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Ethiopian Law
of
Security Rights in
Movable Property
Asress Adimi Gikay

Ethiopian Law of Security Rights in Movable Property
First published © 2021 by Asress Adimi Gikay
asress.gikay@brunel.ac.uk
ISBN: 9798736045747
All rights reserved. No part of this publication may be reproduced in any material
form (including photocopying, scanning, storing in any medium by electronic
means) without the written permission of the author. Request for the author’s
permission to reproduce any part of the book should be addressed to the author.
Preface
In 2019, Ethiopia enacted its first comprehensive law of security rights — the
Movable Property Security Rights Proclamation (MPSRP) — drafted under
the aegis of the International Finance Corporation (IFC). Although the official
narrative is that the MPSRP is based on the UNCITRAL Legislative Guide on
Secured Transactions Law, the MPSRP 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.
The reform effort in Ethiopia is commendable as the country abandoned

an obsolete law, unfit for modern secured financing schemes. Nonetheless, the
MPSRP is not without flaws. The underlying policies of some of its provisions
appear unsuitable for the Ethiopian legal and commercial/economic contexts
while some provisions present interpretive dilemmas. This book provides an
early interpretive and policy analysis by explaining the key principles, policies,
and rules of the MPSRP and highlighting some of the potential challenges
around its implementation and interpretation.
The book has three key objectives. First, it explains the novel approach
to security rights taken by the MPSRP. All stakeholders (judges, litigators,
counsels, policymakers, advocacy groups, researchers, students, and other
interested groups) need guidance in how the law should be interpreted and
applied while also gaining insights into aspects of the law that require reform.
Second, it demonstrates that future legal reform in this area should be informed
by US experience as the MPSRP resembles US law more than the law of any
other nation or the UNCITRAL Legislative Guide on Secured Transactions
Law. Ethiopian legal professionals and policymakers need to be familiar with
the approaches and policies of UCC Article 9, at least on a basic level. Third, the
book aims to serve as the basis for future research and intellectual inquiry into
this increasingly important area of law.
The book is organized into twelve chapters. Chapter one discusses the
reasons for the reform of the Ethiopian law of security rights by analyzing
the shortcomings of the Pre-2019 law. Chapter two examines the conceptual
foundations of the MPSRP where the notions of unitary theory and functional
approach to security interests and their implications are explained. Chapter three
provides an overview of security rights to which the MPSRP does not apply
followed by chapter four which critically analyses possessory security right and
security rights in commercial instruments and documents. Chapter five discusses
floating security rights along with acquisition security rights. Chapter six is
dedicated to security rights in intangible assets (business, intellectual property,
and account receivable) while chapter seven covers security rights in proceeds.
In chapter eight, the book comprehensively analyses perfection — the method
for rendering security rights effective against third parties followed by chapter
nine covering the rules for determining priority of conflicting security rights as
well as the rights of a third-party acquirer of collateral. Chapter ten offers an
in-depth account of private enforcement of security rights including self-help
repossession, private disposition of collateral, and strict foreclosure along with
the remedies for breach of the secured creditor’s duties. In chapter eleven, the book
covers the status of security rights in bankruptcy. Finally, chapter twelve makes
a proposal for the implementation of tailored laws protecting consumers from
abusive debt collection practices and aggressive enforcement of security rights.
The book utilizes comparative analysis to explain policy and interpretive

issues, gaps, and uncertainties that require perspectives from UCC Article 9
with occasional reference to laws of Hungary, Germany, Louisiana, Romania,
and the UK to highlight unique solutions to specific legal problems.
I hope this work, which comes early during the implementation of

MPSRP, serves as a guide for different stakeholders working with the law and
that it inspires other scholars to engage in further expounding this challenging
field of law.
Asress Adimi Gikay

London, United Kingdom - April 2021
Acknowledgement
I am grateful to my former PhD supervisor Prof. Tibor Tajti (Central European
University) for his continued advice and mentorship. My sincere appreciation
also goes to Dr. Radu Rizoiu (University of Bucharest), Dr. Cătălin-Gabriel
Stănescu (University of Copenhagen), and Dr. Williams Iheme (Jindal Global
University) for providing constructive feedback on various parts of this work.
My heartfelf thanks go to Professor Charless Moony Jr. of the University of
Pennsylavnia for the fruitful email conversation during the writing of this book.
Lists of Abbreviations
Ch. Chapter
CRO Collateral Registry Office
DCC Draft Commercial Code (Ethiopia)
ECC Ethiopian Civil Code
ECOMC Ethiopian Commercial Code
ET AL and others
FDCPA Fair Debt Collection Practices Act
FTC Federal Trade Commission
H.R. House of Representatives/U.S.
HUCC Hungarian Civil Code (2013).
IFC International Finance Corporation
LICLE Illinois Institute for Continuing Legal Education
MPSRP Movable Property Security Rights Proclamation
Negarit Gazette/Official Gazette of laws/
Neg. Gaz.
Ethiopia
NY New York
Rep. Report
United Nations Commission on International
UNCITRAL
Trade
UNCITRAL Legislative Guide on Secured
UNCITRAL LGSTL
Transactions Law
U.S. D.C United States District court
U.S.C. United States Code
UCC Uniform Commercial Code
Table of Contents
Preface 6
Acknowledgement 8
Lists of Abbreviations. 9
Chapter One: Modernization of Law of Security Rights in Ethiopia
1.1. Introduction 17
1.2. The Credit Economy — The Driving Force 18
1.3. The Role of the Law of the Security Rights in Enhancing Access to Credit 20
1.4. Modern Law of Security Rights 21
1.5. The Causes for Reform in Ethiopia 24
1.5.1. Private Sector Development and the Law of Security Rights in Ethiopia 25
1.5.2. The Obsolescence of the Pre-2019 Law and Piecemeal Reforms 26
1.5.3. The Ratification of the Cape Town Convention and the Aircraft Protocol 27
1.6. The Defects in Pre-2019 Ethiopian Law of Security Rights 29
1.6.1. Inefficiency 29
1.6.2. Unfairness 33
1.7. Goodbye to French Civil Law 36
1.8. UCC Article 9 via the UNICTRAL Legislative Guide 38
1.9. Conclusion 42
Chapter Two: The Conceptual Foundations of the MPSRP
2.2. The Unitary Theory of Security Right 46
2.3. The Functional Approach to Security Right 48
2.4. Personal Property Security Right 51
2.4.1. Movable Property 52
2.4.1.1. Corporeal Assets 52
2.4.1.2. Incorporeal Assets 56
2.4.2. Accessories 59
2.4.2.1. Conflict between Real Property Law and the MPSRP 59
2.5. Conclusion 65
Chapter Three: Security Rights to which the MPSRP is Inapplicable
3.2. Security Right in Exchange Traded Securities 67
3.3. Security Right in Ships and Aircraft 69
3.4. Liens and Other Non-Consensual Security Rights 72
3.5. Security Right in Immovable Property 76
3.5.1. Possible Explanations for the Exclusion 76
3.5.1.1. Historical Context 76
3.5.1.2. Commercial Necessity 78
3.5.2. The Effect of the Exclusion of Real Property Mortgage 79
3.5.2.1. Different Methods of Registering Security Rights 80
3.5.2.2. Verifying the Status of an Accessory to an Immovable 82
3.6. Conclusion 82
Chapter Four: Possessory Security Right and Security Right in Commercial

Instruments and Documents
4.2. A Hostile Approach to Pledge 85
4.2.1. Pledge — Meaning and Rationale 86
4.2.2. Pledge Under the MPSRP 88
4.2.2.1. Limited Third-Party Effectiveness of Pledge 88
4.2.2.2. Exceptions Creating Effective Possessory Pledge 92
4.2.3. Alternative Approach to Regulating Pledge 94
4.2.4. Expanding the Scope of Possessory Security Right 95
4.3. Security Rights in Commercial Instruments and Documents 96
4.4. Trust Receipt and Security Trust Deed — Anomalies 99
4.4.1. Trust Receipt 99
4.4.2. Security Trust Deed 101
4.4.3. Trust Receipt and Security Trust Deed— Poor Legislative Research 106
4.4.4. Fixing the Anomaly 109
4.5. Conclusion 112
Chapter Five: Floating and Acquisition Security Rights

5.2. Floating Security Right under the MPSRP 116
5.3. Floating Security Right — A Cautionary Tale 118
5.4. Acquisition Security Rights — General Overview 119
5.5. Acquisition Security Rights— Definition, Scheme, and Scope 120
5.6. Acquisition Security Right Super-priority 126
5.7. Specific Acquisition Security Rights — Title Financing 126
5.7.1. Commercial Consignment 127
5.7.1.1. True Consignment and Disguised Security 128
5.7.1.2. Commercial Consignment under the MPSRP— Meaning and Scope 129
5.7.2. Financial Leasing 139
5.7.2.1. Financial Leasing under the MPSRP 140
5.8. Conclusion 145
Chapter Six: Security Rights in Intangibles Assets

6.2. Business Mortgage 149
6.3. Security Right in Account Receivable 151
6.3.1. Scope and Non-Assignability Clause 152
6.3.2. Notification and Registration of Notice with Respect to Receivables 155
6.3.3. Security Right in Account Receivable — Three Observations 157
6.4. Security Right in Intellectual Property 158
6.5. Conclusion 160
Chapter Seven: Security Rights in Proceeds

7.2. Lack of Comprehensible Concept of Proceeds under Pre-2019 Law 162
7.3. The Automatic Extension of Security Rights to Proceeds 163
7.4. The Survival of Security Rights in Commingled Proceeds 165
7.4.1. Commingling in case of Corporeal Assets 166
7.4.2. Commingling in case of Funds 166
7.4.2.1. Commingling with the Debtor’s Own Fund 167
7.4.2.2. Commingling of Competing Creditors’ Funds 170
7.4.2.3. A More Holistic and Policy Oriented Tracing Rules for Commingled Funds 175
7.5. Conclusion 177
Chapter Eight: Perfection — Effectiveness of Security Rights Against Third Parties

8.2. The Rationale for Perfection 180
8.3. Methods of Perfection 181
8.3.1. Perfection by Control 181
8.3.2. Perfection by Possession 185
8.3.3. Automatic Perfection and Perfection by Compliance with Law 187
8.3.4. Perfection by Notice Filing 189
8.3.4.1. Authenticated Registration — the Outdate System 189
8.3.4.2. Notice Filing System— Advantages 191
8.3.4.3. Notice Filing System under the MPSRP 193
I. No Contract Authentication 194
II. Authorization by the Grantor 195
III. Identification of Parties and Collateral 196
IV. One Notice System 197
V. Electronic Registration and Search System 197
8.3.5. Mandatory Perfection and Optional Perfection Methods? 200
8.3.5.1. Methods of Perfection are Permissive 201
8.3.5.2. But Some Methods of Perfection are Superior and Effectively Mandatory 201
8.3.5.3. There should be Mandatory Methods of Perfection 203
8.4. Conclusion 204
Chapter Nine: Priority and Security Rights

9.2. First to Perfect by Filing Notice 207
9.3. Security Rights Perfected through Possession vs. Registration of Notice 210
9.4. Security Rights Perfected through Control and Registration of Notice 212
9.5. Super-Priority of Acquisition Security Rights 213
9.5.1. Acquisition Security Rights vs. Non-Acquisition Security Rights 213
9.5.1.1. Acquisition Security Rights in Non-Inventory Good 214
9.5.1.2. Acquisition Security Rights in Inventory Good 217
9.5.2. Competing Acquisition Security Rights 220
9.6. Priority Right in Proceeds 221
9.7. Third Party Acquirer of Interest in a Collateral 227
9.7.1. Good Faith Acquirer 229
9.7.1.1. Corporeal Assets 231
9.7.1.2. Negotiable Instruments and Documents 231
9.7.1.3. Intellectual Property Rights 233
9.7.1.4. Money and Funds Paid in Deposit Account 233
9.8. Conclusion 236
Chapter Ten: Private Enforcement of Security Rights

10.2. Self-Help Repossession 240
10.2.1. Self-Help Repossession in Ethiopia 240
10.2.1.1. Requirements for Self-Help Repossession under the MPSRP 243
10.2.1.2. Requirements for Self-Help Repossession in the US and other Civilian .......
Systems 245
10.3. Judicial Repossession 248
10.3.1. Judicial Repossession as a Middle Ground 249
10.4. Private Disposition of Collateral 253
10.4.1. Private Disposition of Collateral Pre-2019 253
10.4.2. Private Disposition of Collateral under the MPSRP 255
10.4.2.1. Default 256
10.4.2.2. Notification of Disposition of the Collateral 257
10.4.2.3. Commercially Reasonable Standard 260
10.5. Strict Foreclosure 261
10.5.1. Pre-2019 Strict Foreclosure Law in Ethiopia 261
10.5.2. Strict Foreclosure under the MPSRP 262
10.5.2.1. When May Strict Foreclosure Agreement be Concluded? 262
10.5.2.2. Full Strict Foreclosure 263
10.5.2.3. Partial Strict Foreclosure 264
10.5.2.4. Strict Foreclosure of Consumer Good 265
10.5.3. Suing the Secured Creditor After Agreeing to Full Strict Foreclosure 265
10.6. Enforcement of Security Rights in Intangible Assets 267
10.7. Remedies for Violation of the Secured Party’s Duties 270
10.7.1. Remedies in Pre-2019 Laws 270
10.7.2. Remedies Under the MPSRP 271
10.8. Conclusion 272
Chapter Eleven: Security Rights in Bankruptcy

11.2. The Bankruptcy and Security Rights Nexus 276
11.2.1. Automatic Stay 276
11.2.1.1. Automatic Stay under Ethiopian Law 278
I. Scope of Automatic Stay under the DCC 278
II. Lifting Automatic Stay 280
11.2.2. The Bankruptcy Trustee and Security Rights 284
11.2.2.1. The Bankruptcy Trustee and Voidable Preference 285
11.2.2.2. The Bankruptcy Trustee and Fraudulent Transfer 291
11. 3. Conclusion 294
Chapter Twelve: Security Rights and Consumer Debtor Protection
12.2. Special Provisions in Law of Security Rights 295
12.2.1. Security Right and Consumer Debtor under the MPSRP 296
12.3. Abusive Debt Collection Practices 298
12.4. Conclusion 300
Short Glossary 301

Attachment 302
Chattel Mortgage 302
Lien 302
Perfection 303
Bibliography 304
The author 313
Chapter One: Modernization of the Law of Security Rights in
Ethiopia
1.1. Introduction
Over the past two decades, there has been a heightened focus on modernizing the
law of security rights around the world as international organizations and states
recognize modern law of security rights as vital for economic development. The
United Nations Commission on International Trade Law (UNCITRAL),1 the
European Bank for Reconstruction and Development (EBRD),2 and the Institute
for Unification of Private International Law (UNIDROIT),3 are among the key
advocates of modern secured transactions law at the international level. In
Central and Eastern Europe (CEE), former communist countries have reformed
their secured transactions laws to strengthen their transition to a strong and
sustainable market economy.4 Between 2010 and 2017, five African countries
— Liberia(2010),5 Malawi(2013),6 Nigeria(2014),7 Sierra Leone(2014),8 and
Zimbabwe(2017)9 — undertook a comprehensive reform of the law of security
5
The Liberian Commercial Code (2010), Chapter 5.
6
Malawi enacted Personal Property Security Interests Act (April 2013).
7
See Iheme, W.C. and Mba, S.U., “Towards Reforming Nigeria’s Secured Transactions Law:
The Central Bank of Nigeria’s Attempt through the Back Door,” Journal of African Law 6, no.
1 (2017): 1–23.
8
Supplement to the Sierra Leone Gazette Vol. CXLV, No. 39, The Borrowers and Lenders Act
(2014).
9
Movable Property Security Interests Act (2017) https://stlrp.files.wordpress.com/2016/11/
movable-property-security-interests-act-2017.pdf
18
rights, albeit not necessarily flawless.10 In 2019, Ethiopia joined the ever-growing
list of countries that have modernized their law governing secured financing.
The law of security rights is recognized to play an essential role in boosting
economic development through enhancing access to credit.11 The UNCITRAL
in its Resolution 63/121 affirmed that “access to secured credit is likely to assist
all countries, in particular developing countries and countries with economies in
transition, in their economic development and in fighting poverty.”12 This is the
reason that led Ethiopia to revamp its old law of security rights in 2019 when it
enacted the Movable Property Security Right Proclamation (MPSRP).13
This chapter provides an overview of the reasons for Ethiopia’s choice

to modernize its law of security rights in movable property and the factors that
impacted the legislative choice made by the government. First, the chapter
introduces the credit economy and the role of law security rights in enhancing
access to credit which is then followed by an overview of the causes for the
reform in Ethiopia as well as the choice to implement the reform that departs
radically from the existing law based on the French legal tradition.
1.2. The Credit Economy — The Driving Force

Businesses meet their financing needs principally through equity or debt capital
(credit), or a combination thereof. This is not to say that equity and debt capital
are the only sources of financing for businesses. An alternative to equity and debt
financing is government subsidy, which can play significant roles in revitalizing
the private sector. Nevertheless, a government subsidy could be criticized for its
potential market distortion, inefficiency, and tendency to create an unjustifiably
10
For dissatisfaction with the Nigerian Reform, See Iheme, W.C. and Mba, S.U., “Towards
Reforming Nigeria’s Secured Transactions Law: The Central Bank of Nigeria’s Attempt through
the Back Door.”
11
Hannah Baxbaum, “Unification of the Law Governing Secured Transactions: Progress and
Prospects for Reform,” Rev. dr. unif. 2003-1/2 (2003): 332.
12
UNCITRAL, Resolution 63/12(14, “Resolution of the United Nations Commission on
International Trade Law and General Assembly, December 2007, Recital 2.
13
FDRE, Federal Neg. Gazz. No. 76, Movable Property Security Right Proclamation No.
1147/2019(Addis Ababa, 2019).
19
favored economic sector. In the 21st Century, a government centered private

financing is not considered an efficient and sustainable choice. While equity
markets can finance a significant number of businesses, normally they do not
adequately satisfy the financing needs of businesses. In a speech published in
1998, Stiglitz asserted that “in most countries equity is a trivial source of new
finance, and net issuance of equity has actually been negative in the United States
and United Kingdom over the past decades.”14 Today, credit remains arguably
the most important source of financing for businesses around the world.
Credit can be available from the public through the issuance of bonds
or be obtained from financial institutions such as banks through private loan
contracts. While the issuance of bonds mainly depends on the strength of
capital and bond markets, the availability of loan depends on the strength and
willingness of financial institutions to extend loans, on the one hand, and the
availability of assets useable as collateral on the other hand.
Credit is important for economic development both in the developed

and transition economies. Evidence suggests that access to credit significantly
affects firm profitability and job creation as well as overall social welfare.15 The
purpose of this book is not to explain the economic importance of credit in detail
— such a task is beyond the scope of the book, and substantial work has already
been done by many authors in economics and other disciplines.16 However, with
14
Joseph Stiglitz, “The Role of the Financial System in Development - Presentation at the
Fourth Annual Bank Conference on Development in Latin America and the Caribbean” (LAC
ABCDE) 1998: 3.
15
Taylor & Francis, Ltd., “Credit Constraints and Profitability: Evidence from a Transition
Economy, Emerging Markets Finance & Trade,” 40, no. 4(2004): 77 & G.M. Caporale, “Financial
Development and Economic Growth: Evidence from Ten New EU Members,” Discussion Paper
(DIW Berlin, 2009), 20.
16
On the positive co-relationship between credit or financial market and economic growth, See
for instance, R. Levine, “Financial Development and Economic Growth: Views and Agenda,”
Journal of Economic Literature 35, no. 2(1997): 688-726, Jermy Greenwood & Boyan Jovanovic,
“Financial Development, Growth and Distribution of Income,” Journal of Political Economy
98, no. 5(1990): 1076- 1107 and Jeremy Greenwood, Bruce D. Smith, “Financial markets in
development, and the development of financial markets,” Journal of Economic Dynamics and
Control 21, no. 1 (1997):145- 181.
20
the assumption that credit is an important engine for economic development, a

brief note of few supporting facts should be useful.
Access to credit is critical for the growth of small and medium-sized

enterprises.17 With credit, talents or entrepreneurships can be utilized efficiently,
businesses engaging in productive activities are able to continue production
of goods and/or services, investment in new technology is diversified and
expanded, ultimately boosting economic growth.18 In line with this, transition
economies witnessed a change in economic growth after introducing efficient
credit systems through strengthening the financial sector.19 In a paper published
in the Journal of Applied Corporate Finance, Miller argued that “that financial
markets contribute to economic growth is a proposition almost too obvious for
serious discussion.”20 But how does the law of security interests play a role in
enhancing access to credit?
1.3. The Role of Law of the Security Rights in Enhancing Access

to Credit
“In most countries, even in the United States, which is usually thought of as the
country with the most pronounced equity culture, far more money is raised in
credit markets than in equity markets.”21 The law of security rights plays a vital
role in enhancing access to credit for businesses as well as consumers. There are
three main ways through which a security right can make the cost of borrowing
cheaper. First, it makes credit available by giving lenders better security of
17
Maricica Moscalu, Claudia Girardone & Raffaella Calabrese, “SMEs’ growth under financing
constraints and banking markets integration in the euro area,” Journal of Small Business
Management, 58 no. 4(2020) 707-746.
18
For an insight into the relationship between entrepreneurship and the credit market, See Milo
Bianchi, “Credit Constraints, Entrepreneurial Talent, and Economic Development, Research
Paper No. 2009/20, (UNU-WIDER 2009): 15.
19
See Laura Cojocaru, “Financial System Development and Economic Growth in Transition
Economies: New Empirical Evidence from the CEE and CIS Countries.” (2014): 9-10.
20
Merton H. Miller, “Financial markets and economic growth,” Journal of Applied Corporate
Finance 11 no. 3(1998): 14.
21
Kenneth W. Dam, “Credit Markets, Creditors’ Rights and Economic Development,” John M.
Olin Law & Economics Working paper number 281, 2nd Series (2006), 1.
21
repayment or reducing the risk of default.22 Second, it reduces interest rate as

interest rates are negotiated and fixed relative to the default risk.23 The lower
the risk of default, the lower the interest rate. Because a loan secured by an asset
involves a lower risk of loss for the creditor, the reduced risk in overall recovery
of the loan is considered while negotiating the interest rate for the loan. Third,
secured lending gives creditors more chance of enforcing their rights against
the collateral in case of default and reduces the risk of not being paid at all or
being paid less.24
Understandably, having a law governing secured lending is not in itself

sufficient to facilitate access to credit. The law must possess the required qualities
to permit firms to use diverse range of assets as collateral. Some countries have
crafted their laws to achieve this, while others have not. The question is, what
qualities should policymakers, businesses, and other stakeholders look for in the
law governing secured lending? For the sake of convenience, this book uses the
term “modern law of security rights” to describe a legal regime that is suitable
to modern commerce and secured financing.
1.4. Modern Law of Security Rights

There is no well-established criterion to characterize the law of security rights
as modern, as this is not the central point of discourses on contemporary law
of security rights. Nevertheless, reforms of the law of security interests for the
past several decades have shown crucial features that the law must possess to
suit modern and complex secured financing schemes. These features/qualities
emerged from continuous updating of the law in response to localized financial
innovation and commercial practices as in the US where the law has been
continuously revised in line with changing commercial realities. Reforms in
emerging markets emulating or adapting UCC Article 9 to their local contexts,
22
John Armour, “The Law and Economics Debate about Secured Lending: Lessons for European
Law Making, Centre for Business Research,” University of Cambridge Working Paper No.
362(2008), 2.
23
Ibid.
24
Ibid.
22
either as a response to pressure from external actors or due to a genuine need for
reform, have also solidified the core components of efficiently functioning law
of security interests. On the other side of the spectrum, there are legal regimes
that are noticeably outdated, and countries still maintain them for a variety of
reasons, choosing to make only incremental changes to fix the challenges they
face.25 In this regard, a contrast can be made between obsolete and modern laws
of security interests. Fleisig describes obsolete law as follows:
An obsolete law that governs secured transactions makes it difficult

to use property as collateral, raising hurdles in each stage of the
process – creation, publicity and enforcement of the security interest
and those legal regimes should not make needless restrictions on
creating security interests, excluding economically important property,
agents and transactions.26
One of the major shortcomings of an obsolete law of security rights

is that it excludes certain assets from being used as collateral such as future
assets, including industrial and agricultural products, and accounts receivable,
to mention few examples.27 Modern law of security interests allows the parties
to structure their transaction to use a wide range of assets, present and future as
well as tangible and intangible assets while it permits the debtor to continue to
use the collateral after the loan has been extended, thus enabling the debtor to
use the collateral for revenue-generating activities.28
25
In the UK, despite London being a world financial center, its secured transactions law has a
major flaw, due to the floating security charge that causes great confusion and uncertainty of
legal transactions. Despite calls for its complete abolition and reform based on UCC Article 9,
the UK has so far resisted and is trying to tweak the system. See John de Lacy, ed, The Reform
of UK Personal Property Security Law (Abingdon: Routledge-Cavendish), 83.
26
Heywood Fleisig et al, Reforming Collateral Laws to Expand Access to Credit (Washington
DC: The World Bank/International Finance Corporation, 2006), 23 & 24. See also Xuan-Thao
Nguyen and Bich Thao Nguyen, “Transplanting Secured Transactions Law: Trapped in the
Civil Code for Emerging Economy Countries,” North Carolina Journal of International Law &
Commercial Regulation 40 no. 1(2014): 2-54.
27
Heywood Fleisig, et al, Reforming Collateral Laws, 23 &24.
28
See Su Lin Han (Ed), “Secured Transactions Law Reform in China: Can a commercial law
serve the needs of the market?” China Law and Governance Review no. 3(2006):2.
23
The second major defect of an outdated law of security rights is a flaw

in the public notice and enforcement systems. Certain transactions remain secret
due to the lack of a comprehensive and consistently applied public notification
requirement. With respect to enforcement, the lack of efficient out-of-court
enforcement mechanisms, including self-help repossession and clear rules on
private disposition of collaterals,29 is regarded as a feature of obsolete law of
secured financing. By contrast, modern law of security rights puts in place a
harmonized system of public notice of security rights and flexible and efficient
enforcement systems that strike a fair balance between the interests of the
creditor and the debtor.
The task of identifying key principles of a modern law of security

interests is challenging and is likely to invite criticisms as it requires making
subjective assessments about the functioning of law in the field across
jurisdictions to extract core principles. Furthermore, as the functioning of law
is tied to the existence of other political, economic, and legal institutions such
as strong law enforcement institutions and independent judiciary,30 speaking of
core principles in abstracto does not account for factors extraneous to the law
that could contribute to the effective functioning of the law. Nevertheless, as a
minimum threshold, the following principles could be singled out — that the
law should make it easy to create security interests; that it should permit the
use of non-possessory security; that it should not exclude assets from being
used as collateral; that it should provide efficient means of public notification of
security rights; that it should provide efficient enforcement mechanisms within
and outside the context of bankruptcy.31 These principles are implemented in
29
Self-help repossession gives the secured creditor the right to take possession of the collateral
upon the debtor’s default. On historical insight into the position of civilian legal tradition on
self-help repossession, See, Bruce V. Schewe, “Civilian Thoughts on U.C.C. Section 9-503 Self-
Help Repossession: Reasoning in a Historical Vacuum,” Louisiana Law Review 42 no 1(1981):
241-242.
30
Kenneth W. Dam, the Law-Growth Nexus – The Rule of Law and Economic Development
(Washington D.C.: Brookings Institution Press, 2006), 36.
31
C.f, EBRD, “Core Principles of Secured Transactions Law,” http://www.ebrd.com/what-we-
do/legal-reform/access-to-finance/transactions.html.
24
different ways depending on the context of the country32 but they constitute core
foundations of modern law of security rights.
Having inspired reforms in different countries, UCC Article 9 could be

cited as a good example of modern law of security rights. Tajti identifies six
building blocks of UCC Article 9 (1) the unitary and comprehensive concept
of security interests; (2) the complex system of priorities; (3) the floating lien
concept and its corollary concept of purchase money security interest; (4) the
system of effectiveness of security rights through registering notice applicable
to all transactions securing payment or performance of obligation and (5) an
efficient enforcement system.33 While these building blocks serve as a good
guide for a methodological study of modern secured financing law including the
MPSRP, they do not, per se guarantee efficient functioning of the system. The
way in which the details of these building blocks are designed bears a greater
significance.34 These building blocks will generally be a study guide for the
Ethiopian law of security rights.
1.5. The Causes for Reform in Ethiopia

The reform in Ethiopia is generally aimed at modernizing the country’s law
of security interests in movable property to enhance better access to credit for
business and consumers.35 The pre-2019 law was manifestly unfit for the 21st
Century Ethiopia. While the Pre-2019 law has a historical significance, the
reason for its revamping provides useful policy and practical insights. This
section overviews the main drivers of the reform with the view to depicting
a clear picture of the new law — how and why its conceptual foundations
(principles) and rules are designed.
32
Ibid.
33
Tibor Tajti, Comparative Secured Transactions Law: Harmonization of law of Security
Interests in the United States of America, England, Germany, and Hungary (Budapest:
Akademiai Kiado, 2002), 141.
34
Ibid.
35
The first recital of the MPSRP states that “modern secured transactions systems enable
individuals and entities to use the full range of their movable assets as security for credit
generating new productive capital and fostering access to and usage of finance.”
25
1.5.1. Private Sector Development and the Law of Security Rights

in Ethiopia
The core of Pre-2019 Ethiopian law of security rights was implemented
in 1960 when the country modernized its legal system by adopting three
substantive codes of law including the Ethiopian Civil Code (ECC).36 Today,
Ethiopia has significantly different socio-economic conditions in contrast with
the 1960s. It had passed through different economic systems over the years
— “market-oriented mixed economy (Pre-1974), State-Controlled central
planning (1975-1991), and since 1991 a hybrid of State-Controlled and
Market-Oriented economic system.”37
Since 1992, privatization has been taking place under the Ethiopian
Privatization Agency, now the Ethiopian Public Enterprises Supervision, and
Privatization Agency (EPESPA).38 In 2012, the EPESPA reportedly put six
public enterprises for bid.39 In 2014, the government issued invitation to bid for
eleven state enterprises.40 In May 2016, the government transferred Millions of
dollars’ worth of agricultural farm to a private enterprise.41 The privatization of
state owned enterprises has been a growing phenomenon. Although the specific
policies, strategies, and laws differ, in Central and Eastern European countries,
after the fall of communism, the privatization process started in a similar fashion
36
The Civil Code of the Empire of Ethiopia, Proclamation No. 165 of 1960, Negarit Gazeta,
Gazette Extraordinary, 19th Year, No. 2; The Commercial Code of the Empire of Ethiopia,
Proclamation No. 166 OF 1960, Negarit Gazette 19th Year No. 3.; The Maritime Code of the
Empire of Ethiopia, Proclamation No. 164 of 1960, Extraordinary Gazette, 19th, No. 1.
37
Kibre Moges, “Policy-induced Barriers to Competition in Ethiopia”, CUTS International
(2008), 3.
38
The Ethiopian Privatization Agency was established in 1994 by Proclamation number 87/1994
and 146/1998.
39
http://www.2merkato.com/news/alerts/2747-ethiopia-agency-to-privatize-11-enterprises.
40
Invitation to Bid for Total Acquisition of Government Owned Public Enterprises, Bid No.
003/2012-2014 http://www.fiepr.org.br/cinpr/servicoscin/inteligencia-comercial/uploadaddress/
Privatization_Opportunities_2013-2014%5B49683%5D.pdf.
41
This deal struck between the government and the firm transferred Silea Agricultural
Farm, public enterprise to Lucy Agricultural Plc (A Private Enterprise) Http://allafrica.com/
stories/201605180933.html.
26
as in Ethiopia, leading today to a stronger private sector economy and financial

systems as well as modern law of security interests.42
The continuous privatization process led to a shift from state to private

financing requiring parallel legal reforms especially governing the financial
market and secured transactions. Although the privatization process is still
ongoing, around the year 2017-2018 when the MPSRP was being conceived,
there was already a strong case that providing adequate access to financing to
the ever-growing private sector requires reforming the law governing secured
financing.
1.5.2. The Obsolescence of the Pre-2019 Law and Piecemeal

Reforms
In Pre-2019, Ethiopian law of security interests was scattered across different
codes and statutes. The ECC governed real property mortgage, antichresis,
possessory pledge,43 and the pledge of commercial instruments.44 The Ethiopian
Commercial Code(ECOMC) governed business mortgage45 and the pledge of
transferrable securities.46 Because the provisions of the ECC and the ECOMC
were considered obsolete in some regards, the legislature enacted different
statutes governing security interests including the Warehouse Receipt Law
governing security rights in warehoused goods,47 the Proclamation on Property
Mortgaged or Pledged with Banks (PMPBP),48 the Proclamation on Business
42
See Demetrius S. Latridis & June Gary Hopps, Eds, Privatization in Central and Eastern Europe:
Perspectives and Approaches (Westport, Connecticut, & London: Praeger Publishers, 1998).
43
ECC Article 2287(1) and Title XVIII Chapter 4 Articles 3041 -3130 for Mortgages and
Antichresis and Title XVII Articles 2825 – 2874 for pledges.
44
ECC Article 1128 & 2829.
45
The Commercial Code of the Empire of Ethiopia, Proclamation No. 166 OF 1960, Negarit
Gazette 19th Year No. 3. Title V, Articles 171- 193. The provision of the ECOMC governing
business mortgage is updated by a new law cited as Ethiopian Business Mortgage Proclamation
No. 98/1998
46
ECOMC Articles 950 -958.
47
The Proclamation to Provide for a Warehouse Receipt System, Proclamation no. 372/2003.
48
A Proclamation to Provide for Property Mortgaged or Pledged with Banks, Proclamation No.
97 of 1998, Federal Negarit Gazeta, No.16, 19th, February 1998.
27
Mortgages (BMP),49 and other amendments to the ECC.50 The financial leasing
law, governing various leasing contracts including hire-purchase, should also
be added to the list.51 The parallel existence of all of these statutes presented
some form of challenge.
The ECC essentially introduced the key features of the French Civil
Code (FCC) and has not been meaningfully reformed even though the political
and socio-economic premises on which it was based had fundamentally
changed, while its French counterpart has substantially been reformed in 2006
and 2011.52 Ethiopia has been carrying out piecemeal reforms that could not
improve the legal system adequately.
1.5.3. The Ratification of the Cape Town Convention and the

Aircraft Protocol
While Ethiopia engaged in incremental changes affecting domestic secured
lending agreements, it ratified major international legal instruments governing
security rights in aircraft. The UNIDROIT has been “studying needs and
methods for modernizing, harmonizing and coordinating commercial law as
between States and groups of States and to formulate uniform law instruments,
principles and rules to achieve that objective.”53 Secured financing law is
one of the fields under the remit of UNIDROIT’s legal modernization effort.
UNIDROIT crafted the Convention on Taking International Interests in Mobile
Equipment[“the Cape Town Convention”(CTC)] and the Aircraft Protocol, the
Rail Rolling Stock Protocol, the Space Protocol and the Mining, Agricultural
49
A Proclamation to Provide for Business Mortgages, Proclamation No. 98 of 1998, Federal
Negarit Gazeta, No. 17, 19th, February 1998.
50
A Proclamation to Provide for Business Mortgages, Civil Code as Amended Proclamation,
Gazeta, No. 46, 30th, June 2009.
51
The Capital Goods leasing Proclamation No. 103/1998.
52
Marie-Elodie Ancel, “Recent reform in France: the renaissance of a civilian collateral regime?”
in Secured Transactions Reform and Access to Credit, ed. Frederique Dahan and John Simpson,
(Cheltenham, and Northampton & MA: Edward Elgar Publishing Inc, 2008), 259-272.
53
See UNIDROIT Official Homepage, https://www.unidroit.org/about-unidroit/overview
28
and Construction Equipment(MAC) Protocol.54 The purpose of the CTC

along with its protocols is to modernize the legal regime governing creation
and registration, priority and enforcement of international security interests in
mobile assets, thereby facilitating international financing of the purchase of
those assets.55
Ethiopia has signed and ratified the CTC and the Aircraft Protocol.56
UNIDROIT implemented the MAC Protocol in 2019 — thus far it is the only
protocol Ethiopia has not adopted.57 For a country that is generally reluctant to
ratify international legal instruments affecting commerce,58 this is a major step
forward. The reason for Ethiopia’s extra-ordinarily encouraging step in signing
and ratifying the CTC and the Aircraft Protocol seems to be that Ethiopia has
one of the strongest airlines industry in Africa — hence ensuring a developed
system of international secured financing is an important step to sustaining
the industry.59
The CTC and the aircraft protocol were on a different level relative to the
54
UNIDROIT, Convention on International Interest in Mobile Equipment (Cape Town, 09
June 2001); Protocol to Convention on International Security Interest in Mobile Equipment
on Matters Specific to Aircraft Equipment (Cape Town, 06 November 2001); UNIDROIT,
Protocol to Convention on International Interest in Mobile Equipment on Matters Specific to
Rail Rolling Stock(Luxembourg, 22 February 2007), UNIDROIT, Protocol to Convention
on International Interest in Mobile Equipment on Matters Specific to Space Assets(Berlin, 22
March 2012) and The Protocol on International Security Interests in Mining, Agricultural and
Construction Equipment (MAC) Protocol (Pretoria, 22 November 2019).
55
See the Preamble to the Cape Town Convention.
56
Ethiopia has signed the Cape Town Convention on 16.11.2001 and ratified it on 21.11.2003
and the convention came into force on 01.03.2006.
57
https://www.unidroit.org/mac-protocol-status.
58
Ethiopia has been reluctant to ratify the United Nations Convention on International Sale of
Goods and the New York Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. Ethiopia did not adopt the UNICTRAL model law on commercial arbitration. The list
of international legal instruments on governance commerce that Ethiopia has failed to ratify
could be longer.
59
The Ethiopian Airlines has won multiple awards which include the best airline in Africa of
2018. BBC, “Ethiopian Airlines: Africa’s largest airline,” (BBC, 11 March 2019) https://www.
bbc.com/news/world-africa-47523958.
29
pre-2019 domestic Ethiopian law of secured financing for several reasons. As an

international legal instrument that stemmed from a concerted work of experts
in the field, unsurprisingly, the convention and the protocol possess distinctive
qualities which contrasted with the pre-2019 domestic Ethiopian law.
First, the convention follows a functional approach to security right,

applying to security interests in mobile equipment, retention of title and
assignment by way of security.60 Second, the convention has an improved
system of enforcement of security rights including self-help repossession.61 The
enforcement rules of the CTC give wide room for party autonomy and speedy
enforcement measures in contrast with the Pre-2019 domestic Ethiopian secured
transactions law.62
1.6. The Defects in Pre-2019 Ethiopian Law of Security Rights

A piecemeal reform of the law of security interests, the one that responds to
the needs of specific sectors, sustain inefficient and unfair credit market. Due
to the haphazard reforms coupled with the existence of the Cape Town Regime
that provides different sets of rules for international security rights in mobile
equipment, and the relegation of acquisition financing from secured financing
law and other related factors, the pre-2019 Ethiopian law of security interests
was palpably inefficient and unfair to certain stakeholders.
1.6.1. Inefficiency
Inefficiency refers to the high transaction cost—the undue amount of time and
money spent in the creation, registration, and enforcement of security interests
60
The Cape Town Convention Article 1(“in this Convention, except where the context otherwise
requires, the following terms are employed with the meanings set out below: (a) “agreement”
means a security agreement, a title reservation agreement, or a leasing agreement.”)
61
The Cape Town Convention Article 8(1).
62
Anna Veneziano, “Security Interests Burdening Transport Vehicles - The Cape Town
Convention and Its Implementation in National Law. Italian National Report. pt. 12 (2014),
7, https://www.iacl2014congress.com/fileadmin/user_upload/k_iacl2014congress/National_
Reports/III_D_Italy.pdf.
30
by parties which translate into the overall inefficiency of the credit market.63
It also includes the cost of negotiating security agreements and setting up
contractual mechanisms to guarantee certainty of transactions where the law
is unclear about the status of certain legal transactions. Legal efficiency is a
vital aspect of secured financing law.64 Secured financing law achieves legal
efficiency by maximizing economic benefits and encouraging simplicity, low
cost, speed, certainty, and fitness-to-contexts in which it functions.65 In other
words, the negotiation, creation, registration, determination of priority, and the
enforcement of security rights must be simple, cheap, and fast. Moreover, the
legal system must ensure transactional certainty such as the enforceability of
validly created security rights that are made effective against third parties.66
Finally, the law should be fit to the context in which it functions including the
broader financial, legal, and socio-economic context.67 Pre-2019 Ethiopian law
of security interests did not meet the threshold for legal efficiency mainly due to
the reasons discussed below.
First, entering into a security agreement required negotiating and

drafting extensive agreements and seeking costly legal assistance because apart
from real property mortgage, pledge, and business mortgage, it was not clear if
and where certain non-possessory security rights had to be registered. A case
in point is security right in claims and other rights.68 Creditors taking security
interests in these assets should design mechanisms to protect their rights from
being undermined by the debtor and third parties. This generally deters lenders
from dealing with claims and rights (intangibles) due to the risk of existing
63
Dahan, Frederique, and Simpson, “Legal Efficiency for Secured Transactions Reform:
Bridging the Gap between Economic Analysis and Legal Reasoning,” in Secured Transactions
Reform and Access to Credit, ed. Frederique Dahan and John Simpson (Cheltenham, and
Northampton & MA: Edward Elgar Publishing Inc, 2008), 133-136.
64
Ibid.
65
Ibid.
66
Ibid.
67
Ibid.
68
ECC Articles 2863 et seq.
31
secret transactions overriding subsequent transactions or the risk of costly

litigation. Stated differently, certain transactions remained secret posing what is
commonly referred to as the ostensible ownership problem.
Ostensible ownership “arises when a debtor retains possession of

collateral after conveying to a creditor, an unrecorded property interest or “secret
lien.”69 In civil law countries such as Germany, the fact that retention of title
transaction is not subject to registration poses an enormous challenge despite
the rule protecting the third-party acquirer in good faith of the encumbered asset
of the debtor.70 The challenge was similar in Ethiopia with respect to security
rights in intangible assets.
Second, under the Pre-2019 Ethiopian law, the indiscernible statutory

privileges and liens caused a great deal of inefficiency. Due to the lack of a single
statute which defines security interest(right), the scope of statutory privileges
and liens and the conditions for their priority over consensual security rights was
unclear. In this regard, the tax lien can be a good example.71 The tax authority
can file a single registration and acquire security right in all immovable assets
of the defaulting taxpayer until the defaulter pays all the taxes.72
The absence of a unified system of registration of security rights made

it difficult for subsequent consensual secured creditors to determine whether
the debtor’s assets are encumbered by a tax lien — the tax law does not specify
which authority has the obligation of registering tax liens.73 In an apparent
response, the Ethiopian government introduced a statutory duty on commercial
69
Louis F. Del Duca, et al, Secured Transactions under the Uniform Commercial Code and
International Commercial Code (Anderson Publishing Co., 2006), 3. See also, Flint, George
Lee Jr. & Alfaro, Marie Juliet, “Secured Transactions History: The First Chattel Mortgage Acts
in the Anglo-American World,” William Mitchell Law Review 30 issue 4(2004): 1405.
70
Jens Hausmann, “the Value of Public-Notice Filing under Uniform Commercial Code Article
9: A Comparison with the German Legal System of Securities in Personal Property,” Georgia J.
Int’l and Comp. Law 25, no. 3(1996): 474.
71
See The Ethiopian Income Tax Proclamation, Article 80(1).
72
The Income Tax Proclamation No. 286/2002, Article 80(4).
73
Ibid Article 80(1).
32
banks to require tax clearance from the tax authority in respect of borrowers
as a precondition for extending loans.74 Every time a bank wishes to advance
a loan, it must contact the tax authority inquiring if the prospective borrower
owes tax to the government. The result is an unnecessary burden on the financial
institution and delay in concluding transactions for both parties. Although tax
lien affected real property mortgage which was not part of the reform in Ethiopia,
it does affect accessories to immovable property that are under the scope of the
MPSRP. Nevertheless, the way tax lien could negatively affect how real property
mortgages are negotiated reveals a broader problem with Pre-2019 Ethiopian
law— the lack of a single legal regime that applies to all security rights.
Third, the Warehouse Receipt law represented another source of

inefficiency. Under this law, a holder of a negotiable warehouse receipt could
collateralize the warehouse receipt and borrow money from any authorized
lending institution.75 In addition, the warehouse operator has a lien right in the
warehoused goods for costs it incurs, which the depositor is liable to pay.76
In case of a conflict between the security right of the bank and the lien right
of the warehouse operator, the latter prevails. Under the warehouse receipt
proclamation, the warehouse operator could enforce its lien right by selling the
goods through a private or public auction upon notifying persons with interests
in the goods.77 Persons having claims in the warehoused goods could pay the
amount due to the warehouse operator and prevent the sale.78
The ensuing challenge was that a creditor with a security right in a

warehouse receipt takes possession of the receipt without registration and there
was no public record where the warehouse operator could consult to identify
persons having rights in the warehoused goods. Thus, the duty of notifying
74
Kinfe Michael Yilma, “Notes on the Salient Features of Tax Lien under Ethiopian Law,”
Mizan Law Review 7, no. 1(2013): 57
75
The Warehouse Receipt Proclamation Articles 2(3) cum 20(4).
76
Ibid., Article 2(21).
77
78
Ibid.
33
subsequent secured creditors was impracticable.
In 2010, the Ethiopian Commodities Exchange (ECX) introduced

an internal working procedure, which requires registration of the pledge in
electronic warehouse receipts.79 This procedure covers the pledging of electronic
warehouse receipts held only at the ECX in Addis Ababa. Pledging of Non-
Electronic warehouse receipts is not covered by the rule. Moreover, since ECX
is located in Addis Ababa, warehouse receipts held in other geographical areas
are not covered by this internal rule. Importantly, the warehouse receipt law
was supposed to help farmers to access credit using warehoused goods/receipts
as collateral80 but farmers neither have access to the EXC nor to electronic
warehouse receipts. Thus, under Pre-2019 Ethiopian secured transactions law,
parties involving in warehouse receipt financing were expected to go the extra
miles towards protecting their rights, which causes either a reluctance to deal
with warehouse receipt financing or entails excessive transaction costs.
1.6.2. Unfairness
Arguing for comprehensive reform of the law of security rights, Veneziano
states that piecemeal reform is inequitable because it favors a particular group
of creditors.81 Veneziano raised this issue in the context of reform in Europe but
the Pre-2019 Ethiopian law provides concrete evidence for this argument.
The ECC does not allow the private disposition of collateral by the
secured creditor as a matter of principle.82 The PMPBP provided otherwise.83
Under the latter, a bank could transfer the ownership of the collateral, to a
third party by auction upon giving 30 days’ notice to the defaulting debtor84 in
79
Revised Rules of the Ethiopian Commodities Exchange (2010), Article 9.5.2.1(d).
80
The Warehouse Receipt Proclamation in its recitals.
81
Sjef Van Erpet al, eds, The future of Secured Credit in Europe (Munich: Sellier European Law
Publisher), 125.
82
The ECPC Articles 2951, 2854 & 3060 for mortgage.
83
Federal Democratic Republic of Ethiopia, property mortgaged or pledged with banks
proclamation no. 97/1998,
84
PMPBP Article 3.
34
accordance with the Ethiopian Civil Procedure Code(ECPC).85 This law granted
banks a more efficient enforcement tool.86 The unavailability of a similarly
efficient enforcement procedure for Non-Bank lenders, besides being unfair to
them, discourages them from supplying credit, since their enforcement channel
is solely a lengthy court administered auction.
In another example, self-help repossession — the right to take possession

of the collateral upon the debtor’s default without a state official involvement,87
was permitted in Ethiopia as a remedy to a creditor, only in two exceptional
cases, namely in case of aircraft or aircraft engine collaterals under the Cape
Town Regime,88 and leased goods under the leasing law.
Being that a self-help repossession might subject debtors to abusive

practices including physical assault, trespass, psychological stress, and other
trickeries.89 In the US where the procedure is extensively utilized and regulated,
it is subject to ex post facto judicial control where the court determines whether
it is conducted without breach of peace.90 Under the Cape Town Regime, self-
help repossession is exercised subject to the debtor’s consent, obtained in any
form, before or after default.91 By subjecting it to the consent of the debtor, the
Cape Town Regime removes the duty to give prior notice to the debtor before
the repossession occurs. Presumably, because the subjects of the Cape Town
Regime are professionals with comparable bargaining power, the Cape Town
Regime foresees no unfair terms being imposed by the parties on each other or
85
PMPBP Article 5 & 6.
86
The first recital of the preamble of PMPBP preamble states “Whereas, it takes rather too long
a time to obtain judgment, from courts of law, for sale of property mortgaged or pledged with
banks and to subsequently have it executed…”
87
UCC § 9-609(1). See also Ryan McRobert, “Defining Breach of the Peace in Self-Help
Repossession,” Washington Law Review 87(2012): 569.
88
The Cape Town Convention Article 8(1) (a).
89
McRobert, “Defining Breach of Peace in Self-Help Repossession,” 569
90
Ibid., 569 et seq.
91
Roy Goode, Convention on International Interests in Mobile Equipment and Protocol thereto
on Matters Specific to Aircraft, 3rd ed (Rome: UNIDROIT, 2013) 61.
35
abusive behaviors occurring during the repossession.
Financial lessors and sellers with reservation of title have an even stronger
right with respect to self-help repossession under the Cape Town Regime. Article
10 of Convention states that “In the event of default under a title reservation
agreement or under a leasing agreement as provided in Article 11, the conditional
seller or the lessor, as the case may be, may: (a) subject to any declaration that
may be made by a Contracting State under Article 54, terminate the agreement
and take possession or control of any object to which the agreement relates;
or (b) apply for a court order authorizing or directing either of these acts.”92
Ethiopia has not made a declaration that deprives the secured creditor of the
right to take possession of the collateral without court involvement.93
This efficient tool of enforcement of security rights94 was unavailable

under general Pre-2019 Ethiopian law, except to financial leasing companies
that can repossess leased goods from a defaulting lessee by giving a months’
notice to the lessee (financial leasing including hire-purchase being not formally
treated as secured transactions prior to 2019).95
The permissibility of self-help repossession to only two categories of

creditors is unfair to other creditors and there is no sound policy to distinguish
between banks and leasing companies on the one hand, and other creditors, on
the other hand, that can be justified on long-term efficiency and fairness grounds.
The law must have provided essentially similar channels of enforcement of
security rights for all creditors, with differences that are justified by strong
policy consideration.
92
Cape Town Convention Article 10(1).
93
It has declared that “Pursuant to Article 54(2) of the Convention, any remedy available to
the creditor under any provision of the Convention which is not there expressed to require
application to the court, may be exercised without leave of the court.” Declaration Lodged
by the Federal Democratic Republic of Ethiopia under the Cape Town Convention at the
Time of the Deposit of its Instrument of Ratification, https://www.unidroit.org/status-
2001capetown?id=467.
94
Catalin-Gabriel Stanescu, Self-Help, Private Debt Collection, and the Concomitant Risks, 1.
95
The Capital Goods Leasing Proclamation Article 6(1) & (2).
36
1.7. Goodbye to French Civil Law

The reform in Ethiopia justified by the reasons explained above marks a
departure of the Ethiopian law of security interests from the French legal
tradition that greatly influenced Ethiopian civil law. Regarding the source of
ECC that governed the most common security rights in Ethiopia, there are two
different positions.
The drafter of the ECC claimed that, “[t]he primary sources of the ECC
cannot be attributed to any one law but have been adapted from the law of
those nations with whom Ethiopia has “cultural, commercial and maritime
connections.”96 According to this position, the laws of Egypt, Italy, Greece,
Switzerland, India, and even the restatement of American law were consulted
although the French Civil Code (FCC) played a general and pervasive role.97
The second position, which is more realistic, in my opinion, states that despite
the eclectic approach to the selection of sources and drafting technique, the
ECC was inevitably French in substance and style because most of the codes
claimed to be consulted by the drafters were influenced by the FCC.98
The book adopts the second view because there is no sufficient reason to
believe that the ECC is not based on FCC. First, the French drafter of the ECC,
Renè Davide, seemed to have been chosen due to the accident that the wife of
an advisor of emperor Haile Selassie was French.99 No evidence suggests that
further thought was put into selecting a committee of drafters well versed in
different foreign laws. Although Renè David had an impeccable resume for the
job, one cannot doubt that his knowledge of French law and the fact that he
represented French culture and identity had highly influenced his work. Second,
the civil codes of other countries supposedly consulted are traceable to the FCC.
96
Norman J. Singer, “Modernization of Law in Ethiopia: A Study in Process and Personal
Values,” Harvard International Law Journal 11 no. 73(1979): 88-89.
97
Ibid.
98
Paul Brietzke, “Private Law in Ethiopia,” Journal of African Law 18, no. 2(1974): 149-167.
99
M. Aden, a Call for New Ethiopian Civil Code (2012), 4. “It is also known that the emperor’s
advisor was educated in French culture and language as much as the emperor himself was.”
37
The French law security interests itself was meaningfully revised only
in 2006 because it was recognized and conceded that the law enshrined in the
FCC was no longer fit for purpose.100 While the FCC went through reform, at
least once, the ECC remained for the most part as it was in 1960. The MPSRP
marked the death of FCC-based law of security rights in Ethiopia.
The reason for the departure from the FCC is self-evident. Nevertheless,
for readers who seek further insights, although French law of security interests
itself has been reformed a couple of times, complaints regarding its compatibility
with the current commercial reality of France have been widespread. One of the
latest comprehensive reforms took place in 2006.101 Describing the problems
with Pre-2006 French secured transactions law, Marie-Elodie Ancel states:
The French Civil Code provisions had more or less lost any relevance, as
the possessory pledge does not suit modern economic life. Yet specific
regimes had been created to such an extent and in such a piecemeal
manner that stakeholders were confronted with a puzzling patchwork of
legislation, which in fact suited nobody. Secured creditors had difficulties
getting information on their debtor’s existing encumbrances: a debtor
could be in possession of assets that he in fact did not own. Moreover,
these secured creditors’ rights were in real danger when the debtor went
into insolvency proceedings, unless they had a right of retention or a
fiduciary transfer of title over the assets. Debtors, notwithstanding the
numerous specific statutes, had difficulties using some of their assets as
collateral: stock-in-trade for example could not easily be charged. Third
parties, in particular unsecured creditors, also complained of the lack of
transparency: multiple specific registers had been created and existed
side-by-side, making searching difficult; publicity of retention of title
clauses and fiduciary transfers was not required, although it was required
100
Marie-Elodie Ancel, “Recent reform in France: the renaissance of a civilian collateral
regime?” 262.
101
Ordinance No. 2006-346 of 23 March 2006 Relating to Security Rights.
38
for some pledges and leasing contracts.”102
The quote succinctly summarizes not only French law of security interest
but also its Pre-2019 Ethiopian counterpart. Notwithstanding the recent reforms,
French law of security rights until recently has been considered complex,
because of its fragmentation. Marie-Elodie Ancel argues “…complexity was
one of the main criticisms of French secured transactions law. So, one may
contend that complexity is now even worse because none of these previous
devices has been repealed.”103
In 2017, I argued that it is time for the Ethiopian law of security interests
to divorce its marriage with the French legal tradition and look for a model
elsewhere.104 “In the first place, the influence of French law on the Ethiopian
legal system is a historical happenstance and arbitrary decision to modernize
Ethiopian law based on French law than based on real historical, socio-economic,
and cultural ties between the two countries.”105 The Ethiopian law of security
rights enacted two years later departed from the French law.
1.8. UCC Article 9 via the UNICTRAL Legislative Guide

The direct source of the MPSRP is purported to be the UNICITRAL Legislative
Guide on Secured Transactions Law (UNCITRAL LGSTL).106 The UNCITRAL
LGSTL contains a set of recommendations believed to be a suitable basis for
reforming secured financing law reform across jurisdictions. States that opt to
use the Guide can adopt the essential recommendations and principles and adapt
them to their local context. Nevertheless, a closer review of the document and an
inquiry into its background reveals that the UNCITRAL LGSTL is based on the
102
Marie-Elodie Ancel, “Recent reform in France: the renaissance of a civilian collateral
regime?” 262.
103
Ibid., 267.
104
Asress Adimi Gikay, “Rethinking Ethiopian Secured Transactions Law through Comparative
Perspective: Lessons from the Uniform Commercial Code of the US,” Mizan Law Review 11,
no. 1(2017) 175.
105
Ibid.
106
FDRE House of Peoples’ Representatives, Explanatory Notes on the Draft Movable Property
Security Right Proclamation (2019), Paragraph 8.
39
UCC Article 9. It is beyond the purpose of this book to examine the UNCITRAL
LGSTL, as it would not be of appreciable benefit to the reader in understanding
Ethiopian law of security rights. Nevertheless, an example is provided here to
argue that the UNCITRAL LGSTL is indeed based on UCC Article 9.
UCC Article 9 which governs security interests in movable assets in the

US was adopted first by the National Conference of Commissioners on Uniform
State Laws (NCCUSL)107 and the American Law Institute (ALI)108 in 1952.109
Today, UCC Article 9 is adopted in 52 states in the US.110 It has been revised
several times over the years (in 1999, 2001, and 2010). The amendment to UCC
Article 9 made in 2010 took effect in 2013.111 Throughout this book, revised
UCC Article 9(2001) is the main point of reference while a reference to the
2010 version is indicated specifically whenever necessary.
UCC Article 9 is regarded as the most modern, rational, and

comprehensive law of security interests in the world.112 It is considered the
most successful contemporary secured transactions law primarily for its unitary
theory and functional approach to security rights, that influenced legal reforms,
not only in common law jurisdictions but also in Continental Europe.
In continental Europe, Book IX of the Draft Common Frame of Reference

(DCFR) governing security rights which has legal concepts borrowed from
UCC Article 9 can be named as a prime example of the global reception of
107
The National Conference of Commissioners on Uniform State Laws is a body of commissioners
appointed by states that promote uniform state laws. See the official website(https://www.
uniformlaws.org/home).
108
Founded in 1923, the American Law Institute is a non-governmental body led by academics
and lawyers. For more information about the ALI, See the official website(https://www.ali.org).
109
See Phillip L. Kunkel, et al Security Interests in Personal Property, Farm Legal Series,
Regents of University of Minnesota (2008), 1.
110
See Robert M. Fishman et al eds. Secured Transactions (Springfield: IICLE, 2016), § 1-4.
Scott J. Burnham, the Glannon Guide to Secured Transactions, Learning Secured
111
Transactions through Multiple-Choices, Questions and Analysis (New York: Aspen

Publishers, 2007), 22.
112
Bahaa Ali El-Dean, Privatization and the Creation of Market-Based Legal System: The Case
of Egypt (London, and Boston & Köln: Brill, 2002), 107.
40
UCC Article 9.113 The DCFR is a product of efforts among European scholars
and practitioners to create a Pan-European private soft law instrument that
reconciles the differences among private laws of European countries.114 Two
features of Book IX of the DCFR may be taken as evidence of the influence
of UCC Article 9. First, Book IX introduced the unitary concept of security
interests though not as faithfully as it is designed under the UCC Article 9.115
Second, its drafters have shown the desire to encourage private enforcement of
security rights stating that “in many European countries there is an increasing
movement seeking an alternative to traditional methods of enforcing security
rights because of its delays, costs, and often disappointing results.”116 These are
two facets of UCC Article 9, which place it in contrast with secured transactions
laws of the civil law jurisdictions, be it German, Scandinavian, or Napoleonic,
that the DCFR attempted to change.
Before and in the aftermath of the DCFR, European scholars have

examined the differences and similarities between the UCC Article 9 and secured
transactions laws in continental Europe, revealing sharp differences between the
two legal families in the field.117 In determining the relationship between the
UCC Article 9 and secured transactions laws in continental European countries,
it can be argued that in part, the DCFR epitomizes the degree to which the civil
law tradition has received UCC Article 9 so far.118
113
The DCFR codifies the common core of European Private Law including laws of contract
and security rights. http://ec.europa.eu/justice/policies/civil/docs/dcfr_outline_edition_en.pdf.
114
Christian von Bar, “A Common Frame of Reference for European Private Law - Academic
Efforts and Political Realities,” Electronic Journal of Comparative Law, Electronic Journal of
Comparative Law 12 no. 1(2008), 1.
115
DCFR Section 1: IX. – 1:101.
116
Christian von Bar & Eric Clive, Principles, Definition and Model Rules of European Private
Law. Draft Common Frame of Reference (DCFR), 1st ed, (London: Oxford University Press,
2010) ,5614.
117
Jens Hausmann “the Value of Public-Notice Filing under Uniform Commercial Code Article
9,” See also Sjef Van Erp, et al, The Future of Secured Credit in Europe.
118
Tibor Tajti, “Could Continental Europe Adopt A Uniform Commercial Code Article 9 – Type
Secured Transactions System? The Effect of Differing Legal Platforms,” Adelaide Law Review
35, no. 1(2014):178.
41
The DCFR should in theory influence legal reform in Europe and has
done so in some countries in some areas of laws besides being applied in
court.119 Nevertheless, it has not been taken as a model for secured transactions
law reform yet. Despite that, the DCFR shows the overall admission of the
superior qualities of UCC Article 9 by continental European scholars. Secured
transactions laws of Croatia, Hungary, Poland, and Romania have been reformed
with significant UCC Article 9 influence.120 Therefore, it is fair to state that UCC
Article 9 has a fair amount of influence on the law of security rights around
the world, certainly more than the law of any other nation in the field by far
in the 21st Century.
The UNCITRAL LGSTL was adopted in 2008, over half a century

after the UCC Article 9 was adopted. The Guide is a simplified version of UCC
Article 9, supposedly making it suitable to various legal systems. The idea of
a functional approach to security rights where secured financing law applies
to all transactions in which movable property is used to secure payment or
performance of an obligation irrespective of how the parties nominate them
is the creation of UCC Article 9.121 The functional approach which made its
way to the Ethiopian law of security rights is one of the selling points of the
UNICTRAL LGSTL. Many provisions under the MPSRP have a striking
resemblance, sometimes verbatim sameness with the provisions of UCC Article
9. Sometimes, the UNCITRAL LGSTL does not mention certain legal concepts
that mysteriously appear in the MPSRP while those legal concepts are peculiar
to or dominantly utilized in the US Legal system such as trust receipt and
security trust deed (see infra § 4.4).
119
Lorna Richardso, “The DCFR, anyone?,” The Journal of the Law Society of Scotland, Online
Publication, http://www.journalonline.co.uk/Magazine/59-1/1013494.aspx.(Accessed .
120
See Norbert Csizmazia, “Reform of the Hungarian law of security rights in movable
property,” 182; Patricia Živković, “Floating Security Interest- Comparative Analysis of US,
English and Croatian Approaches” 1050-1058 & Catalin-Gabriel Stanescu, Self-Help, Private
Debt Collection and the Concomitant Risks.
121
UCC § 9-109 (a) states “Except as otherwise provided in subsections (c) and (d), this Article
applies to: (1) a transaction, regardless of its form, that creates a security interest in personal
property or fixtures by contract.”
42
Consequently, the proper implementation of the MPSRP requires

mindfulness and some level of understanding of the real source of the law —
UCC Article 9 — rather than its fabricated version, the UNCITRAL Guide on
Secured Transactions Law. This would be important in terms of looking for
solutions to potential implementation and interpretation issues that might be
faced in the future. The rich body of cases in the US, the official commentary
to UCC Article 9, and nearly a Century-old experience applying sophisticated
law of security interests would significantly benefit the Ethiopian legal system
rather than a document prepared by a group of consultants who are not in the
position to provide interpretive guides on a continuous basis. As commercial
realities change so does the law as applied in practice. It is for this reason that
this book provides a problem-oriented comparative analysis of the Ethiopian
law of security rights and UCC Article 9.
1.9. Conclusion
The need for the reform of the Ethiopian law of security rights has been long
overdue. The enactment of the MPSRP in 2019 was a timely response to the
needs of the modern market economy where access to credit to firms and
consumers is essential. In particular, the departure from the existing legal regime
based on French legal tradition is encouraging development in the history of the
Ethiopian legal system. Notwithstanding the official position that the MPSRP
is based on the UNICTRAL LGSTL, this book argues that UCC Article 9
can be regarded to have a stronger influence, and future implementation and
interpretive challenges will be better addressed by studying how the US secured
transactions law functions.
43
Chapter Two: The Conceptual Foundations of the MPSRP
2.1. Introduction
Pre-2019 Ethiopian law of security rights is characterized by a compartmentalized
system of security interests. The law also lacked a coherent and logical structure
and organization. The ECC recognized a few types of security interests in
different types of assets. The major security devices – namely pledge and
mortgage – are organized in different chapters and titles of the ECC although
both legal devices secure payment or performance of an obligation.122 Security
right in warehoused goods (receipts) was governed by Warehouse Receipt
System Proclamation of 2003,123 while the ECC governed it prior. Within the
ECC, sui generis set of rules was applicable to security interests in intangibles
and claims.124 Lastly, a business mortgage was governed by the ECOMC.125
Under the MPSRP, this fragmented approach to security interests ended with a
single concept of security rights being introduced.
122
In the ECC, Contract of Pledge is governed in book V governing special Contracts
including sales and title XVII governing Contracts for custody, use or possession of chattels
and Chapter 6 of title XVII governs contract of Pledge. Contract of Mortgage is in book V
governing special Contracts, Title XVIII (Contracts relating to immovable), and Chapter 4
governing mortgage and antichrists.
123
The Warehouse Receipt System Proclamation No. 372/2003. Under the ECC, Articles
2806-2824 governed warehousing. The ECC provisions are no more applicable after the
enactment of the warehouse receipt system law of 2003.
124
ECC Chapter 6, Section 2: pledging of claims or intangibles. Articles 2863 – 2874 are
dedicated to the pledging of claims or intangibles.
125
The ECOMC, Book I, Title V, Articles 171- 193. The provision of the commercial code
governing business mortgage is updated Business Mortgage Proclamation No. 98/1998.
46
This chapter examines the conceptual foundations of the Ethiopian law

of security rights and its significance in ensuring legal certainty and efficiency.
To practitioners, policymakers, researchers, and students, being able to explain
these conceptual foundations would be beneficial to develop a robust scheme of
understanding and practicing the law.
2.2. The Unitary Theory of Security Right

The MPSRP has adopted a unitary as opposed to a compartmentalized system
of security interest that prevailed Pre-2019. The unitary model is pioneered by
UCC Article 9126 whereas the non-unitary model is prevalent in civil law as well
as some common law jurisdictions.127 Under the unitary model, the legal regime
governing security rights applies to all transactions creating a security interest
in movable assets including intangible property and fixtures(accessories). In
Anglo-Saxon legal terminology, the law applies to what is commonly referred
to as personal property.128
Article 3(1) of the MPSRP states that “This proclamation shall apply to
rights in movable property created by agreement that secure payment of credit
or other performance of an obligation.”129 The draft version of the MPSRP had
additional explanatory phrases, “regardless of the form of the transaction, type
of movable property, status of the debtor or secured creditor or the nature of
the secured obligation.” Article 3 closely resembles its counterpart in UCC
Article 9, § 9-109(1) (a) which states that this article “applies to a transaction,
regardless of its form, that creates a security interest in personal property or
fixtures by contract.”130 One commentator asserts that “the principal contribution
126
Tibor Tajti, “Could Continental Europe Adopt A Uniform Commercial Code Article 9 –
Type Secured Transactions System? The Effect of Differing Legal Platforms,”150.
127
See Joseph J. Norton & Mads Andenas eds, Emerging Financial Markets and Secured
Transactions (The Hague/Boston: Kluwer Law International, 1998) 6.
128
Michael Bridge, Personal Property Law, 2nd ed, (Oxford: OUP, 2015), 10. “…personal
property (or personalty) is all the property that is left once land—that is real property (or
realty)—has been subtracted. Personal property is therefore residual in character, an attribute
that contributes to the somewhat formless nature of the subject.”
129
MPSRP Article 3(1).
130
UCC § 9-109(1) (a). See also exceptions UCC § 9-109(1)(c) and (d).
47
of Article 9 is to replace the many Pre-Article 9 security devices with a uniform

security device called security interest.”131 Gilmore asserts that the first thing
to be noticed about Article 9 is its comprehensiveness: it is all-embracing, all-
devouring; it covers everything.132 By uniting various Pre-Article 9 security
devices under one roof, Article 9 ensures comprehensiveness and eliminates the
creation of a novel security device that is not governed by Article 9.133 In other
words, even if parties to a transaction create a new device, never specifically
named by Article 9, it falls under Article 9 if it purports to secure payment or
performance of an obligation.134
Thus, the unitary concept of security interest ensures certainty of

transactions because parties entering into secured financing agreements have
the confidence that they have priority in payment regardless of how poorly or
wrongly their transaction has been nominated.135 The key feature of the unitary
model is that all security devices created on personal property are united under
the single concept of security interest and are subject to a single set of rules,
including rules of creation, registration, and enforcement.
Adopting the unitary theory of security interest, Article 3 of the MPSRP

ensures that no other law governs security right in movable assets, for all
security rights are united under the umbrella of one law, save assets that are
excluded from the ambit of the proclamation for the right(justifiable) or wrong
reasons (see infra Ch. 3). If the transaction secures payment or performance
of an obligation, for instance, a sale of a car where the seller has retained the
title until the payment of the full price, that is a security right and as such falls
under the ambit of the MPSRP. It is subject to the same rules of registration and
enforcement unless the MPSRP provides a specific exception. This conceptual
131
Richard F. Duncan & William H. Lyons, the Law and Practice of Secured Transactions:
Working with Article 9(New York: Law Journal Press, 2012), Sec. 1.01(3).
132
Grant Gilmore, Security interests in Personal Property, Vol. 1(New Jersey: The law Book
Exchange Ltd, 1999), 295.
133
Ibid., 295-296.
134
Ibid., 296.
135
See Michael G. Bridge, et al, “Formalism, functionalism an understanding the law of
secured transactions” McGILL Law Journal 44 (1999): 621.
48
basis of Ethiopian law of security interests in movable property was born under
UCC Article 9 and it is incorporated in Article 3 of the MPSRP.
2.3. The Functional Approach to Security Right

Another major novelty of the MPSRP is the functional approach which may
be regarded as a sub-element of the unitary theory. In its draft version, Article
3 states that “This Proclamation shall apply to all rights in movable property
created by an agreement that secures payment or other performance of an
obligation regardless of the form of the transaction, type of movable property,
status of the grantor or secured creditor or the nature of the secured obligation
(Emphasis Added).” The Phrase “regardless of the form of the transaction, type
of movable property, the status of the grantor or secured creditor or the nature
of the secured obligation,” was removed from the final version of Article 3.
Nevertheless, Article 2(43) captures this stating that “security right” means a
property right in movable property that is created by an agreement to secure
payment or other performance of an obligation, regardless of whether the
parties have denominated it as a security right, and regardless of the type of
property, the status of the grantor or secured creditor, or the nature of the secured
obligation.”136 This means in concrete terms that the form of transaction is
disregarded for substance. Consequently, the judge sees the economic reality
behind the transaction rather than the formal designation the parties have given
to the transaction in the determination of a security agreement.137 Cindy puts the
essence of the functional approach to security interest as follows:
The form of the transaction or the label the parties put on the transaction
is irrelevant for the purpose of determining whether Article 9 applies.
Rather, the determination of whether Article 9 applies is based on the
economic reality of the transactions. For example, transactions may
be characterized as a sale or lease of goods but if in economic reality
security interest is being created, Article 9 will nevertheless apply […] it
MPSRP Article 2(43).

136
Cindy J. Chemuchin, ed., Forms under the revised uniform commercial code Article 9,
137
committee, task force on forms under revised Article 9, 2nd ed., (American Bar Association,
2009), 4.
49
is also not required that the parties refer in their agreement to a ‘security
interest’ being created under a ‘security agreement’. Even if parties
use terms such as ‘assignment’, ‘hypothecation’, ‘conditional sales’
‘trust deed’, the like, Article 9 still applies whenever security interest
in personal property is being created. Similarly, it is irrelevant for the
purpose of Article 9, whether title to the collateral is in the name of the
debtor or the secured party.138
The functional approach to security interest ensures that transactions

whose economic function is to secure payment of credit or performance of
an obligation be treated as secured transactions and be subject to the law of
security rights. 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 differences that are designed to fit the
peculiarities of different types of assets or parties are eradicated entirely. For
instance, a security right in money is made effective against third parties only
through possession under UCC Article 9(see infra § 8.3.2). While this principle
is not explicitly stated under the MPSRP, a secured party that has perfected
its security right in money through possession has priority over the secured
party that has perfected it through registration (see infra § 9.3). Security rights
in intangibles assets such as accounts receivables are made effective against
third parties only through registering notice. These specific rules have sound
policy justifications. The functional approach does not dictate eliminating these
kinds of differences. It rather requires that all transactions purporting to secure
payment or performance of obligation be treated as secured transactions and be
subject to essentially similar rules.
The functional approach to security interests requires a shift from

dogmatic treatment of transactions prevalent in civilian systems139 to purpose-
oriented assessment. Unsurprisingly, this approach is unfamiliar to the pre-
Ibid
138
Tibor Tajti, “Consignments, and the Draft Common Frame of Reference,” Pravni Zapisi:
139
Godina 2, no. 2 (2011): 358, 362.

50
2019 Ethiopian secured transactions law. Hence offering a practical example to

demonstrate the concept would be beneficial.
Title financing security right, a form of acquisition security right (in the
language of the MPSRP) emerges from a transaction where the financier has
the title to the ownership of the asset while the debtor has possession within the
framework of the relevant legal arrangement.140 It includes sale with retention
of ownership, hire-purchase, and consignment. Concerning the treatment of title
finance in domestic laws, two patterns can be identified — (a) the treatment of
title financing outside the realm of secured transactions law such as contract law
and financial leasing law (b) their re-characterization as secured transactions.141
The MPSRP adopted the latter approach.
Following the functional approach, the MPSRP now brings

hire-purchase, a specific type of financial leasing under its ambit by
recharacterizing it as a secured transaction. Under the Ethiopian Financial
Leasing Law, a Hire purchase is:
…a type of leasing where the lessor provides a lessee with the use of a
specified capital goods, against payment of mutually agreed installments
over a specified period under which, with each lease payment, an equal
percentage of the ownership is transferred to the lessee and, upon effecting
of the last payment, the ownership of the capital goods automatically
transfers to the lessee.142
The financial leasing law is no more applicable to hire-purchase as a

security device. Nevertheless, the reason the MPSRP had to recharacterize hire-
purchase can be understood adequately by examining how hire-purchase was
treated under the leasing law. When the lessee defaults or is declared bankrupt,
there are two remedies available to the lessor. Upon default, the lessor has
the right to rescind the contract and take possession of the good by giving 30
140
Philip R. Wood, Title Finance, Securitization, Derivatives, Set-off and Netting (London:
Sweet & Maxwell, 1995) 4.
141
UNCITRAL Legislative Guide on Secured Transactions Law, Recommendation 50-64.
142
The Capital Goods Leasing Proclamation Article 2(4).
51
days’ notice to the lessee.143 If the lessee is declared bankrupt, the lessor has
priority on the leased good because “the lessor does not lose its ownership right
in the goods even though the lessee is judicially bankrupt.”144 The remedies
available to the lessor are quicker and cheaper therefore more efficient than
those available to other creditors. It is also a proprietary remedy as opposed
to a contractual remedy. Therefore, under the leasing law, a hire-purchase
agreement was for all practical purposes, functionally similar to a security
agreement granting the lessor a proprietary right in the leased goods. UCC
Article 9 re-characterizes financial leasing as secured transactions to ensure that
the mandatory provisions applicable to security rights such as those relating
to registration and enforcement are applicable to leasing arrangements under
specific conditions (see infra § 5.7.2.1).145
Before the enactment of the MPSRP, hire-purchase was not seen as a

secured transaction despite its functional similarity to secured transactions.
The MPSRP changed this status quo. There are other transactions that were
not considered secured transactions because they bear certain names such
as consignment and sale with retention of title or financial leasing. With the
MPSRP adopting the functional approach, those too are brought under the realm
of secured transactions law (see Infra Ch. 5).
2.4. Personal Property Security Right

The MPSRP states that it applies to “all rights in movable property created by
[an] agreement that secures payment or other performance of an obligation.”146
It defines security right as “property right in movable property.”147 The approach
taken by the MPSRP is what is called personal property security right approach
similarly to UCC Article 9 which applies to “financing secured by ‘‘personal
property” (i.e., movables, whether tangible or intangible, as distinct from ‘‘real
143
Ibid., 6(2).
144
Ibid., Article 8(2). 3)
145
Herbert Kronke, “Financial Leasing and its Unification by UNIDROIT – General Report,”
Rev. dr. unif. (2011), 29.
146
MPSRP Article 3(1).
147
52
property”, i.e., land and buildings).”148 There are two pertinent questions to be
examined in relation to this provision. The first one is the positive scope of the
law— what is intended to be covered by movable property. The second question
is, what is the policy rationale for the exclusion of real property mortgages from
the umbrella of the MPSRP and what are the implications of this? The latter is
discussed in chapter 3.
2.4.1. Movable Property

The MPSRP adopts a more pragmatic approach to movable property by doing
away with the doctrinal and formalistic approach adopted by the ECC. Movable
property is defined under Article 2(27) of MPSRP as “inventories, agricultural
products, incorporeal assets, corporeal assets, the right to use land unless
prohibited by pertinent laws, properties excluding land, house, and building,
a security right under a hire-purchase agreement, security trust deed, trust
receipt, commercial consignment, mortgage of a business, sale with ownership
reserved, sale with right of redemption, security rights in certificated securities,
and security rights in warehouse receipts.”149
The general approach to defining movable property under the MPSRP

is fairly clear. Movable property embraces anything ranging from a corporeal
chattel to an incorporeal asset and the right to use land. The MPSRP also defines
instruments and documents representing claims as movable property. The
broader notion of movable property under the MPSRP provides the necessary
flexibility to extend the meaning of movable property to anything other than
land and building, resources that have a value which makes them susceptible for
use as collateral. This approach can be contrasted to a certain degree with the
notion of movable property under the ECC.
2.4.1.1. Corporeal Assets

The MPSRP defines corporeal assets as all types of goods including money,
negotiable instruments, negotiable documents, and certificated securities.”150
The MPSRP is intentionally general, by employing the terms all goods. A closer
analysis reveals that the approach to the definition of corporeal assets under the
MPSRP is broader and more functional than under the ECC.
53
ECC Article 1127 which is the starting point for the classification of
property as corporeal and incorporeal states that “corporeal chattels are things
which have material existence and can move themselves or can be moved by
a person without losing their individual character.”151 There are three types
of corporeal chattels under the ECC, depending on the mode of acquisition,
proof, transfer, and extinction of their ownership. These are ordinary, special,
and deemed corporeal chattels. There is a fourth type of corporeal chattel
which is called movable chattel by anticipation. It is worth noting that Muradu
Abdo in his article, “A Subsidiary Classification of Goods under the Ethiopian
Property Law: A Commentary”, lucidly writes about the importance of division
of property as immovable and movable and provides a compelling argument
for why further classifications such as corporeal and incorporeal, fungibles
and non-fungibles, divisible and indivisible have significance under Ethiopian
property law.152 This book fully endorses the view of Muradu Abdo’s and only
focuses on corporeal assets and incorporeal assets as this is the classification
adopted under the MPSRP.
Under the ECC, an ordinary corporeal chattel is a corporeal chattel

whose ownership can be acquired or transferred by mere acquisition or transfer
of possession without the special procedure being necessary.153 Moreover, for
ordinary corporeal chattels, the person in possession is presumed to be the owner
unless proven otherwise.154 With regards to the transfer of ownership, the ECC
having stated that “the ownership of corporeal chattels shall be transferred to
the purchaser or legatee at the time when he/she takes possession thereof,”155
further states that “nothing in this article shall affect the provisions of special
laws or relating to special kinds of corporeal chattels.”156 This provision refers to
151
ECC Article 1127.
152
Muradu Abdo, “A Subsidiary Classification of Goods under the Ethiopian Property Law: A
Commentary,” Mizan Law Review 2, no. 1(2008): 52–90.
153
ECC Articles 1151, 1161(1), ECC 1186(1), 1186(2). See also Muradu Abdo, “A Subsidiary
Classification of Goods under the Ethiopian Property Law,” 80-90.
154
ECC Article Article 1193.
155
ECC Article 1186(1).
156
54
various laws requiring special procedure for transfer of ownership of corporeal

chattels.157 For instance, the Vehicles Identification, Inspection and Registration
Proclamation states that ‘Any person, to whom a vehicle is transferred by way
of sale, donation, succession or otherwise, shall apply to the appropriate organ
within six months for the re-issuance of the title certificate book in his own
name.’158 The implication of this is that if the transferee does not obtain the title
certificate book upon registration, the transferor remains the owner. It is this
category of corporeal assets that are identified as special corporeal assets.
Another class of corporeal assets under the ECC are deemed corporeal
chattels — things that are not corporeal assets but deemed by the law as such.
The main characteristics of corporeal chattels are material existence and
mobility.159 The ECC makes an exception to the material existence and deems
certain things that do not have material existence as corporeal chattels.
The first deemed corporeal chattel under the ECC is claims and other
incorporeal chattels. Accordingly, “unless otherwise provided by law, claims,
and other incorporeal rights embodied in securities to bearer are deemed to be
corporeal chattels.”160 Under Ethiopian law, there is no definition of securities,
although securities commonly include shares, bonds, and other instruments. The
ECOMC distinguishes between two types of shares — bearer and registered
shares. Pursuant to Article 340(1) of ECOMC, bearer shares are transferred
through mere delivery of possession to the transferee, without any other
requirement.161 Besides shares, bonds can also be issued to the bearer. The rights
embodied in bearer instruments, including possibly the right to vote and the
right to take part in dividend sharing are incorporeal, lacking material existence
while the document enshrining those rights has material existence. The ECC for
the sake of convenience deems the incorporeal right as a corporeal asset.
157
Muradu Abdo, “A Subsidiary Classification of Goods under the Ethiopian Property
Law,” 82.
158
Vehicles Identification, Inspection and Registration Proclamation No. 681/, Article 6.
159
ECC Article 1121.
160
ECC Article 1128.
161
ECOMC Article 340(1).
55
The second class of deemed corporeal chattels is natural forces of

economic value, that unless otherwise provided are deemed to be corporeal
chattels where they have been mastered by a person and put to his/her use.162
This includes electricity, natural gasses, and other intangible things that exist in
nature as long as they are put to use by a person.163
Movables by anticipation are immovable things by nature but the law

considers them as movable things. Under the ECC ‘trees and crops which are
considered as intrinsic elements of land are to be considered corporeal chattels
where they are subject to contracts for their separation’.164 It is to be recalled that
under the ECC, a corporeal chattel is a thing that has a material existence and
that can move or be moved by a person without losing its individual character.165
The preceding cursory overview of the meaning of corporeal assets

under Ethiopian property law makes it apparent that the MPSRP has a slightly
broader notion of corporeal assets. Consistently with the ECC, a security right
under the MPSRP can be granted in ordinary corporeal chattels(furniture) and
special corporeal chattels (motor vehicle). It can also be granted in movables
by anticipation such as crops, including future crops and forests(trees).166
Furthermore, the MPSRP characterizes negotiable instruments and documents
as movable assets in line with the ECC which characterizes claims, and other
incorporeal rights embodied in documents issued to the bearer as corporeal
assets. The MPSRP goes further in its scope as it applies to instruments and
documents issued both to bearer and specified person as well as electronic
instruments,167 while the ECC characterizes only bearer instruments as corporeal
assets. Admittedly, this may be regarded as a minor deviation, compared to the
difficulty that may be faced with respect to intangibles under the ECC.
162
ECC Article 1129.
163
ECC Article 1129.
164
165
ECC Article 1127.
166
See MPSRP Article 2(16) & 18.
167
See MPSRP Article 2(1) & 2(27).
56
2.4.1.2. Incorporeal Assets

The MPSRP also applies to incorporeal assets defined as all types of movable
property other than corporeal assets including receivables, deposit accounts, and
intellectual property rights.168 Under Ethiopian law, if one were to try to identify
the common features of various intangible assets, it would be a futile exercise.
This is because the rules governing incorporeal assets are scattered throughout
the ECC, the ECOMC, and other statutes. Incorporeal assets including claims,
intellectual property rights such as copyrights, patents, trademarks, goodwill,
and contractual claims are neither defined following a consistent theory nor
treated similarly under the ECC provisions governing property sometimes to the
extent that it is not clear whether some of these things were seen susceptible to
giving rise to property right when the code was conceived.
The key question is whether the MPSRP follows a more liberal approach
to movable property as in common law system, where there is no difficulty in
fitting incorporeal things within the notion of movable property169 and alters the
meaning of movable property under the Ethiopian law or does it merely fix the
disorderliness of the Ethiopian property law, which is unnecessarily technical,
doctrinaire, and complex?
The ECC defines corporeal chattels as things that have a material

existence and can move themselves or can be moved by a person without losing
their individual character.170 The contrary reading of the relevant ECC provision
is that things that do not have material existence are not corporeal chattels even
if they move by themselves or be moved by a person. But does that mean that
those things are incorporeal assets with respect to which property rights can be
exercised? Analysed earlier, there are things that have no material existence that
are treated as corporeal chattels. Claims and other incorporeal rights that are
168
169
See Christian Von Bar & Ulrich Drobnig, The Interaction of Contract Law and Tort and
Property Law in Europe: A Comparative Study (Munchen: Sellier European Law Publishers,
2004), 319.
170
ECC Article 1127.
57
embodied in securities to the bearer are deemed to be corporeal chattels.171 This

means any claim or incorporeal right embodied in security to the bearer such as
a bond or stock, or warehouse receipt, or bill of exchange or a promissory note
or any other instrument to the bearer changes the claims it incorporates into a
corporeal chattel. Here, it can be seen that the law treats some incorporeal rights
as corporeal. Does that mean all incorporeal rights not embodied in security to
the bearer are considered as incorporeal property as a residual category? May
we make such a categorical inference? Certainly, incorporeal things also include
all claims not embodied in securities to the bearer such as a bill of exchange, or
a check or a bond or stock issued to a specified person, or order, a contractual
claim, intellectual property rights such as copyrights, patents, trademarks,
goodwill and commercial secretes or a software or simply a personal data.172 The
ECC does not explicitly state that all of these are incorporeal assets susceptible
to property rights. This is notwithstanding the fact that the constitution of the
FDRE explicitly recognizes intangible things as property.173
The challenge in understanding intangibles under the ECC becomes

even more acute in the light of Article 1204 of the ECC which states that
“ownership is the widest right that may be had on a corporeal thing.”174 When the
law explicitly states that ownership right may be had only on a corporeal thing
and tries to redefine incorporeal things as corporeal (as in the case of deemed
corporeal chattels), one can reasonably argue that perhaps, the law does not
treat the rest of the incorporeal things as properties. These include, but are not
171
ECC Article 1128.
172
In Europe, there is a movement for propertization of personal data. National courts are also
coming to recognize personal data as an asset of value. In a controversy involving Facebook
resolved by the Administrative Court of Lazio (Italy) on appeal from the Italian Data Protection
Authority, one of the issues raised in the claim was that Facebook made misleading advertising
stating that its services are for free while it monetarizes personal data, a claim which eventually
was accepted by the court. In this context, the Lazio court in affirming the ruling against Facebook
held that personal data is an economic asset that susceptible to negotiation and economic use
(disponibile in senso negoziale, suscettibile di sfruttamento economico). Facebook Ireland vs
Astroconsumo, Il Tribunale Amministrativo Regionale per il Lazio, Pubblicato il 10/01/2020.
173
FDRE Constitution Article 40(2).
174
ECC Article 1204.
58
limited to, intellectual property rights and claims not embodied in securities to
the bearer. Without setting the general basis for defining an intangible property,
the ECC randomly goes to governing property right in certain intangibles. For
instance, Articles 1347–1352 govern usufruct of incorporeal rights/things.175
These provisions affirm that there are intangible things that are treated as
intangible properties under the ECC. But what are those intangible things and
what are their common features?
The problem emerges partly from the fact that the entire notion of
property under the ECC seems to be centred on ownership of corporeal things,
a legal approach that is prevalent in many civilian systems,176 which led to
recharacterizing incorporeal things as corporeal for the purpose of consistency.
In the process, certain incorporeal assets such as intellectual property rights,
have been relegated to the periphery in the realm of property law, with no
consistent theoretical foundation.
The MPSRP adopts a different approach by listing things that constitute

intangible property in which security rights can be granted. The approach should
be considered a positive step as it prevents the application of the provisions
of the ECC that are full of confusions and ambiguities without clear policy
rationale, largely unfit for the commercial realities of the 21st century. Today,
businesses create value from things that are not regarded as corporeal chattels
as much as they produce value in corporeal chattels. Thus, the ECC’s dogmatic
and technical approach to defining corporeal assets is timely and justifiably
overridden by the MPSRP which favours a more pragmatic approach. This
becomes more vivid when the place of patents, trademarks and trade names is
examined under Ethiopian property law. Despite their paramount importance
for commerce and in creating value for firms, the ECC barely mentions the type
of property right pertinent to them while it provides detailed rules regarding,
how one becomes an owner of a lost 500 ETB. The code was enacted in 1960
ECC Articles 1347-1352.

175
Christian Von Bar & Ulrich Drobnig, The Interaction of Contract Law and Tort and
176
Property Law in Europe, 317-319.

59
when incorporeal assets such as intellectual property did not gain prominence
but the fact that it has not been revised until today is baffling.
This is not to say that the MPSRP is flawless. It has its own shortcoming
in this regard that require a judicial tolerance for an ill-drafted statute. For
instance, the MPSRP confidently states that intellectual property rights will have
the meaning given to it in the intellectual property law as if there is a branch
of law that gives a generic meaning to intellectual property rights (see infra §
6.4). If the purpose of the reform is to bring a paradigm shift in the Ethiopian
legal system, the MPSRP should have been more explicit in its approach by
not relying on any assumed meaning of intellectual property rights as such a
meaning does not exist. Regardless of this and other similar issues for which
the statute can be critiqued, the MPSRP overall changes the legal approach to
moveable property and incorporeal assets for the better.
2.4.2. Accessories
One of the objectives that a law reform must accomplish is ensuring terminological
consistency within the given statute as well as across other relevant statutes and
codes where they are relevant. The MPSRP’s notion of accessory is inconsistent
with the meaning of accessory established under the Ethiopian property law.
Furthermore, a transaction applying to an accessory to an immovable property
conducted under the ECC may conflict with a security right under the MPSRP.
Because of the way in which the MPSRP is crafted (for instance not requiring
registration of a contract of sale that affects an accessory to an immovable under
the ECC), some transactions may remain hidden from secured creditors under
the MPSRP as can be observed in illustration 2.1.
2.4.2.1. Conflict between Real Property Law and the MPSRP

Illustration 2.1
A purchaser buys a home where there are furniture and other accessories
including a refrigerator. The contract does not mention the movable items that
appear to be destined for the use of the home. This contract is not registered at
the CRO as this is not required. Subsequently, the seller grants security rights in
60
the movable items in the home and the creditor registers its security right at the
CRO. When the home buyer receives delivery of the home, it finds the movable
items removed from the home. The buyer argues that any dealing that applies
to the immovable property applies to its accessories and therefore the movable
assets should be returned to it. The secured creditor and the seller argue that the
MPSRP does not consider movable things that are not materially attached to
an immovable as an accessory. Accordingly, there is a valid security agreement
created on the movable assets in question. Who wins in this hypothetical
scenario? The buyer or the secured creditor?
The MPSRP states that a “security right may encumber and continue in
an accessory to movable or immovable, and a security right is not extinguished
by an affixation of the accessory to movable or immovable property.”177
However, no security right can be created “in ordinary building materials
incorporated into an immovable”178 The MPSRP applies to security rights in
things attached to an immovable property such as fluorescent lights that can be
removed while it does not apply to ordinary building materials incorporated in a
building such as bricks, lumber, and cement.179 A security right in an accessory
to immovable, which is made effective against third parties has priority over
competing claims arising out of other laws.180 These provisions demonstrate that
an accessory to an immovable is considered as movable property and, hence,
in principle, a security right in an accessory to immovable is governed by the
MPSRP. The challenge in practice would be to understand the meaning of
accessories especially in the light of the potential conflict between the MPSRP
and the ECC as both define accessories differently.
The ECC defines an accessory as anything, which the owner or the
177
MPSRP Articles 4(4) & 53(1).
178
179
UCC § 9-334(a) states similarly that “A security interest does not exist under this article in
ordinary building materials incorporated into an improvement on land.” See also Squillante,
Alphonse M., “The Law of Fixtures: Common Law and the Uniform Commercial Code: Part
II: The UCC and Fixtures,” Hofstra Law Review 15, Issue 3(1987): 452.
180
61
possessor of the thing has permanently destined for the use of another thing.181
The meaning of accessory under the ECC does not contain the criteria of
physical attachment. Thus, what bears significance is the predetermination by
the owner that the movable property is for the use of an immovable property. In
this sense, an accessory to an immovable is immovable by destination (destined
to the use of the immovable property). In illustration 2.1, the refrigerator and
furniture destined for the use of the home potentially qualify as accessories
within the meaning of accessories under the ECC, while they are just movable
things under the MPSRP. This is because the meaning of accessory under
the MPSRP presupposes material attachment while under the ECC, material
attachment is not required.
This difference may create practical challenges in determining whether

a security right in an asset that is not physically affixed to an immovable but is
destined for the use of the immovable falls within the scope of the MPSRP. In our
example, the most plausible argument is that under the MPSRP, a movable thing
that is destined for the use of an immovable thing is a movable property despite
the owner’s decision to destine it for the use of the immovable property. Thus,
a security right created under the MPSRP prevails on another claim emerging
from a transaction under the ECC, if that transaction emerges from the ECC
provision that contradicts the provisions of the MPSRP. This line of argument
needs to be reconciled with the rule under the MPSRP which states that “This
Proclamation shall not prevent the creation of an encumbrance in accessories to
immovable under immovable property law.”182 The provision gives room for the
operation of the ECC provisions governing accessories that have rules allowing
the creation of encumbrances in accessories.
Under the ECC, the rule that is the most pertinent to the topic at hand
holds that in the absence of an express provision to the contrary, rights or dealings
relating to the principal thing automatically apply to the accessory.183 This rule
181
ECC Article 1136.
182
MPSRP Article 3(3).
183
ECC Article 1135.
62
might lead to a potential conflict between the right in an immovable property

extending to the accessory under the ECC and a security right under the MPSRP
created on the same property. On the one hand, security rights in accessories are
governed by the MPSRP and an accessory is defined differently from how the
ECC defines it. On the other hand, the MPSRP states that “This Proclamation
shall not prevent the creation of an encumbrance in accessories to immovable
under immovable property law.”184 Since the MPSRP has its own definition of
accessories, does it tacitly repeal the definition provided under the ECC?
The response seems to be affirmative. Because the MPSRP is a special

law(lex specialis) governing proprietary interest while the ECC is a general law
governing property — in case of conflict, the former prevails and this is clearly
affirmed in Article 93(3) of the MPSRP which states that “No law, regulation,
directive or practice shall, in so far as it is inconsistent with this Proclamation may
be applicable with respect to matters covered under this Proclamation.”185 It is
also the later law(lex posterior) which prevails over the previous law. This begs
the question, when does the MPSRP give deference to an encumbrance created
under the MPSRP under Article 3(3) which states that “This Proclamation shall
not prevent the creation of an encumbrance in accessories to immovable under
immovable property law.”186
Article 3(3) seems to permit an encumbrance created under immovable

property law where there is no inherent contradiction between the encumbrance
and a security right created under the MPSRP. In the illustration in 2.1, if the
sales contract clearly stated that it applies to the furniture and refrigerator
and the contract is registered at the relevant register of immovables before
the subsequent security right is registered, the contract of sale that applies to
the accessories would prevail. In this case, the buyer needs to ensure that the
contract is valid under immovable property law and it is rendered effective
against third parties as required under the immovable property law. The MPSRP
184
MPSRP Article 3(3).
185
186
MPSRP Article 3(3).
63
gives deference to such a transaction. It also gives deference to a transaction

that perfectly fits the requirement of accessory under the MPSRP which is
conducted under real property mortgage law (e.g., a mobile home on a piece of
land). The subsequent creditor who provides loan by taking security right in the
accessories (furniture and refrigerator or the mobile home) without verifying
whether they are encumbered by inquiring at the register of immovables, takes
the risk of its security right being overridden by an existing sales contract or
even another security right affecting the immovable property along with the
accessories. But this by itself is not entirely satisfactory as it is being assumed
that where the transaction does not expressly apply to so-called accessories, the
MPSRP may not give deference to the encumbrance under the real property law.
This should be concerning to parties involved in real property

transactions as well as secured creditors under the MPSRP alike. A potential
buyer of a farmland should first consult at the CRO if the prospective seller has
granted security rights in the movable accessories that are destined for the use
of the farmland. Second, in the contract of sale, a clear provision governing
accessories should be added. Third, a rule requiring the registration of the
contract of sale and possibly transfer of title should be put into effect as soon
as possible. Secured creditors under the MPSRP should not conclude a security
agreement affecting an accessory to an immovable without verifying the status
of the immovable itself by inquiring at the register of immovables.
The rules regarding the conflict between a seller or a secured party

in a real property and a secured creditor of an accessory under UCC Article
9, although significantly better, are not ideal either. UCC Article 9 applies
to a fixture (the equivalent of accessory).187 It provides a general definition
of a fixture as “goods that have become so related to particular real property
that an interest in them arises under real property law.”188 The precise test to
apply in the determination of whether a property qualifies as a fixture is left
187
UCC § 1-201(37).
188
UCC § 9-102(a)(41).
64
to states, states applying varying tests.189 Generally, factors taken into account
include the parties’ intention and the difficulty of removing the item from the
immovable property.190
Nevertheless, the approach under UCC Article 9 is different as there

are no different statutes that provide fundamentally diverging definitions as in
Ethiopia. Second, creditors having security rights in the fixture can perfect it by
registering notice at the real property mortgage registry (fixture filing).191 This
is to notify third parties entering into a real property transaction extending to
fixtures. However, sometimes, it is not easy to determine whether given collateral
is a fixture or merely a personal property. Thus, if a secured creditor makes a
fixture filing at the real property mortgage registry while in fact the collateral
does not qualify as a fixture and is rather a movable property, the filing would
be invalid(ineffective). To prevent this, sometimes secured creditors conduct
double filing —one at the real property mortgage registry and another at the
relevant UCC Article 9 collateral registry.192
Therefore, at least on paper, UCC Article 9 provides one definition of

fixture which has its root in common law and is interpreted by using common law
cases,193 while the MPSRP introduces an entirely new definition different from
what is known under the ECC. Second, UCC Article 9 requires registration of
security rights in fixtures to be made at the real property mortgage registry while
the MPSRP requires registration only at the CRO. The latter approach makes
it difficult for real property dealers to know if the accessories are encumbered
without checking at the CRO. At the same time, secured creditors need to consult
189
David Joseph Somrak, “The Definition of Fixture in Article 9 of the U.C.C.,” Case Western
Reserve Law Review 31(1981): 849.
190
First Merit Bank, N.A., v. Antioch Bowling Lanes, Inc., 108 F.Supp.3d 618 (N.D.Ill. 2015)
& Harrisburg Community Unit School Dist. No. 3 v. Steapleton, 195 Ill.App.3d, 553
N.E.2d 76, 142 Ill.Dec. 726 (5th Dist. 1990).
191
UCC (2010) § 9-102(a) (40).
192
Squillante, Alphonse M., “The Law of Fixtures: Common Law and the Uniform
Commercial Code: Part II: The UCC and Fixtures,” Hofstra Law Review 15, Issue 3 (1987):
548.
193
David Joseph Somrak, “The Definition of Fixture in Article 9 of the U.C.C.,” 849.
65
the real property registry to check the status of an accessory although this is not
what the law requires formally. Thus, the approach in Ethiopia adds a burden
on parties dealing with real property mortgages as well as accessories. The US
system which imposes a potential double registration protects third parties better.
Accessories are peculiar assets, found at a crossroad between real

property and personal property where parties involving in real property
transactions may not be mindful of the complications that they may face in
concluding a real property transaction extending to accessories. In the long run,
the ideal solution would be to reform the ECC provisions governing accessories
and possibly remove the notion of accessories as its defining element (the owner
destining the use of the movable property cannot be evidentiarily ascertained
in many cases). Nevertheless, until the notion of accessory in the ECC is not
removed by legislative reform, the sensible policy will be to protect parties
dealing with real property transactions from losing their proprietary right to
secured creditors who in general deal with movable assets but step into the
territory of real property through tentacle of accessories. UCC Article 9 does
that while the MPSRP does not.
2.5. Conclusion
The MPSRP has brought fundamental changes to the notion of security
interests in Ethiopia by adopting unitary theory and a functional approach. It
ensures that the transactions that secure payment of credit or performance of
obligation are subject to secured transactions law regardless of how parties
denominate them. The system promotes certainty of transactions, eliminates
unjustified differences in the treatment of different transactions merely based
on formality by applying essentially similar rules of creation, registration, and
enforcement of security rights in different assets. The MPSRP has also a broad
definition of movable property and justifiably avoids relying on the definition of
property under the ECC.
The provisions of the MPSRP pertaining to accessories could create

potential practical challenges as there could be conflicting transactions affecting
the same property both under property law and the MPSRP. As the law stands
66
now, a creditor extending loan collateralized by an accessory must consult the

register of movables assets as well as the CRO instead of consulting only the
CRO. A transaction applying to an accessory arising from real property law may
be undermined by security right under the MPSRP if the parties failed to run a
check of the status of the accessory under the CRO. These challenges can only be
resolved first by reforming Ethiopian property law to do away with the notion of
accessories entirely or to align the meaning of accessories under general property
law and the MPSRP. Second, the rules regarding registration of the transactions
both under the MPSRP and the real property law should be reformed to allow
registration and inquiries of transactions by multiples registries.
Chapter Three: Security Rights to which the MPSRP is Inap-
plicable
3.1. Introduction
The MPSRP is inapplicable to security rights in immovable property as well
as security rights in various movable assets that are excluded from its umbrella
due to various reasons.194 This chapter provides an overview of security rights
excluded from the scope of the MPSRP along with the policy rationales as well
as the implications thereof.
The chapter covers security rights in exchange traded securities, security

rights in aircraft, aircraft engines, aircraft objects, and helicopters, and non-
consensual security rights and security rights in immovable assets. As the book
primarily focuses on explaining security rights to which the MPSRP applies (not
security rights to which the MPSRP does not apply), this chapter only serves as
the basis for further inquiry into the security rights excluded from the scope of
the MPSRP. It does not provide a complete account of the areas excluded from
the MPSRP, as this goes beyond the purpose of the book.
3.2. Security Right in Exchange Traded Securities

The MPSRP does not apply to security rights in securities that are traded on
exchanges (also known as intermediated securities).195 This relates to shares,
bonds, and other securities that are traded on exchanges. Although there is
currently no stock exchange in Ethiopia, the Ethiopian Government has recently
194
MPSRP Article 3(2) lists the types of movable property and interests that are excluded from
its scope of application.
195
MPSRP Article 3(2)(a).
68
expressed its interest and has started preparation to establish one.196 In December
2020, the Ethiopian Council of Ministers has endorsed a bill to establish the first
Stock Exchange in the country.197
The UNCITRAL LGSTL states that “The Guide does not apply to
security rights in securities because the nature of securities and their importance
for the functioning of financial markets raise a broad range of issues that merit
special legislative treatment.”198 Another reason provided by the UNCITRAL
LGSTL as to why the guide does not cover security rights in securities is the
availability of special multinational legal instrument — “the UNIDROIT
Convention on Substantive Rules for Intermediated Securities (Geneva,
2009).”199 The MPSRP partially adopted the approach taken by the UNCIRTAL
LGSTL— partial because the former applies to security rights not traded on
exchanges while the latter does not cover security rights in any type of security,
whether or not traded on exchanges. The assumption is that regarding the rights
and duties of parties involved in exchange traded securities, Ethiopia does not
have a law which might make it difficult to lay down rules governing security
rights in securities.200
UCC Article 9 applies to all security rights in a class of assets nominated

as an investment property,201 defined as a security, whether certificated or
uncertificated, security entitlement, securities account, commodity contract, or
commodity account.202 Unsurprisingly, UCC Article 9 is built on robust legal
regimes on securities including UCC Article 8 and other relevant statutes, that
among others, define securities.203 While the legal rules regarding security rights
196
Kaleyesus Bekele, “Addis Ababa Stock Exchange in 2020”, The Reporter, (22 December
2018).
197
Council of Ministers Endorsed a Bill to Create Ethiopia’s First Stock Exchange (Ethiopian
Monitor, December 22, 2020).
198
UNCITRAL Legislative Guide on Secured Transactions Law, 40.
199
Ibid.
200
Ibid.
201
U.C.C. § 9-102(a)(49) (2010).
202
U.C.C. § 9-102(a)(49) (2010).
203
U.C.C. § 8-103 & § 8-102(a)(15) (2010).
69
in securities including those traded on exchanges are not exceptionally complex,

there is an appreciable level of challenge in attempting to put a comprehensive
legal regime for a country that has little or no experience in this sphere.
The first challenge pertains to designing a robust legal regime governing

the definition of securities, delimiting its scope, defining what types of securities
can be traded on exchanges, and governing the substantive rights and duties of
various stakeholders involved in trading securities. The second challenge relates
to determining the methods of granting security rights in securities traded on the
exchange and designing the rules for perfection and enforcement (these things
cannot be done in abstracto, without having the law governing securities traded
on an exchange). The third potential challenge is regulating security rights in
securities traded among market players from different jurisdictions (cross-border
transactions).204 Implementing efficient and robust legal rules governing security
rights in intermediated securities requires addressing these three key challenges.
Even though having a separate legal regime for security rights in intermediated
securities would lead to fragmentation of the legal regime governing security
rights, without a targeted study and evaluation, jumping to implementing a legal
regime in Ethiopia on such a fairly complex issue would undoubtedly lead to a
suboptimal outcome.
3.3. Security Right in Ships and Aircraft

Security rights in ships and aircraft are also outside the scope of the MPSRP.205
Ships are regarded as special movable property and security interests created
in them are considered as “mortgage” (a non-possessory security right created
over an immovable property). Accordingly, the ECC exceptionally allows
some special types of movable property to be mortgaged.206 Security rights in
these assets are regarded as mortgages because a mortgage is a non-possessory
204
UNIDROIT Convention on Substantive Rules for Intermediated Securities (2009). This
convention is implemented precisely to address the challenges posed by diverging rules across
jurisdictions about the holding of intermediated securities as well as granting security rights in
intermediated securities.
205
MPSRP Article 3(2)(b) and (c).
206
70
security device, which enables an owner of an asset (the ship) to grant the asset
as security while maintaining ownership and possession of the asset. Thus, the
Maritime Code principally governs security rights in ships.207
Security rights in aircraft and aircraft engines, aircraft objects, and

helicopters are governed by the Cape Town Convention and the aircraft protocol
as Ethiopia is a state party to these legal instruments. The Cape Town regime
applies to international interests in mobile equipment including aircraft and
aircraft engines provided that at the time of the creation of the security right, the
debtor is situated in a contracting party.208 For the purposes of the convention,
the debtor is situated in any Contracting State, if (a) under the law of which it is
incorporated or formed; (b) where it has its registered office or statutory seat; (c)
where it has its center of administration; or (d) where it has its place of business.209
A creditor of Ethiopian Airlines or any other airline located in Ethiopia, provided
that the agreement meets the requirements of Article 2 of the convention210 are
required to file registration of their security rights to the international registry.
Enforcement is also conducted under the convention’s rules.211
The general scheme of the Cape Town Regime is slightly different from
the MPSRP which applies to a broader range of parties and transactions. This
book does not examine the Cape Town regime as adequate coverage has been
given to it by other scholars. I have made available to the Law Library of Addis
Ababa University; the official commentary on the Cape Town convention and
the Aircraft Protocol written by Sir Roy Goode, which serves as a complete
guide to the legal rules of the CTC and the Aircraft Protocol.212 A brief
note by way of alerting those working on financing in the airline industry is
207
The Ethiopian Maritime Code Articles 30-53.
208
The Cape Town Convention Article 3(1).
209
210
211
Roy Goode, Convention on International Interests in Mobile Equipment and Protocol
thereto on Matters Specific to Aircraft, 3rd ed (Rome: UNIDROIT, 2013) 26.
212
Roy Goode, Convention on International Interests in Mobile Equipment and Protocol
thereto on Matters Specific to Aircraft.
71
provided here, with the view to clarifying a few basic issues.
First, the CTC and the aircraft protocol applies to international interests in
airframes, aircraft engine, air objects, and helicopters.213 Second, the convention
applies to a security right created by an agreement between the creditor and the
grantor (charger in the language of the convention), conditional sale (sale with
reservation of title), and financial leasing.214 Third, the convention applies if, at
the time of the creating of the security right, the debtor is situated in a contracting
party, whether or not the secured creditor is located in a contracting party.215 A
practitioner would naturally be curious to know if there can be security rights
affecting an aircraft in Ethiopia that may be governed by domestic Ethiopian
law of security rights, considering that the Cape Town regime seems to have
a broad scope of application.
The convention along with the protocol excludes the application of

domestic law to security rights in aircraft, aircraft objects, and aircraft engines
in Ethiopia. This means that registration, determination of priority, and
enforcement are conducted according to the convention’s and protocol’s rules.
Non-consensual security rights are an exception in this regard. The CTC gives
contracting states the option to declare if they wish non-consensual security
interests to have priority over registered international security interests.216
Ethiopia has made such a declaration pursuant to which the following non-
consensual security interests do not need to be registered at the international
registry as required by the convention and the protocol to enjoy priority over
any registered international security interest:217
213
For definition of each term and exclusions, See the Aircraft Protocol, Articles I(2)(a)-(c).
See also the Cape Town Convention Article (2)(3).
214
Cape Town Convention Article 2(2).
215
Ibid., Article 3.
216
Ibid., Article 39.
217
Declaration Lodged by the Federal Democratic Republic of Ethiopia under the Cape Town
Convention at the Time of the Deposit of its Instrument of Ratification, https://www.unidroit.
org/status-2001capetown?id=467.
72
i. Claim of payment of workers arising from an employment relationship.

ii. Lien on goods in possession of home workers.
iii. Lien created by repairers on goods in their possession.
iv. Lien created by bailees on goods in their possession.
At the same time, Ethiopia has declared the security right of judgment
creditors to be registrable under convention’s rules.218 While the convention
gives member states the option of declaring certain transactions to be internal
rather than international, Ethiopia has not made such as declaration.219 Thus, the
convention is designed to eliminate the possibility for the creation of security
agreements governed by domestic secured transactions law. Practitioners should
therefore assume that the convention applies virtually to any security agreement
or security right in aircraft, aircraft engines, aircraft objects, and helicopters if
the debtor is situated in Ethiopia or any other contracting state.
3.4. Liens and Other Non-Consensual Security Rights

A lien or other security right granted by law is another type of security right
to which the MPSRP is inapplicable unless provided otherwise.220 A lien is a
peculiar non-consensual security right stemming from the operation of the law.
It entitles a contracting party to possess an asset of its debtor until the latter
discharges its obligation towards the former. The ECC, with respect to a contract
of work and labor, states that “[t]he contractor shall have, as a guarantee of the
obligations that the client owes him under the contract, a right of retention over
such movable goods belonging to the client as he has made or repaired and
as are in his possession.”221 The MPSRP also excludes other non-consensual
security rights such as tax lien, warehouse receipt lien, and the agent’s liens.222
218
The Cape Town Convention Article 40.
219
220
MPSRP Article 3(2)(d).
221
ECC Article 2628 (1).
222
ECC Article 2224 states that “Until the payment of the sums due to him by reason of the
agency, the agent shall have a lien on the objects entrusted to him by the principal for the
carrying out of the agency.”
73
Although the MPSRP is generally inapplicable to a lien or other security

rights given by law, there are certain provisions dedicated to lien and other non-
consensual security rights. Those provisions address issues of priority between
consensual and non-consensual security interests and do not govern substantive
requirements for the validity of non-consensual security rights. Thus, with
respect to non-consensual security rights (other than possessory lien), in case of
conflict with consensual security rights, the law gives primacy to the consensual
security right unless the non-consensual security right has been made effective
against third parties by registering notice before the consensual security right
was registered.223
For instance, the tax authority may have a lien on all immovable assets
of the taxpayer, until the taxpayer pays the tax due. Although the lien (called
legal mortgage or charge under the income tax law) applies to immovables,224
it can also apply to accessories to the immovable. In this case, a conflict could
rise between the tax lien on the accessory to an immovable and a consensual
security right in the accessory. The tax authority maintains a priority right if it
has registered a notice at the collateral registry, for the failure to do so would
subordinate its non-consensual security right to a consensual security right that
is made effective against third parties according to the prescribed rule.
Illustration 3.1
Zeway Farm obtains a loan from the CBE by granting security rights in cotton
to be harvested and agricultural machinery. The security right of CBE was
registered at the CRO on January 15, 2020. On March 10, 2020, the Ethiopian
Revenue Authority (ERA) registered a notice at the CRO indicating that it
has a security right in all the immovable assets of Zeway Farm along with the
accessories including the agricultural equipment (the latter as accessories). The
ERA notifies the CBE that it has registered a notice of its tax lien at the CRO
affecting Zeway Farm on March 20, 2020. CBE provides additional loans to
Zeway farm on April 10, 2020 and May 10, 2020. On August 10, 2020, both
223
224
Income Tax Proclamation No. 286/2002 Article 80(1)-(4).
74
ERA and CBE move to recover their claims from the Zeway farm by selling the
agricultural equipment.
Here, note that for ERA, the agricultural equipment arguably qualifies
as an accessory of the farm (according to the definition of accessories under the
ECC) and its tax lien extends to the equipment. CBE has security right in all
agricultural equipment. In this case, to what extent can ERA have priority?
Under Article 55(2) of the MPSRP, where the non-consensual secured

creditor has not complied with the requirement of registering its lien, the
consensual secured creditor has priority with respect to the credit extended by
the secured creditor (a)within thirty working days from the time the secured
creditor received a notification from the non-consensual creditor that the non-
consensual creditor has registered a notification in the Collateral Registry or (b)
pursuant to an irrevocable commitment in a fixed amount or an amount to be
fixed pursuant to a specified formula of the secured creditor to extend credit; if
the commitment was made before the secured creditor received a notice from
the non-consensual creditor that the non-consensual creditor had registered
a notice.225
In illustration 3.4, CBE has registered notice of its security right prior to
ERA. Thus, its security right in the agricultural equipment has priority over the
security right of ERA. Nevertheless, CBE has extended loans after it was notified
of the non-consensual security right by ERA. Thus, the rule under Article 55(2)
of the MPSRP applies. Accordingly, CBE has priority for the loan that it has
extended on April 10 because that is a loan extended within 30 days after it has
received notification from ERA; that ERA has registered a non-consensual tax
lien affecting Zeway Farm’s equipment. Alternatively, CBE would have priority
to recover the loans extended both on April 10, and May 10, 2020, if those
loans were extended according to an irrevocable agreement with Zeway farm
where the CBE agreed to provide a fixed amount of money or an amount to be
calculated according to an agreed-upon formula.
225
75
Under UCC Article 9, the rule regarding non-consensual liens is slightly

different. A non-consensual secured creditor, called lien creditor is defined
broadly as “(A) a creditor that has acquired a lien on the property involved
by attachment, levy, or the like; (B) an assignee for benefit of creditors from
the time of assignment (C) a trustee in bankruptcy from the date of the filing
of the petition; or (D) a receiver in equity from the time of appointment.”226 A
security interest of a consensual secured creditor is subordinate to the security
right of the lien creditor if the latter perfects it before the former;227 with the
exception of acquisition security right which can override the security right of
a lien creditor, even if it is perfected later than the security right of the non-
consensual lien creditor provided that the perfection of the acquisition security
right is made within 20 days after the creation of security right.228 As it can
be noticed, UCC Article 9 is (a) clear in terms of its definition of who a lien
creditor is and (b) in its priority rules.
Although a non-consensual lien creditor is forced to be a secured creditor

of the debtor, it is not necessarily cuddled under UCC Article 9, if they failed
to file registration of their lien. By contrast, the MPSRP curves the enforcement
right of the consensual secured creditor by limiting it to credits provided within
a given timeline or under given contractual terms. The implication of the rule is
that in Ethiopia, once the non-consensual creditor registers notice and informs
the consensual creditor who has perfected its security right earlier, the consensual
secured creditor should stop providing loan to the debtor, even if their contract
creates an arrangement where the creditor extends loans on regular basis (if the
arrangement is revocable).
With respect to a non-consensual secured creditor who has a possessory

lien, the MPSRP states that “a possessory lien on goods which secures payment
or performance of an obligation for services or materials furnished with respect
to goods by a person in the ordinary course of the person’s business has priority
226
UCC Section 9-102(a)(52).
227
UCC § 9-317(a)(2).
228
UCC Section 9-102(a)(52).
76
over a security right in the goods as long as the holder of the possessory lien
remains in possession of the goods.”229 This provision protects service providers
such as a mechanic that has repaired a car or has provided a replacement spare
part alone or along with maintenance service or a warehouse operator who has
provided a warehouse service that is unpaid for or an agent that is not paid by the
principal for its service and any other provider of goods and services. As long
as the good/service provider has possession of the collateral, its lien right has
absolute priority over competing for consensual security right. The rule of the
absolute priority of possessory lien is virtually identical under UCC Article 9.230
3.5. Security Right in Immovable Property

The most important consequence of the personal property security approach
taken by the MPSRP is the exclusion of security rights in real property from
its ambit. From policy perspective, it is worth thinking whether the choice to
exclude security rights in immovable asset from the reform process in Ethiopia
was a sound choice. Experiences from other legal systems suggest that there are
two main reasons real property mortgage is excluded from secured transactions
law reform —historical context and commercial necessity.
3.5.1. Possible Explanations for the Exclusion

To understand the historical reason for the divide between security rights in
movable property and Security rights in real property, one must revert to UCC
Article 9. UCC Article 9 does not apply to security interests in real property —
it applies to security interests in personal property and fixtures.231 Real property
mortgage being outside its scope is governed by state laws.232
3.5.1.1. Historical Context

UCC Article 9 excludes real property mortgage from its scope because, in the
US, state mortgage laws follow three different theories of mortgage —the title
229
230
UCC § 9-333(a) &(b).
231
UCC § 9-109(d) (11).
232
Andra Ghent, ‘the Historical Origin of America’s Real Estate laws’ (Research Institute for
Housing America 2012), 1.
77
theory, the lien theory233 and the intermediary theory234 — making it difficult
to design uniform (national model) law on the subject matter. Under the title
theory, the title to the property is transferred to the lender and the lender remains
the legal owner of the property for the duration of the mortgage while in the
lien theory, the mortgagor (the debtor) remains the owner for the duration of the
mortgage.235 In the states where the intermediary theory applies, the mortgagor
remains the owner until default on the mortgage.236
The fact that mortgage of immovables is excluded from UCC Article
9 and is subjected to state real property mortgage laws is considered to create
problems in the US. First, dealers of real property do not have complete
information as to the existence of security interests in fixtures from real
property records and have to bear the cost associated with checking various
records including registrations made under UCC Article 9.237 Second, both the
real property claimants and chattel-type secured parties need to be cautious
of the classification of the collateral and may need to make double or triple
registrations.30 Hence, the relegation of real property mortgage law from UCC
Article 9 which has been dictated by differences in state laws is proven to
have undesirable consequences. But the system could not be fixed due to the
irreconcilability of the existing differences among state laws.
The explanation for the differences in state’s real property laws in the
US is historical. Most of the older states in the US adopted the title theory of
real property mortgage developed in England in order to circumvent usury law,
while younger states adopted the lien theory as the usury laws were relaxed
233
Ibid., 7.
234
Lega Information Institute, “Mortgage,” Cornel Law School, https://www.law.cornell.edu/
wex/mortgage
235
Andra Ghent, “the Historical Origin of America’s Real Estate laws” 7.
236
Lega Information Institute, “Mortgage,” Cornel Law School, https://www.law.cornell.edu/
wex/mortgage.
237
Coogan, Peter F. and Clovis, Albert L. “The Uniform Commercial Code and Real Estate
Law: Problems for Both the Real Estate Lawyer and the Chattel Security Lawyer,” Indiana Law
Journal 38, Issue 4 (1963): 536, 573.
78
during the 19th century making it unnecessary to adopt the title theory.238
Since mortgage transactions in which the debtor pays high interest rates were
regarded as usurious, the title theory enabled the lender to get the title of the
debtor’s property and structure the transaction in such a way that the debtor
pays rents on the property instead of interest rate and this enabled the parties
to avoid violating usury law.239 If the primary reason real property mortgage
is not covered by UCC Article 9 is the different approaches adopted by state
laws which in turn is explained by the historical origin of state mortgage laws,
it can be argued that for countries where real property mortgage law is uniform
nationwide, there does not appear a good reason to exclude it from secured
transactions law reform.
In Ethiopia, the ECC governs mortgage of immovable property

nationwide.240 States do not have the power to enact laws governing real property
mortgage (the constitutional basis for this can be debated but realistically
speaking that is irrelevant to the topic at hand). Therefore, from a historical or
state structure perspective, there is no reason to have separate laws governing
security rights in movable assets and immovable assets in Ethiopia.
3.5.1.2. Commercial Necessity

The second reason the personal property security right approach is trending is
that in many legal systems, despite the fact that movable assets represent a large
portion of assets of businesses,241 secured transactions laws tend to have no
comprehensive legal regime for allowing debtors to access credit using movable
assets as collateral.242
Financial institutions settle with real property mortgages as it is simpler
to enforce mortgage rights with real property value that is generally increasing
over time and real property being readily available for foreclosure (less likely
to dissipate). Hence, recent reforms have been targeted at facilitating the use of
238
Ibid., 15 - 19.
239
Ibid.
240
ECC Article 3041 et seq.
241
Heywood Fleisig, et al, Reforming Collateral Laws to Expand Access to Credit, 7.
242
Ibid., ix.
79
movable assets as collateral to counter their underutilization. But this does not
mean that security rights in immovable assets do not require the same degree
of attention. While a comprehensive and robust legal framework to facilitate
the use of movable assets including incorporeal assets as collateral should be
put in place, that can be achieved without excluding immovable assets from the
reform effort.
The UNCITRAL LGSTL’s explanation for why the guide applies only
to movable assets is vague.243 The guide states that “In some legal systems, the
regime of secured transactions extends to both movable assets and immovable
property. Nonetheless, encumbrances on immovable property are, in principle,
excluded from the scope of the Guide because they raise different issues (see
recommendation 5). For example, encumbrances on (and title to) immovable
property are typically subject to a special document registration system and
indexed by asset, not by grantor.”244
The guide does not provide an additional comprehensible explanation.

It appears to be that the working group did not want to engage in the intricacies
of the system of registration of title deeds and thus decided to just exclude
immovable assets from secured transactions law. Given that countries like
Ethiopia have limited resources to pay foreign consultants for modernizing
their legal systems, it is unfortunate that the opportunity to revisit the real
property mortgage law, which was enacted in 1960, deserving equal attention
has been missed.
3.5.2. The Effect of the Exclusion of Real Property Mortgage

Real property mortgage plays a key role in financing in Ethiopia. The legal
regime governing mortgages has been in place since 1960. It is as obsolete as
the rest of the Pre-2019 Ethiopian secured transactions law. It requires a strong
policy justification to postpone reforming the rules governing security rights in
immovable assets at a time when Ethiopia managed to create a rare opportunity
for comprehensive secured transactions law reform. While several reasons could
243
UNCITRAL Legislative Guide on Secured Transactions Law. 40.
244
Ibid., 40-41.
80
be provided for the exclusion of real property mortgage law from the reform,
the International Finance Corporation’s approach to promoting reform based on
a template model has undoubtedly played a part. Marek Dubovec, who was the
lead consultant during the reform in Ethiopia advised the Malawian government
to enact the 2013 Malawian Personal Property Security which is essentially
similar to the MPSRP.245 He has engaged in secured transactions law reform in
dozens of other African countries promoting a nearly copy-paste approach.
The problem in implementing personal property security law for Ethiopia
is the differential treatment of secured creditors with interests in movable assets
on the one hand and real property mortgage creditors on the other, and potential
practical challenges faced by creditors/dealer operating under the real property
law and creditors under the MPSRP (see § supra 2.4.2).
3.5.2.1. Different Methods of Registering Security Rights

Under the MPSRP, the registration of a security right should contain the
identifier of the grantor of the security right(the debtor or the person who gave
the property as collateral on the debtor’s behalf), the identifier of the secured
creditor or its representative, an address of the grantor and the secured creditor,
a description of the collateral, the period of effectiveness of the registration, and
any other information to be prescribed in the directive to be issued pursuant to
the proclamation.246 The MPSRP’s registration provisions incorporate what is
known as a notice filing system as opposed to authenticated registration.
The notice filing system which was introduced by UCC Article 9
provides subsequent creditors (or third parties) general information regarding
the existence of security interests in the debtor’s property. Essentially, the notice
filing system considers it unnecessary to provide the security agreement or its
details to third parties — it requires disclosure of information that should be
245
Dr. Marek Dubovec’s Biography can be found at http://natlaw.com/staff/dr-marek-dubovec/.
I have met Dr. Dubovec at UNIDROIT Headquarters in Rome during the deliberation of the
MAC Protocol’s first reading when I was conducting my visiting research at UNIDROIT
under UNIDROIT Foundation Scholarship Scheme, https://www.unidroit.org/english/
legalcooperation/list-of-guests-e.pdf.
246
MPSRP 27(1)-(2).
81
supplemented by further inquiry from the debtor by interested third parties.247
The notice filing system is based on the policy that prospective

creditors should inquire about the details of the transaction from the existing
creditor(s) based on the information they obtain through the conducting
search in the collateral registry. Under UCC Article 9 notice filing system,
prospective creditors can require the debtor’s approval of a prepared statement
of account that discloses the indebtedness of the debtor— failure of the debtor
to approve the statement would be regarded as an indication that the debtor
is hiding credit information, an inference that helps the prospective creditor
to decide not to extend credit to the debtor.38 The theoretical benefit of this
system is the reduced transaction cost; both in terms of time and money spent to
comply with the registration requirements. The MPSRP confers this advantage
upon secured creditors.
Ethiopia has authenticated registration system for security interest’s real

property mortgage which requires the security agreement to be authenticated
and registered by a notary, where the notary has substantial authority including
to ascertain whether the formalities for the relevant contract are met; the parties
have the capacity and authority to sign the contract and others.248
The main advantage of the authenticated registration system is its

paternalistic nature because a state authority or a notary checks the validity of
the security agreement giving the parties more opportunity to do the same at
the stage of registration. Its disadvantage is inflexibility and higher transaction
cost. The systems require the registration of details regarding the contract that
are not essential for the purpose of rendering the contract effective against third
parties. Furthermore, because authentication requires the entire document to
be produced to the authority in charge, the parties or their legal representatives
247
UCC (2010) § 9-210(b). See also Robert I. Donnellan, “Notice and Filing under Article 9,”
Missouri Law Review 29, Issue 4 (1964): 517 & Jens Haussmann, “the Value of Public-Notice
Filing under Uniform Commercial Code Article 9,” 444.
248
FDRE Acts and Documents Authentication and Registration Proclamation, No. 334/2003,
Federal Negarit Gazzet, Legal Notice No. 54(Addis Ababa, 2003) Articles 2(1) & 4. See also
ECC Article 1573.
82
must be physically present at the authority in charge and deposit a copy of the
relevant agreement entailing higher transaction costs.
Despite a meaningful reform with the enactment of the MPSRP, real

property mortgage creditors still use the old system of authenticated registration
while secured creditors with movable collateral benefit from an efficient and
flexible notice filing system. If the goal of the reform is indeed to implement a
comprehensive legal regime that reduces transaction costs involved in secured
lending, it is questionable whether real property mortgage should have been left
out of the new legal framework.
3.5.2.2. Verifying the Status of an Accessory to an Immovable

With respect to contracts relating to accessories, the fact that real property
mortgage is not covered by the MPSRP imposes on buyers or secured creditors
under immovable property law and secured parties under the MPSRP; the duty
to check different registers to prevent their claim from being subordinated (see
§ supra 2.4.2).
3.6. Conclusion
The exclusion of real property mortgage from the ambit of the MPSRP does
not appear to be reasonable. This chapter has shown why different methods of
registration of security rights in real property and movable assets are unjustifiable.
The notice filing system which simplifies public notification should have been
implemented with respect to both. With the evolution of technologies that make
it possible to register property right in a secure and incorruptible manner, there
is no reason the outdated method of registering real property mortgage should
be maintained rather than the notice filing system which requires registration of
identifiable aspects of the property and the right associated with it. Furthermore,
from the practitioners’ perspective, there is a second challenge. If a security
right in an accessory to immovable property is being negotiated, the creditor
must check both the collateral registry and the register of security rights in
immovable properties. This is because if an existing security right that affects
both the immovable property and the accessory has already been created under
the immovable property law, it is not registered at the CRO. This may lead to
83
conflicting security rights being created on the same asset. A single system of
registration for real property mortgage and security rights in movable assets
would solve this potential practical problem.
The inapplicability of the MPSRP to security rights in various assets

is largely justifiable due to the existence of more tailored legal regimes (e.g.,
the Cape Town Regime for security rights in aircraft) or due to want of legal
regimes that serve as a prerequisite (e.g., security rights in securities traded
one exchange).
84
Chapter Four: Possessory Security Right and Security Right in
Commercial Instruments and Documents
4.1. Introduction
So far, the book has demonstrated that the modernization of Ethiopian law of
security rights in movable assets came at a fitting time in the country’s history
and has generally moved the legal system in the right direction (despite some
shortcomings) by introducing the functional approach to security right and by
bringing all transactions securing payment or performance of an obligation
under the umbrella of a single law.
This chapter analyzes possessory security rights — security rights

involving the transfer of possession of the asset by the debtor to the secured
creditor. The chapter shows that regarding pledge (a possessory security right),
the MPSRP has brought about changes that unnecessarily undermine its use and
effectiveness. The chapter also covers security rights in commercial instruments,
trust receipt, and security trust deed.
4.2. A Hostile Approach to Pledge

The MPSRP has adopted rules that undermine the effectiveness and arguably
the validity of pledge. If C and D create a security right in D’s fifty quintals
of teff and transfer the possession of the fifty quintals of teff to C, would the
security agreement be effective between the parties and against third parties
under the MPSRP? This is the central question that dictates a thorough analysis
of the relevant provisions of the MPSRP.
86
4.2.1. Pledge — Meaning and Rationale

Pledge is a security device where the debtor or a third party on behalf of the
debtor transfers the possession of movable collateral to the creditor securing
the performance of an obligation. Pledge by its very nature is possessory
meaning that the debtor transfers the possession of the property to the creditor
or a third party.249
The transfer of possession to the pledgee is required first to prevent

potential fraud that may be committed by the debtor who may illicitly dispose of
the chattel. In the US, the law of fraud partly explained the possessory nature of
pledge because as a security agreement under which the debtor has the right to
dispose of the collateral and apply the proceeds to its own benefit was regarded
as fraudulent in law.250 Griswod vs. Sheldon confirmed that even if not stated in
the contract, if the debtor is in the possession of the collateral and has in fact
the right to dispose of it, the transactions are fraudulent in law.251 Second, the
transfer of possession tackles the problem of ostensible ownership. Ostensible
or apparent ownership “arises when a debtor retains possession of collateral
after conveying to a creditor an unrecorded property interest or “secret lien.”252
From the secured party’s perspective, possessory pledge is a safe type of security
device as the creditor who has possession of the collateral does not need to have
trouble with enforcement in case of default. Other less obvious advantages of
pledge include the ability of the secured creditor to maintain the value of the
collateral by proper upkeeping and if agreed with the grantor, the possible use
of the asset by the secured creditor.253
There is also a downside to possessory pledge stemming from the fact
249
The Yale Law Journal Company Inc., “Security Interests under Pledge Agreements,” The
Yale Law Journal 51, Issue 3 (J1942): 431, 432.
250
See Griswold v. Sheldon, 4 N.Y. 581 (N.Y. 1851).
251
Griswold v. Sheldon, 4 N.Y. 581 (N.Y. 1851).
252
Louis F. Del Duca, et al, secured transactions under the uniform commercial code and
international Commerce, 3. See also Flint, George Lee Jr. and Alfaro, Marie Juliet “Secured
Transactions History: The First Chattel Mortgage Acts in the Anglo-American World, William
Mitchell Law Review Vol. 30, no. 4(2004: 1405.
253
87
that it is possessory. Pledge is, overall, economically inefficient security device

from the debtor’s perspective because the debtor who physically transfers the
collateral to the creditor is barred from using the collateral during the ordinary
course of its business.254 From business point of view, having a movable
tangible asset of the business, possessed by the creditor every time a business
creates a security interest in such movable asset, hinders the usage of the asset
for generating value that can be used, inter alia, to repay the debt owed to
the creditor. Pledge also imposes the responsibility on the secured creditor to
upkeep the collateral so that it does not lose its value.255
Regardless of any disadvantage it has, pledge can still be an important

security device where the secured party wishes to have more control over
the asset. Pledge can be the most effective security device in the commercial
world where the debtor transfers possession of documents of title (negotiable
documents) and negotiable instruments.256 Consumers may also borrow money
by transferring possession of the collateral to the creditor.
Because possessory pledge is generally not well-suited to modern

commercial realities, non-possessory security rights are widely supported as
“the primary economic function of non-possessory secured transactions is to
manage and mitigate credit risk without limiting the production capacity of the
collateral and the debtor.”257 It is due to this reason that the chattel mortgage laws
in different states in the US emerged requiring recordation of the pledged chattel
so that third parties have the notice of the chattel mortgage(registered pledge)
while at the same time the debtor has the right to use the collateral.258 This is the
primary reason, in other jurisdictions, for instance, the Polish Registered Pledge
254
Ibid., 55.
255
Ibid.
256
Hugh Beale, Michael Bridge, Louise Gullifer, Eva Lomnicka, The Law of Security and Title-
Based Financing 3rd Ed. Online Version (Oxford: Oxford University Press, 2018), Para 5.03.
257
Giuliano G. Castellano, Reforming Non-Possessory Secured Transactions Laws: A New
Strategy? Modern Law Review 78, no. 4(2015): 611, 617.
258
See Flint, George Lee Jr. and Alfaro, Marie Juliet, “Secured Transactions History,” 1406
et seq.
88
Act and the Lithuanian Law on Pledge of Movable Property were enacted.259
4.2.2. Pledge Under the MPSRP

The MPSRP is based on the notion of facilitating the registration of security
rights as a general principle. This means that generally, a security right is
effective against third parties if registration of notice is filed at the CRO. But
what is the effect of this approach on a pledge?
4.2.2.1. Limited Third-Party Effectiveness of Pledge

To have a full account of the status of pledge under the MPSRP, it is useful to
start with examining the provisions of the ECC. The ECC defines a contract
of pledge as “a contract whereby a debtor undertakes to deliver a thing, called
the pledge, to his creditor as security for the performance of an obligation.”260
Under the ECC, assets subject to pledge can be movable property, totality of
effects, claims, or other rights pertaining to movable property.261 The ECC
permits a contract of pledge to be made in order to secure a future or conditional
debt.262 Equally revealingly, the furnishing of a pledge without dispossession of
the debtor may be made in such cases only as are expressly provided by law.263
In all other cases, the contract shall be of no effect where it stipulates that the
thing shall remain in the possession of the debtor.264 Thus, although the actual
delivery of the collateral to the creditor is not a precondition, an agreement
that explicitly envisions delivery of the collateral to the secured creditor is a
prerequisite for the validity of a contract of pledge.265
The MPSRP does not have any provision where pledge is expressly
mentioned. This is consistent with the approach taken by the law which creates
a unified concept of security right that renders formal labels and classifications
259
Lithuanian Law on Pledge of Movable Property (1998) & The Polish Registered Pledge Act
(1996), Articles 1 – 14.
260
ECC Article 2825.
261
ECC Article 2829.
262
ECC Article 2827.
263
264
265
89
that do not serve specific economic purposes irrelevant. Nevertheless, to the

Ethiopian legal system, pledge has been an important security device and it is not
difficult to imagine why in many instances pledge could be a preferred security
right as it gives the secured creditor direct control over the collateral, sparing
it from the potential illegal disposition of the collateral by the debtor. One of
the motivations for the reform of the law of security rights across jurisdictions
is the general policy that the law should not make it difficult for businesses to
grant non-possessory security rights and use their assets as collateral while they
have the ability to utilize the asset during their normal course of business.266 The
UNCITRAL LGSTL states:
The granting of a security right should not make it difficult or impossible

for the grantor of the security right to continue to operate its business.
This means that the grantor should not be required to give up possession
of the encumbered assets to the secured creditor. Thus, a modern secured
transactions regime should provide for non-possessory security rights
in a broad range of tangible and intangible assets, including equipment,
inventory, and receivables.267
Moreover, the lack of a central collateral registry makes it difficult to

ascertain the status of a property and causes uncertainties in transactions and
creates an unnecessary transaction cost. Due to these reasons, modern laws of
security interests seem, not only to positively prescribe rules for non-possessory
security rights but also adopt a hostile approach to possessory security rights by
requiring most collaterals to be registered. Does the MPSRP which is based on
the aforementioned premises unduly limit possessory pledge? The response to
this question is unfortunately not a straightforward one. As a starting point, the
UNCITRAL LGSTL clearly states that:
Under a slightly different approach, all types of rights serving security

purposes would be abolished and the specific transactions and financing
practices they envisioned would be subsumed into a single, uniform
266
UNICTRAL Legislative Guide on Secured Transactions Law, 21.
267
Ibid.
90
notion of security rights. There would be a single set of rules applicable

to all secured transactions because there would only be one type of
security device available… As a general approach, except in connection
with acquisition financing, the Guide recommends that States adopt the
second of these two approaches to enacting a functional, integrated,
and comprehensive secured transactions regime... Under this approach,
all secured transactions, no matter how denominated, are classified as
security rights and are subjected to an identical regulatory framework.268
As the MPSRP has adopted the functional approach, maintaining

existing security devices only in limited cases (e.g., business mortgage), the
logical conclusion is that possessory pledge was intended to be abolished. The
UNICTRAL Legislative Guide also states that “By far the most common type
of security right in tangible assets is the pledge. Traditionally, a pledge requires
for its validity that the grantor relinquishes possession of the encumbered asset.
Today, by contrast, many States have extended the term “pledge” to situations
where the grantor retains physical possession of the encumbered asset. In the
Guide, these modern types of pledge are considered to be non-possessory
security rights, not pledges.”269 It is clear that the UNCITRAL LGSTL took a
possessory pledge unfriendly approach.
Nevertheless, there are a few provisions under the MPSRP that ensure
that possessory security rights are effective against third parties. If C wishes to
obtain security right in a share certificate issued and registered in D’s name, C
and D need to sign a security agreement which is binding between C and D. For
their security agreement to be binding on third parties, C needs to take possession
of the certificate. In this respect, the MPSRP states that a security right in
movable property shall be effective against third parties “if the secured creditor
has possession of the corporeal asset that is money, negotiable instruments,
negotiable documents, and certificated securities or subject to Article 56.”270
268
Ibid., 58.
269
Ibid., 43.
270
91
The share certificate in our example is certificated security. Does this provision
indirectly state that a possessory pledge is still valid under the MPSRP? The
answer to this question is negative but the explanation lies in technicality.
A pledge agreement under the ECC is not valid if it does not envision
the transfer of possession of the collateral to the secured creditor. This means
that a pledge agreement does not have a binding effect even between the parties
to the agreement, if it does not envision dispossession of the debtor.271 If the
contract of pledge does not envision dispossession, it simply becomes a failed
pledge contract. By contrast, under the MPSRP, an agreement creating security
right in a movable asset does not have to envision dispossession of the collateral.
It is binding on the parties regardless of a dispossession clause. Thus, the rule
that security right in certificated securities does not need to be registered to be
valid against third parties, does not address pledge of certificated securities. It
is simply a security right in certificated securities that is made effective against
third parties through possession. In other words, under the MPSRP, transfer
of possession from the debtor to the secured creditor is a precondition for the
effectiveness of the security right against third parties, not between the parties
themselves. Quite the opposite is true for pledge because the expectation of
transfer of possession is a requirement for the validity of pledge as between
the parties. Thus, it can be argued that the MPSRP, at least on paper, abolishes
the possessory pledge.
In concrete terms, what the MPSRP does is to require registration of

security right in any type of collateral (except those that can be effective against
third parties by control or possession). This means that a secured creditor that
extends a 10,000 ETB Loan with security right in a piece of furniture must
register that security right at the CRO rather than merely taking possession
of the furniture. This is because the types of assets in which security rights
can be granted and be made effective against third parties by possession are
limited under Article 13(2) of the MPSRP — money, negotiable instruments
and documents, and certificated securities. In all other cases, security rights are
271
92
effective against third parties through registration or control, neither of which

is possession. Thus, in our hypothetical question involving security rights in
50 quintals of teff, the parties must register notice regarding the security right
as possession does not suffice to render it effective against third parties. This
effectively nullifies possessory pledge, limiting it only to money, negotiable
instruments and documents, and certificated securities. It unnecessarily entails
compliance costs where the risk involved in not registering the collateral
(security right) is appreciably low.
The only plausible explanation seems to be that the law is trying to prevent
situations where the secured creditor who has possession of the collateral owned
by the debtor may illegally dispose of the collateral claiming to own it. This is
an obvious fraud for which the debtor has a remedy in law, but the remedy may
not come swiftly and cheaply. However, one might argue that even the debtor
who maintains possession of the collateral in case of non-possessory security
in a chattel may dispose of the collateral even if the collateral is registered, at
the detriment of the secured creditor. The caveat to be added is that possessory
pledge would still be valid as a security right between the parties as long as
the contracts envisage the transfer of possession to the secured creditor, but it
would simply not have an effect on a third party until a notice with respect to it
is registered (if the exceptions do not apply).
4.2.2.2. Exceptions Creating Effective Possessory Pledge

Under the MPSRP, there are cases where a security right can be made effective
against third parties by possession. Notwithstanding the fact that the MPSRP 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
93
by possession.272 Although the list seems to indicate that security rights in a broad
range of assets can be perfected through possession, the exception is narrow as
specific criteria need to be met by the secured creditor to be able to perfect its
security right by possession. The third in the list is of particular importance where
only acquisition security rights in inventories and equipment can be perfected
by possession. This means that the secured creditor that has provided a loan for
the purchase of or has supplied the good (equipment and inventory) can perfect
its security right through possession (see infra § 8.3.2). Other secured creditors,
i.e., those who provide loans not for the purpose of financing specific item of
asset, cannot perfect their security right through possession, unless it is money,
negotiable instrument, or document. This basically means that security rights
in a wide range of assets must be registered and a possessory pledge cannot be
created in them even if the parties wish to do so.
Our hypothetical scenario at the beginning of the section can be useful

here. Can C and D create a security right in D’s fifty quintals of teff and transfer
the possession of the fifty quintals of teff to C? Would the security agreement
be effective against third parties under the MPSRP? In principle, the security
agreement does not have effectiveness against third parties because it is not
registered at the CRO. However, if the 50 Quintals of teff were stored at a
warehouse and D delivered the warehouse receipt to C, the security right will be
effective against third parties as it falls under the exception in Article 13(2) which
allows security rights in negotiable documents to be perfected by possession. It
is also to be noted that the security right in negotiable documents extends to the
asset represented by the document.273 However, if the 50 Quintals of teff are
not represented by a document, the security right would not be effective against
third parties unless registered. The outcome would be different if the possession
of the 50 Quintals were given to the secured creditor to secure payment of
purchase price provided by the creditor, provided that the 50 quintals qualify as
inventory, as in this case, the security right becomes acquisition security right
272
See MPSRP Article 13(2) and 56(1) & (2).
273
94
in inventory that can be perfected by possession.
4.2.3. Alternative Approach to Regulating Pledge

The Possessory pledge is one of the oldest forms of security devices in the
US, although states adopted chattel mortgage laws(security right in ordinary
movable assets) requiring registration.274 As noted earlier, the US system being
a pioneer of the functional approach to security right brings all transaction,
securing payment or performance of an obligation, regardless of their forms
and labels under the umbrella of UCC Article 9.275 Furthermore, under UCC
Article 9 generally, “a secured party may perfect a security interest in negotiable
documents, goods, instruments, money, or tangible chattel paper by taking
possession of the collateral.”276 Without getting into some of the exceptions, it
can be observed that in the US, taking possession of wide varieties of collateral
including goods is defined as all things that are movable277 and in general
renders the security right valid against third parties(perfects it). This means that
essentially in the US, a possessory pledge is still as good a security device like
any other (regardless of the fact that the law may not call it a possessory pledge).
In other words, two parties can sign a security agreement covering furniture
and transfer the furniture to the secured creditor and the security agreement is
effective against third parties. In our example, the security agreement under
which 50 Quintals of teff are transferred to the secured creditor to secure
payment of a loan would be valid against third parties under UCC Article 9,
with no conditions attached. Effectiveness of security right against third parties
by possession is permitted for a broad range of corporeal chattels in the US.
To put things in a better perspective, in Hungary, the HUCC permits

the transfer of possession of the collateral to the secured creditor to effect
274
See Flint, George Lee Jr. and Alfaro, Marie Juliet, “Secured Transactions History,” 1406.
275
Scott J. Burnham, The Glannon Guide to Secured Transactions, 35.
276
UCC § 9-313.
277
UCC § 9-102 (a)(44) defines goods as “all things that are movable when a security interest
attaches.”
95
pledge.278 The HUCC distinguishes between a pledge where the debtor transfers
the possession of the collateral – which is called a ‘hand pledge’ and a chattel
mortgage (registered pledge) where the registration of the collateral suffices.279
Similarly, the Lithuanian law on the Pledge of Movables absolves the parties
from registering the pledge if the debtor transfers the pledge to the creditor.280
The same holds true under the Polish registered pledge act that governs the
registration of pledge entered into in writing between the pledgee and the
pledgor.281 In these countries, possessory pledge is still used but there are
separate laws governing the so-called registered pledge.
4.2.4. Expanding the Scope of Possessory Security Right

Regarding pledge, the conventional wisdom is that since pledge is possessory,
its registration is not necessary to render it effective against third parties.
Nevertheless, due to its unsuitability for modern business practice, countries
tend to enact laws of a registered pledge where the parties enter into a pledge
agreement and register the agreement rather than transferring the collateral to
the creditor.282
In the US, possessory pledge in virtually all goods is valid as long there
is a security agreement, and the creditor has possession of the collateral. In
Hungary, although it is possible to register the pledge instead of giving the
278
HUCC Section 5:88 states that “a lien shall be considered established upon entering into
a pledge agreement and in that context, it is necessary: a) to have the lien registered in the
relevant register (mortgage); or b) to transfer possession of the pledged property to the lien
holder (possessory lien).”
279
Ibid.
280
See Lithuanian Law on Pledge of Movable Property Article 1(2) which states that this Law
shall not be applicable to mortgages effected in accordance with the Law on Mortgage or when
the property is transferred into the possession of the pledgee, or when the property is pawned,
or when the securities of the Government of Lithuania or the Bank of Lithuania are offered as
collateral for loans.
281
See the Polish Registered Pledge Act (1996), Articles 1 – 14.
282
See Lithuanian Law on Pledge of Movable Property Article 3 (“(1)A pledge shall be created
when: (1) in a manner set forth by this Law, a written pledge agreement is concluded between
the debtor or another person (the pledgor) and the creditor (the pledgee), and the transaction
involving the pledge is registered in the Register of Mortgages; 2) the transaction involving the
pledge is registered in the Register of Mortgages by a unilateral declaration of the pledgor.”)
96
possession to the creditor, a possessory pledge is still a valid security device.

It is therefore unclear as to why the drafter of the MPSRP chose to restrict
the effectiveness of possession of collateral on third parties only to limited
circumstances and possibly largely abolished possessory pledge when even
countries with the advanced legal system still maintain it.
4.3. Security Rights in Commercial Instruments and Documents

The MPSRP applies to security rights in negotiable instruments and negotiable
documents. The secured creditor can obtain possessory security right in
commercial instruments. The MPSRP defines negotiable instruments and
negotiable documents as corporeal assets even though they represent an
entitlement to payment of money or delivery of a good.283 This is consistent with
the rule that a security right in a negotiable document extends to the corporeal
assets covered by it.284
The MPSRP distinguishes between negotiable instruments and negotiable

documents and permits the granting of security rights in both. “Negotiable
instrument includes a bill of exchange, promissory note and other instruments
except check issued to bearer, specified name or order.”285 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.”286 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.
The definition of negotiable instruments provided by the MPSRP

eliminates confusion in the meaning of commercial instruments created by
Article 732(1) of the ECOMC which defines commercial instruments as
negotiable instruments setting out an entitlement consisting in the payment of
283
284
MPSRP Article 11.
285
286
97
a sum of money where paragraph 2 of the same article enumerates commercial

instruments as bills of exchange, promissory notes, checks, travellers’ checks,
and warehouse goods deposit certificates. The confusion stems from the fact that
while commercial instruments are negotiable instruments setting out the right
to payment of money, one of the instruments listed in the second paragraph—
warehouse goods deposit certificate (warehouse receipt) does not embody the
right to payment of money. The proclamation puts warehouse receipts under the
category of negotiable documents, rather than instruments.
Although UCC Article 9 does not make the distinction between

negotiable instruments and negotiable documents as explicitly as in the MPSRP,
it does make an implicit distinction with the result that negotiable instruments
such as promissory notes and negotiable documents such as warehouse receipts
fall under different rules of UCC Article 9 for certain purposes.287
The distinction between negotiable instruments and negotiable

documents has a legal effect. Under the MPSRP, a third-party transferee of
a negotiable instrument who takes possession of the instrument and gives
value without being aware of the existence of security right in it, even if the
security right is registered takes it free as a holder in due course as long as the
requirements for the holder in due course set under the ECOMC are met.288 The
rule is similar under UCC Article 9.289
The same rule does not apply to commercial documents as the rules for
transfer/negotiation of negotiable documents are slightly more rigid than for
negotiable instruments. The MPSRP states that “a security right in a negotiable
document extends to the corporeal asset covered by the document.”290 Thus, a
security right in a warehouse receipt covers the asset for which the warehouse
receipt is issued. “A transferee of an encumbered negotiable document that
obtains possession of the document and gives value without knowledge that the
287
UCC § 9-102(a)(47).
288
289
UCC § 9-331(a).
290
MPSRP Article 11.
98
sale or other transfer is in violation of the rights of the secured creditor under the
security agreement, acquires its rights free of a security right in the document and
the corporeal assets covered thereby that is made effective against third parties
under this Proclamation.”291 While for negotiable instruments, the transferee
needs to have received the transfer as a holder in due course per the ECOMC
provisions, the transferee of negotiable documents does not need to qualify as a
holder in due course. Nevertheless, the difference could be inconsequential as in
practice, even the transferee of the negotiable document must qualify as a good
faith acquirer in a similar way as the holder in due course.
Once a security right is created in a negotiable instrument or negotiable

document, it is effective between the parties. It is effective against third parties
if the secured creditor has possession of instrument or document292 or when
registration of notice is effected.293 The rules governing security rights in
negotiable documents and instruments are fairly straightforward. However, the
MPSRP’s approach to addressing the issue of priority in case of conflicting
security rights poses a challenge to parties involved in transactions covering
negotiable instruments and documents (see infra § 9.7.1.2).
It is worth mentioning that security rights in warehouse receipts (one

type of negotiable document) present a unique challenge to secured creditors.
Under the warehouse receipt’s proclamation, a holder of a negotiable warehouse
receipt can collateralize the warehouse receipt and borrow from any authorized
lending institution.294 This rule is now replaced by the relevant provisions of
the MPSRP. Nevertheless, the rule that the warehouse operator has a lien on the
warehoused goods for costs it incurs that the depositor is liable to pay,295 still
holds valid. In case of conflict between the security right of a bank and the lien
right of the warehouse operator, the latter prevails. This is affirmed by Article
55(3) of the MPSRP which states that “a possessory lien on goods which secures
291
292
293
MPSRP Article 61(1) & Article 64(1).
294
The Warehouse Receipt Proclamation Articles 2(3) cum 20(4).
295
99
payment or performance of an obligation for services or materials furnished with

respect to goods by a person in the ordinary course of the person’s business has
priority over a security right in the goods as long as the holder of the possessory
lien remains in possession of the goods.”296 Fees due to the warehouse operator
for upkeeping and storage of warehoused goods are payment for service
furnished by the warehouse operator within the normal course of its business.
As such, the lien right of the warehouse operator has priority over
consensual security rights if the warehouse operator is in possession of the
goods. Secured creditors taking security rights in warehoused goods should
therefore be aware of possible unpaid fees that the warehouse operator may
recover from the warehoused goods.
4.4. Trust Receipt and Security Trust Deed — Anomalies

The MPSRP purports to apply to security rights in trust receipt and security
trust deed.297 Since both trust receipt and security trust deed are undefined by
the MPSRP and are unfamiliar to the existing Ethiopian law, I consider them
as anomalies. The fact that these concepts are not defined is indeed at odds
with the style of the drafting adopted for the MPSRP which provides definitions
for even legal concepts that are relatively well-established under Ethiopian law
(e.g., possession or corporeal asset). Because the MPSRP is purported to be
based on UNCITRAL LGSTL, one would assume that it may be of assistance
in understanding the meaning of these legal concepts, only to end up with a
disappointment as the UNCITRAL LGSTL lacks even a mere reference to these
security devices.
4.4.1. Trust Receipt

Trust receipt and security trust deed are common law concepts with little practical
relevance to the current Ethiopian commercial reality. A trust receipt is a complex
security device in the US. By way of clarification, trust receipt has nothing to do
with trust; the institution that allows one party, the settlor to make a disposition
of property for the benefit of another party, the beneficiary by transferring the
296
297
100
legal title to the trustee and the equitable title to the beneficiary.298 Trust receipt
in the US was a product of attempts by banks who finance imported goods for
sale or processing.299 Banks being financiers of goods shipped from overseas
shipment, would pay for the goods shipped and received deliveries. The banks
created a practice where they draw up a document called trust receipt which
laid out their security right in the goods (right to recall the goods without notice,
survival of the bank’s right in the property after it is sold or processed).300 This
document would be signed by the buyer as a condition of release of the goods by
the financier(seller). While initially, trust receipt was used in foreign shipment,
after the second world war, the device started to be used in domestic transactions
with the rise in automobile dealership mainly based on credit, ultimately being
used by financiers of other goods at a domestic level.301
In 1935, the first Uniform Trust Receipt Act was promulgated in the
US.302 The act is very complex and the exact scope of trust receipt as a security
device is difficult to demarcate even in the US. In a nutshell, a trust receipt is
a transaction in which the lender gives money or property to the borrower (the
trustee) with reservation of title to the lender. “The trustee, under a pure trust
receipt arrangement, receives custody and holds possession of the goods for
the financier, and also holds the proceeds of any sale of the goods in trust for
the financier.”303 In the trust receipt transactions, the lender rather than taking
possession or holding security right in the good, holds a security right in trust
receipt. 304
Trust receipt system is not a known financing scheme in Ethiopia.
298
Graham Virgo, The Principles of Equity and Trust Law, 2nd ed. (Oxford: Oxford University
Press, 2016), 13.
299
Grant Gilmore, “The Trust Receipt” Yale Law Journal 57(1947-1948): 761.
300
Ibid.
301
Ibid., 765.
302
The Uniform Trust Receipt Act (1933).
303
“The Uniform Trusts Receipts Act in Pennsylvania,” Temple Law Quarterly 16, no. 2
(1942): 208.
304
Bogert, George Gleason “The Effect of the Trust Receipts Act,” University of Chicago Law
Review 3, Issue 1(1935): 28.
101
It is also questionable as to whether the drafter of the MPSRP has given

much thought to its practical use within the Ethiopian commercial and legal
context. It can be argued that even in the US, security right in trust receipt
has only historical significance because UCC Article 9 is not interested in the
denomination of the transaction, rather its function which means that whether
the transaction is named as trust receipt, as long as it secures payment of credit
or performance of an obligation, UCC Article 9 applies to it. As such, UCC
Article 9 does not make any reference to security interest in trust receipt. In
an email response to my query, one of the reporters of UCC Revised Article 9,
Charles W. Mooney Jr. stated:
On trust receipts, I will just note that I have taught secured transactions
just about every year for the past 35 years and I do not recall that I have
ever mentioned (much less discussed) trust receipts. And why would I?
They are not in any general use and the simplified treatment of secured
transactions in Article 9 makes resort to such devices unnecessary. The
Trust Receipts Act no longer exists on the books. It might make an
interesting history lesson for those interested in the history of secured
transactions in the US but is not anything of any particular interest of
significance. If a transaction were currently structured as a trust receipt
transaction, it would be a SISO (security interest securing an obligation),
and the rules of Article 9 would apply.305
Therefore, the mention of trust receipt under the MPSRP seems to

confirm the main premise of the book that the law is primarily based on US
secured transactions law despite the claims made by the drafter that it is based
on UNCITRAL LGSTL. Furthermore, the drafter for some reason failed to
adjust whatever template draft they have to the Ethiopian local context.
4.4.2. Security Trust Deed

Security (trust deed) is a real property tripartite transaction where a lender provides
money to the borrower and takes a security interest in a real property requiring
305
Charles W. Mooney Jr, Email Conversation with the Author (Jan. 16, 2021).
102
the conveyance(transfer) of legal title of the real property to a neutral third party
(the trustee).306 In this transaction, the credit extended by the lender is secured
by a real property. However, unlike a mortgage where there are only two parties,
in a trust deed arrangement, there are three parties — the borrower(trustor), the
third party (the trustee), and the lender (the beneficiary).307 The security trust
deed identifies the parties, the real property security, the obligation owed by the
trustor(borrower) in many cases evidenced by a promissory note, and the terms
of the security right including the rights and the duties of the parties. 308 In the
US, this security device is used in many states in lieu of real property mortgage
due to the difference in the enforcement procedure for mortgage and trust deed,
the latter allowing the secured party to foreclose the collateral without judicial
process.309 At this juncture, it is important to recall that UCC Article 9 does not
apply to real property mortgage as well as trust deeds as it applies to security
rights in personal property and fixtures.
Nevertheless, the lender(beneficiary) “on a deed of trust has a right to

payment secured by an interest in real estate.”310 The right to receive payment
secured by the real property has a value that the lender(beneficiary) can use as
collateral to access credit by assigning the trust deed along with the promissory
note to the lender. At this point, the security right in the right to receive payment
secured by a real property in the trust deed arrangement becomes a security right
in personal property. An illustration should be helpful to explain the point clearly.
Illustration 4.1
Awash International Bank (AIB) lends 50 Million ETB to Sunshine Construction
306
James D. Ciampa, “Comment, Federal Preemption of State Law Regulating Deed of Trust
Reconveyance Fees,” Santa Clara Law Review 32, no. 1 (1992):199.
307
Editorial Staff, “Trust deed characteristics” First Tuesday Journal (Jan. 2005), https://
journal.firsttuesday.us/trust-deed-characteristics/92/.
308
Ibid. See also William E. Boyd, “CANINE: The Complete Article Nine” (The Center for
Computer-Assisted Legal Instruction, 2001-2011), https://www.cali.org/lessons/web/ct11/
index.htm#chapter_20.htm.
309
Hoffmann, Joseph L., “Court Actions Contesting the Nonjudicial Foreclosure of Deeds of
Trust in Washington”, Washington Law Review 59(1984): 323-340.
310
William E. Boyd, “CANINE: The Complete Article Nine”.
103
and takes security right in several buildings in Addis Ababa. Sunshine

construction writes a promissory note to pay the 50 Million ETB loan. The title
to the buildings is transferred to Dashen Bank as a neutral party(trustee) until
Sunshine pays the 50 Million ETB to AIB.
The transaction in this scenario is a trust deed arrangement where AIB is
a beneficiary of payment secured by buildings while Dashen Bank is the trustee
with legal title to the buildings. Sunshine Construction, the borrower is the
trustor. This transaction is purely hypothetical as Ethiopia does not recognize a
transaction of this nature in real property. However, if Ethiopian law recognized
this kind of transaction, the transaction would not fall within the scope of the
MPSRP as it is a real property security device. The same is true under UCC
Article 9. Nevertheless, the following illustration shows how this transaction
may give rise to security right falling within the scope of the MPSRP.
Illustration 4.2
AIB lends 50 Million ETB to Sunshine Construction and takes security right in
several buildings in Addis Ababa. Sunshine construction writes a promissory
note to pay a 50 Million ETB loan. The title to the buildings is transferred to
Dashen Bank as a neutral party(trustee) until Sunshine pays the 50 Million ETB
AIB. AIB gets hit by a shortage of cash flow and decides to borrow 10 Million
ETB from the Commercial Bank of Ethiopia. AIB uses its right to receive the 50
Million ETB from Sunshine Construction secured by the building as collateral.
The right to receive the payment along with the security right in the
building becomes a movable (personal property). The MPSRP purports to
apply to a security right granted in the right to receive payment secured by
a real property. In our scenario, it applies to the security right of CBE in the
right of AIB to receive payment of 50 Million ETB from Sunshine secured
by the buildings. The fundamental principle is that the original transaction
between Sunshine and AIB is distinct from the arrangement between CBE and
AIB as the latter arrangement involves movable property. In this case, AIB
needs to assign the promissory note and the deed of trust to CBE, essentially
AIB being substituted by CBE to claim payments from Sunshine in case AIB
104
defaults on the loan payable to CBE.
UCC Article 9 applies to this transaction although it does not call it a

security trust deed. It uses the term “security interest in the right to payment or
performance secured by a security interest.”311 Accordingly, under UCC Article
9, a security right that is effective in a right to payment or performance secured
by a security interest or other lien on personal or real property is also effective
security interest in the security interest, mortgage, or other liens.312 This provision
establishes that the security right of CBE in our example applying to the right
to receive payment of AIB is effective with respect to the security right of AIB
in the building owned by Sunshine. Under UCC Article 9, the secured creditor
with security right in the right to payment must perfect it through registering
notice or taking possession of the promissory note issued by the debtor.313
To Ethiopian practitioners, judges, and policymakers, what is of

significance is to understand the mechanics of security trust deed than the
detailed rules under UCC Article 9. Security trust deed is not a familiar security
device under Ethiopian law because there is no security device in real property
property(building) that involves the transfer of title to a third-party trustee. The
closest akin to trust deed under Ethiopian law is antichresis. The ECC defines
antichresis as a contract whereby the debtor undertakes to deliver an immovable
to his/her creditor as a security for the performance of his/her obligations.314 In
an antichresis transaction, the person that creates the antichresis may deliver the
immovable and its accessories to the creditor or such other person as has been
specified in the contract.315
Antichresis is a form of security interest designed to meet the interest

of creditors that need more certainty in recovering their claims because the
delivery of the immovable property to the creditor is a requirement for the
formation of an antichresis contract.316 The fact that the debtor must deliver the
possession of the immovable to the creditor or a designated third party reduces
the cost of pursuing the property for the purpose of enforcement. Considering
314
ECC Article 3117.
105
that in the case of a mortgage, the debtor may alienate the encumbered property
which increases the cost of pursuing the property in the hands of a third party,
antichresis is a safer alternative security device from the lender’s perspective.
However, antichresis does not require the transfer of legal title to a third-
party trustee, which is an essential requirement for a security trust deed. To
be clear, the debtor or the grantor of the security right in antichresis transfers
possession to the creditor or the designated third party, not legal title. Why did
the drafter of the MPSRP import this legal concept which is peculiar to the US
legal system without defining its scope and key features/ requirements? May
this device be adapted to the existing legal devices of mortgage and antichresis
in Ethiopia? If the intention of the drafter were for the MPSRP to permit the use
of the right to payment or performance secured by a real property security right,
why not state it clearly so that a mortgagee or the creditor in antichresis would
be able to use its right to receive payment from the mortgagor/debtor secured by
the building as collateral? This is in fact what UCC Article does.
Section 9-203(g) states that “the attachment of a security interest in a

right to payment or performance secured by a security interest or other lien on
personal or real property is also attachment of a security interest in the security
interest, mortgage, or other lien.”317 Under UCC Article 9, in addition to a
beneficiary in a trust deed who can use the trust deed along with the promissory
note as collateral, other secured creditors with security rights in movable and
immovable assets can create security right in their right to receive payment.
This provision is clear about its scope and intent.
The most practical question a policymaker or practitioner should ask is

whether an Ethiopian judge would interpret the MPSRP to allow the use of the
right to receive payment secured by a mortgage or antichresis as collateral. The
answer is likely to be negative although the right to receive payment could be
317
UCC § 9-313(g).
106
interpreted as account receivable whether it is secured by a security right.318 It

is also possible, in principle to treat the right to receive payment secured by a
building (antichresis or mortgage) as an intangible right and apply the MPSRP
to a transaction where that right is used as collateral. Nevertheless, this may
not necessarily be the case in practice. This type of transaction is likely to be
associated with a real property mortgage and be perceived as an assignment of
the mortgage by way of security and be treated under the real property mortgage
law. Alternatively, because a security trust deed has peculiar meaning and
scope, the MPSRP is likely to be interpreted not to recognize any transaction
involving real property mortgage or antichresis. A judge that adopts this line of
thinking would resort to the provision of the ECC which states for instance that
“the creditor may not lease the immovable nor assign his right to a third party
without the consent of the person having created the antichresis.”319 Under this
provision, if the creditor borrows money and wishes to assign its right to collect
payment as security to a third party, it needs the consent of the creator of the
antichreiss. Thus, the ECC has its own rule regarding how an antichresis may
be assigned (presumably also as a security). Due to the forgoing reason, it is
unlikely that the right to receive payment secured by a mortgage or antichresis
will be treated under the MPSRP as the law stands now.
4.4.3. Trust Receipt and Security Trust Deed— Poor Legislative

Research
Neither trust receipt, nor security trust deed is familiar to the Ethiopian legal
system. UCC Article 9 applies to security rights in movable assets whether it is
denominated as trust receipt or given any other name, similarly to the MPSRP.
Because trust receipt and trust security deed are not known under Ethiopian
law, it is interesting to inquire as to why the drafter considered it important to
mention them in the MPSRP without defining them. It appears that the drafter
used a template model and failed to adapt it to the Ethiopian local context. The
318
MPSRP Article 2(37) defines receivable as “a right to payment of a monetary obligation,
excluding a right to payment evidenced by a negotiable instrument, a right to payment of
funds credited to a deposit account and a right to payment under security.”
319
ECC Article 3127.
107
draft version of the MPSRP also had another legal concept — charge — that is
as anomalous and out of context as trust receipt and security trust deed.
The draft version of the MPSRP states that it applies to “… financial

lease, right under a hire-purchase agreement, charge, security trust deed,
trust receipt, commercial consignment…”320 The term charge has no meaning
under the Ethiopian law of security interests or the Ethiopian law in general.
The Ethiopian income tax law states that “where the tax authority has served
a notice on the registering authority(of its preferential claim over the asset of
the defaulting taxpayer), the registering authority shall, without fee, register
the notice of security as if the notice were an instrument of mortgage over or
charge on such asset, as the case may be, and such registration shall, subject to
any prior mortgage or charge, operate while it subsists in all respects as a legal
mortgage over or charge on the land or building to secure the amount due.321
The income tax law does not define what a charge on an asset is.
Charge is a generic term that refers to the security interest under English
law and the law of countries that are influenced by English law. Under English
law, a charge can be a fixed or floating charge (meaning a security right that
attaches to a specific asset or floats over the after-acquired assets of the debtors
respectively).322 In Germany, there are two well-known security devices
governed by the Bürgerliches Gesetzbuch (BGB), the German Civil Code —
Hypothec and Land Charge.323
Under the BGB, a plot of land may be encumbered in such a way that
the person in whose favor the encumbrance is created is paid a specific sum
320
The Draft MPSRP, Released under Letterhead of the National Bank of Ethiopia (November
17, 2017) Article 3(1)(a), http://www.asressgikay.org/2021/03/29/the-movable-property-
security-rights-proclamationdraft-version-circulated-by-the-national-bank-fo-ethiopia/
321
The Ethiopian Income Tax Proclamation No. 286/2002, Article 80(4).
322
See generally Roy Goode, Commercial Law, 2nd Ed, (Penguin Books 1995) 732. See also
Asress Adimi Gikay, Rethinking Ethiopian Secured Transactions Law, 184-188.
323
German Civil Code (BGB) in the version promulgated on 2 January 2002 (Federal Law
Gazette [Bundesgesetzblatt] I page 42, 2909; 2003 I page 738).
108
of money from the plot of land.324 The key difference between hypothec (the
equivalent of real property mortgage under Ethiopian Law) and a land charge is
that while “hypothec secures a personal claim against the owner of the property
(or a third party) and is dependent on the existence of the specific debt, the
land charge is a “stand-alone” security right, independent of a claim to be
secured.”325 In Germany, the stand-alone land charge has some advantages.
When the underlining contract of loan is invalid, hypothec as accessory security
ceases to exist while land charge survives.326 Moreover, when a business debtor
receives an additional line of credit from a creditor the original land charge
suffices to secure the new obligation of the debtor without additional steps being
taken to that effect.327
The only security rights that can be acquired in immovable property in

Ethiopia are mortgage and antichresis— none resembles land charge as governed
under German law. Under the ECC, the ECOMC, or any other statute, there is
no definition of the term “charge.” After I wrote a criticism of the draft law in
an article published in Hawassa University Journal of Law,328 among others, for
the drafter’s apparent lack of proficiency in the existing Ethiopian legal regime
governing security rights reflected in the inclusion of security devices, undefined
or irrelevant to the Ethiopian context, in the draft law, the drafter removed the
terms charge and lien from the final version of MPSRP. Nonetheless, the drafter
kept trust receipt and security trust deed in the final version of the MPSRP.
324
BGB Article 1191(1). Translation service provided by Federal Ministry of in cooperation
with Juris GmBH, <www.juris.de> Accessed 30 January 2018.
325
David Cox et al, Endrik Lettau, Security over real estate: Germany compared to England and
Wales (White & Case LLP, 2006), p. 21.
326
Christian Hertel & Hartmut Wicke (2005), Real Property Law and Procedure in the European
Union National Report Germany, European University Institute (EUI) Florence/European
Private Law Forum in cooperation with Deutsches Notarinstitut (DNotI) Würzburg, 38.
327
Ibid 39.
328
Asress Adimi Gikay, “Examining the Suitability of the Draft Ethiopian Personal Property
Security Rights’ Law to the Local Context”, Hawassa University Journal of Law, Vol. 2 (July
2018), 1-37.
109
4.4.4. Fixing the Anomaly —Security Interest in the Right to

Payment Secured by a Security Interest
Trust receipt system will likely be irrelevant to the Ethiopian commercial reality
unless American businesses introduce their financing practices over time, which
seems very unlikely as the device is becoming less and less relevant in the
US as well. Under the MPSRP, there are other devices that can achieve the
same purpose security right in trust receipt achieves. In the US, where a lender
provides loan or supplies goods, instead of obtaining security right in the goods,
they can obtain security in the trust receipt issued by the borrower(trustee) who
holds the goods in trust for the lender until the price for the goods or the loan
extended is paid. Simple retention of title or an acquisition security right can
achieve the same purpose.
What would be missing in retention of title (which is a security device

under the MPSRP) or acquisition security right is the trust receipt which really
is a piece of document issued by the debtor. In the absence of a detailed law
governing trust receipts in Ethiopia, it is pointless to try to introduce the notion
only in the law of security rights where there are other security devices that are
equally effective. In the US, every state has its own trust receipt act 329which
governs the substantive aspects of trust receipt. Ethiopia either must enact a
trust receipt law or remove the trust receipt system from the MPSRP as it adds
unnecessary confusion. As Mooney stated, even in the US, trust receipt acts
are no more as useful as they once were.330 Therefore, the reference to trust
receipt under the MPSRP seems to confirm the main premise of the book that
the law is primarily based on US secured transactions law despite the claims
made by the drafter that it is based on UNCITRAL LGSTL. Even still, the
drafter has miserably failed to adjust whatever template they were using to the
Ethiopian local context.
The MPSRP also purports to apply to security trust deed but it provides
329
Barry A. Nelson, “Summary of States that Adopted the Uniform Trust Code and those
States” Treatment of Exception Creditors” (Sections 503-504) https://www.actec.org/
assets/1/6/Nelson_UTC_State_Laws.pdf.
330
Charles W. Mooney Jr, Email Conversation with the Author (Jan. 16, 2021).
110
no definition for the concept, let alone laying out or clarifying its essential
ingredients. Given the fact that it is a transaction closely linked to a real property,
it is likely to be rejected by Ethiopian courts, if at all utilized by financial
institutions. Nevertheless, the use of the right to payment secured by a security
right as collateral can significantly enhance access to credit. In our illustration
(4.2), AIB would have difficulty obtaining a loan if it has a limited asset to use
as collateral. However, its right to receive payment from Sunshine along with
its security right in the buildings can serve as a strong borrowing base. The
mechanics of the device can be applied to mortgage, antichresis, and security
rights in personal property.
There are two alternative solutions that could be adopted. The first
solution requires judges to interpret the provisions of the MPSRP governing
security rights incorporeal assets and receivable to allow the use of the right to
receive payment secured by a security right as collateral. To me, this approach
does not call for creative interpretation as incorporeal assets and receivable
are defined broadly. It would be within the wording and spirit of the law to
apply the MPSRP to a security right in the right to payment or performance of
obligation secured by a security right (both in movable and immovable assets).
Adopting this approach means that the notion of security trust deed becomes
irrelevant. Nonetheless, it is also not inconceivable that due to the separation of
real property mortgage and security rights in movable property, judges might
refuse to treat a security deed-type transaction under the MPSRP. Should this
be the case, the MPSRP should be amended to clearly recognize the use of the
right to receive payment or performance secured by a security right in movable
or immovable assets as collateral. Even in this case, the reference to security
trust deed creates unnecessary confusion and thus it should be removed from the
MPSRP as it does not appear in any provision of UCC Article 9 either.
In this regard, while taking the cue from UCC Article 9, a caution must
be applied as well. UCC Article 9 has several categories of security rights in the
right to receive payment. The one which is the most problematic and a UCC
Article 9 creation(novelty) is chattel paper. “Chattel paper is a record or records
111
that evidence both a monetary obligation and a security interest in specific

goods or lease of goods...”331 Suppose that a car dealer concludes a contract of
sale where the buyer pays the price in installments and the dealer has security
interest in the car until the full price is paid. This transaction involves a security
right of the seller in the car for the payment of the price. This transaction may
be referred to as “First Generation Transaction”.332 When the dealer gives
the right to installment payment together with security interest in the car, as
collateral to a bank, the bank’s security interest becomes security interest in
chattel paper and the transaction between the dealer and the bank is second-
generation transaction.333 The bank holds security interest in a record that
evidences a monetary obligation of the buyer towards the dealer and security
interest of the dealer in specific good. Chattel paper is not different from account
receivable except that in account receivable, the right to receive payment may
not necessarily be secured by a security interest. At the same time, UCC Article
9 excludes certain transactions from chattel paper.334
UCC Article 9 introduced chattel paper due to the prevalence of chattel

paper financing for consumers in the US.335 Other jurisdictions do not tend to
recognize it. In discussing the significance of chattel paper in Australia, Duggan
argues that unlike in the US where chattel paper financing is prevalent, in
Australia, there are alternatives that are used to achieve the same end, and thus
chattel paper provisions should be repealed from the Australian PPSA.336 The
2009 Australian PPSA did not do away with chattel paper and I do not know
of subsequent change in the status quo.337 For Ethiopia, the main focus should
331
UCC (2010) § 9-102(a)(11).
332
See excerpt from Margit Livingston, Chattel Paper Priorities Under U.C.C. Article
9(Lexisnexis),http://www.lexisnexis.com/legalnewsroom/corporate/b/business/
archive/2008/05/06/chattel-paper-priorities-under-u.c.c.-article-9.aspx.
333
Ibid.
334
UCC § 9-102(11). “The term does not include (i) charters or other contracts involving the
use or hire of a vessel or (ii) records that evidence a right to payment arising out of the use of a
credit or charge card or information contained on or for use with the card.”
335
Anthony Duggan. “Chattel Paper” (2013) 43 Australian Business Law Review 171-185.
336
Ibid.
337
See Australian PPSA (2009) Section 10.
112
be to implement rules that allow the debtor to use its right to receive payment
secured by security interest as collateral, without artificially creating nominated
transactions where the commercial context does not call for that. Chattel paper is
a good example of a transaction that does not need to be recognized in Ethiopia
and future reform should avoid a thoughtless emulation of UCC Article 9. By
the same token, security trust deed as a nominated device unnecessarily limits
the use of the right to payment secured by security interest as collateral.
4.5. Conclusion
This chapter has covered pledge as a security right and security rights in
commercial instruments. While the provisions of the MPSRP are overall
comprehensive, the chapter has shown some drawbacks of the MPSRP.
With respect to pledge, the chapter has argued, the fact that the MPSRP
has significantly limited the use of possessory pledge by requiring registration of
security rights in corporeal chattels (save in exceptional cases), is incompatible
with the longstanding legal tradition of Ethiopia which recognizes possessory
pledge as one of the most important security devices. In other jurisdictions
including in the US, possessory security right is still a strong security right
because of the possibility to take possession of a broad range of assets as a
method of rendering the security right effective against third parties. In
Hungary, Lithuania, and Poland, although a registered non-possessory pledge
is specifically regulated(encouraged), possessory pledge is still prevalent. In
Ethiopia, due to the hostile approach to possessory security right that seems to
have been adopted by the MPSRP, the effectiveness of possessory pledge against
third parties is limited to specific instances. In the exceptional cases recognized,
delivery of possession of the collateral renders the security agreement effective
against third parties. If a security agreement envisions delivery of possession
to a secured creditor with regards to corporeal chattels in general, there is a
risk that it may not be binding on third parties if is it not the asset with respect
to which perfection by possession is not permissible, effectively nullifying the
security agreement and discouraging the parties from using possessory pledge.
Lastly, the security rights in negotiable instruments and negotiable

113
documents are adequately regulated under the MPSRP. With respect to security
rights in trust receipt and security trust deed, potential challenges exist. The
concept of trust receipt is irrelevant to the Ethiopian commercial and legal
context and therefore it should be removed from the MPSRP as Ethiopia does
not have a law governing substantive aspects of trust receipt. With respect to
security trust deed, the chapter has argued that the law should ensure the use of
the right to payment secured by a security right as collateral. However, security
trust deed being peculiar and limited in scope causes an unnecessary confusion
—it should be removed from the MPSRP. In this regard, judicial interpretation
of the provisions of the MPSRP governing incorporeal assets and receivable to
cover security rights in right to payment or performance of obligation secured
by security right would be one approach to tackling the challenge. Alternatively,
a rule that permits the use of the right to payment or performance of obligation
secured by a security right in immovable and movable property as collateral
should be designed by way of amending the MPSRP.
114
Chapter Five: Floating and Acquisition Security Rights
5.1. Introduction
When security right is created on present and future assets of the debtor (assets
yet to be acquired by the debtor or after-acquired property in the terminology of
UCC Article 9338), it is called floating security right or in the terminology of the
American law of security interests — floating lien.339 Floating security is one
of the important facets of UCC Article 9. Other jurisdictions such as the UK
have also their version of floating security right known as the floating charge.340
Nevertheless, it has been argued by many authorities that the English version
of floating security right is unnecessarily complex and unsuitable for secured
financing and there have been calls for its abolition.341
The policy rationale for allowing the debtor to use a security right that
floats over its present and future assets is to widen the debtor’s borrowing base.
Because the debtor does not have to wait to acquire the asset to use it as collateral
for accessing a loan, the debtor can use a single security agreement to encumber
338
UCC § 9-204(a).
339
Arthur J. Harrington, “Insecurity for Secured Creditors: The Floating lien and Section 547 of
the Bankruptcy Act,” Marquette Law Review 63, Issue 3(1980): 449. See also UCC §§ 9-204(3)
and (5),
340
David W. Carroll, “The Floating Lien and the Preference Challenge: Some Guidance from
the English Floating Charge,” Boston College Industrial and Commercial Law Review 8, no.
2(1967): 448 & Roy Goode, Roy Goode on Commercial Law, 4th ed. (London: Penguin Books,
2010) 732.
341
Asress Adimi Gikay, “Rethinking Ethiopian Secured Transactions Law through Comparative
Perspective,” 153-197. Mokal, Riz, In the Floating Charge - An Elegy. Commercial Law and
Commercial Practice, ed. Sarah Worthington, (Oxford: Hart Publishing, 2004).
116
assets that are not yet acquired. However, since the floating security right
hovers over future assets of the debtor, which might be financed by subsequent
creditors, the law gives subsequent financiers the acquisition of specific assets
who have a security interest in those assets (acquisition security right), a priority
over the floating security right. This chapter provides an in-depth analysis of
floating security rights and acquisition security rights under the MPSRP with
comparative perspectives from UCC Article 9.
5.2. Floating Security Right under the MPSRP

The MPSRP permits the creation of security rights in the debtor’s present and
future assets. First, MPSRP states that a “security right shall be created by
a security agreement, provided that the grantor has rights in the asset to be
encumbered or the power to encumber it.”342 This provision refers to an existing
property that the grantor can encumber either on his own behalf or on behalf
of another person, such as acting as an agent of an owner of the asset. Second,
the MPSRP allows the creation of a security right in a future asset.343 For this
purpose, it defines a future asset as “a movable property, which does not exist or
which the grantor does not have rights in or the power to encumber at the time
the security agreement is concluded.”344 Third, “a security right may secure one
or more obligations of any type, present or future, determined or determinable,
conditional or unconditional, fixed or fluctuating.”345
These rules enable the secured creditor and the debtor to enter into an
agreement, where the creditor’s security right extends to the future assets of the
debtor provided that they are to be acquired by the debtor/grantor and become
disposable. Furthermore, they enable the debtor to encumber his/her asset, with
a single agreement, for obligations that may be incurred in the future. Hence, the
MPSRP clearly recognizes floating security rights.
Under UCC Article 9, the creditor can encumber the debtor’s present
342
MPSRP Article 4(1).
343
MPSRP Article 4(3).
344
345
MPSRP Article 5.
117
and after-acquired property.346 This type of security right is nominated by

commentators as a floating lien, a term of art that combines lien (security right)
and floating (that floats over the debtor’s assets). Gilmore defines floating lien
as “an interest in all the assets of a borrowing enterprise, whether owned by the
borrower when the loan is extended or subsequently acquired”.347
It is recognized that there is no single provision that creates floating lien

Under UCC Article 9, rather the secured creditor uses its different provisions to
acquire security interest over the present and future assets of the debtor. The first
one is the provision under which a security interest attaches348 to an after-acquired
property, in which case the security interests attach and perfects the moment the
debtor acquires rights in the property.349 “The second set of provisions which
are thought to contribute to the floating lien are those that allow the security
agreement to cover future advances whether or not committed for.”350 The third
possible component of floating lien is the abolition of Benedict vs Ratner rule by
UCC Article 9,351, as a consequence of which security interest is not invalid or
fraudulent merely because the debtor uses proceeds or acts as though there were
no security interests — exercises unfettered dominion over the collateral.352 The
abolition of Benedit vs. Ratner rule allows the secured creditor to take security
interests in the debtor’s accounts receivables without being required to exercise
control(police the debtor),353 allowing the creditor’s right to float over shifting
assets of the debtor. Under UCC Article 9, by using the clause “owned and after-
acquired assets” the parties can avoid a specific description of the collateral as
346
UCC § 9-204(a) & Arthur J. Harrington, “Insecurity for Secured Creditors,” 449.
347
Grant Gilmore, Purchase Money Priority, Harvard Law Review 76(1963): 1333.
348
Attachment of security interest means the effectiveness of the security interest/agreement
between the parties. See UCC§ 9-203(a).
349
UCC, § 9-204(a). See also Peter F. Coogan, “Article 9 of the Uniform Commercial Code:
Priorities among Secured Creditors and the “Floating Lien.”” Harvard Law Review 72, o.
5(1959): 851.
350
Ibid., 851.
351
Ibid., p. 853.
352
UCC § 9-205(a).
353
Peter F. Coogan, “Article 9 of the Uniform Commercial Code: Priorities among Secured
Creditors and the “Floating Lien,””853.
118
long as the security agreement identifies the collateral reasonably.354
The preceding overview shows that the MPSRP has introduced this
innovative device that allows the debtor to enter into one security agreement to
be able to grant security right that covers the present and future assets.
5.3. Floating Security Right — A Cautionary Tale

The relevant provisions of the MPSRP on floating security rights appear to be
reasonable although the drafter could have done better in terms of defining its
boundaries. In the US where floating security right is well utilized, litigations on
the effect of the after-acquired clause usually arise.
In Re Filtercrop, the 9th Circuit Appellate Court confronted the question

“whether under Washington law, a security agreement that grants an interest
in “inventory” or “accounts receivable,” presumptively includes after-acquired
inventory or accounts receivable.”355 The court held that the description extends
to after-acquired accounts receivables because there was no evidence to the
effect that the intent of the parties was to limit their agreement to specific after-
acquired receivables.356 Nonetheless, the court held that the agreement does
not extend to after-acquired inventories because the agreement contained an
attachment of a list of inventories that the court used as evidence of the intent of
the parties to limit the inventories to present inventories.357
One of the questions to ask with respect to the MPSRP is the following:
if the parties to the security agreement state in their agreement that the creditor’s
security right extends to the presently available assets of the debtor and accounts
receivables, does this agreement cover all accounts receivables of the debtor
without regard to their source and when the accounts receivables are due?
What if the agreement applies to identified or listed inventories and unspecified
accounts receivables? At least in the US, these questions gave rise to litigation.
354
In Re Filtercrop, Inc., United States Court of Appeal, Ninth Circuit, 1998, 163 F. 3d 579. See
also UCC §9-108.
355
In Re Filtercrop, Inc.
356
Ibid.
357
Ibid.
119
Practitioners should use clear language in drafting security agreements

to prevent any kind of doubt regarding the scope of the floating security right.
If the parties intend the security agreement to cover present and future accounts
receivables, that must be stated clearly in the security agreement as well as the
notice at the CRO.
5.4. Acquisition Security Rights — General Overview

Under the MPSRP, the debtor can grant a security right that floats over its
present and future assets (floating security right) (see supra § 5.2). But floating
security right can create the floating secured creditor’s monopoly over the
debtor’s assets as its present and future assets are encumbered by floating
security right. Subsequent creditors could be discouraged from providing loans
to the debtor with floating security right in its assets. This phenomenon is called
a situational monopoly.358
The solution for this problem is acquisition security rights super-priority.

The MPSRP gives security right in a corporeal asset or intellectual property,
which secures the obligation to pay any unpaid portion of the purchase price
of the asset or other credit priority over floating security right.359 Under the
MPSRP, a secured party that provides a loan for the acquisition of a specific
item by taking a security interest in that asset has priority over the secured
creditor with floating security right (see infra § 9.5). Acquisition security right
super-priority is designed to ensure that the debtor’s assets are not tied up by
a security right of a single creditor and to ensure that this does not discourage
subsequent creditors from financing the debtor.
In the US, acquisition security right, in the parlance of UCC Article 9 —

Purchase Money Security(PMSI) — has super-priority.360 Under UCC Article 9,
generally for a security interest to qualify as PMSI, (1) the creditor must have
extended “enabling” loan — a loan that made it possible for the debtor to acquire
358
Anthony Townsend and Jackson, Thomas H. “Secured Financing and Priorities among
Creditors,” Yale Law Journal 88 (1979):1167.
359
MPSRP Articles 2(2) & 57.
360
UCC § 9-103, (b) (1-3).
120
rights in the property that it did not previously have and (2) the loan must be
traced to identifiable, discrete items of property.361 If the loan is extended for a
purpose other than financing a particular item, there is no PMSI as it is the case
when the loan cannot be traced to a particular item of good.362 Any valid security
interest created to secure the performance of an obligation incurred to finance an
identifiable collateral is PMSI.363
Overall, the MPSRP follows the same pattern as UCC Article 9 in terms
of allowing the debtor to grant security rights in its present and future assets
while giving super-priority to acquisition security rights.
The aims of this section are manifold. First, it expounds on the general
scheme of acquisition security rights —what makes a given security right an
acquisition security right. Second, it explains the priority rules to some length
because priorities are covered at great length in chapter nine. Lastly, it provides
a critical analysis of specific types of acquisition security rights—acquisition
security rights emerging from financial leasing and consignment. Although Sale
with retention of the title gives the seller an acquisition security right for the
unpaid price, the chapter does not cover it. A sale with retention of title, besides
being a familiar legal concept in Ethiopia, presents no complex legal questions.
5.5. Acquisition Security Rights — Definition, Scheme, and Scope

The MPSRP organizes a class of security rights that were previously placed
outside secured transactions law and were not treated as security devices under
one category called acquisition security right. Acquisition security right refers to
a security right that is strictly linked to the acquisition of specifically identifiable
collateral. Article 2(2) of the MPSRP defines acquisition security right as “a
security right in a corporeal asset or intellectual property, which secures the
obligation to pay any unpaid portion of the purchase price of the asset or other
credit extended to enable the grantor to acquire rights in the asset to the extent
361
Anthony Townsend and Jackson, Thomas H. “Secured Financing and Priorities among
Creditors,” 1165.
362
Ibid.
363
121
the credit is used for that purpose.”364
It is also worth noting here that acquisition security right has different
designations across jurisdictions. A possible future reform in Ethiopia in this
area requires general awareness of the different legal terminologies used to refer
to acquisition security rights. In the US, acquisition security right is referred to
as purchase money security interest. In academic commentaries, the term `title
financing’ is also used to describe the same concept, although title financing
is limited in its scope as it covers only transactions where the secured creditor
withholds title to the property as security (e.g., sale with retention of title).
Generally, acquisition security rights have priority over other security

rights provided that the relevant legal requirements are met. This so-called PMSI
super-priority (in the US) or acquisition security right super-priority (as we may
call it in Ethiopia) is aimed at protecting the interest of a secured creditor who
extends a loan for the acquisition/financing of an identifiable asset knowing
that the debtor’s present and future assets are already (might be) encumbered
by floating security right. Although floating security right saves costs by
eliminating the need for drawing up a security agreement covering a new asset,
every time the debtor acquires the new asset, it also creates what economists call
a “situational monopoly,” in which a creditor with a security right in an after-
acquired property (future property) enjoys a competitive advantage over other
lenders in all its subsequent dealings with the debtor. Acquisition security right
super-priority is designed to tackle the situational monopoly created by floating
security right. The floating security right places the creditor in a monopolistic
position where subsequent creditors would either be unwilling to deal with
the debtor or are forced to accept less favorable terms. It is this problem that
acquisition security right super-priority is designed to solve.
Article 2(2) of the MPSRP defines acquisition security right as “a

security right in a corporeal asset or intellectual property, which secures the
obligation to pay any unpaid portion of the purchase price of the asset or other
364
MPSRP Article 2(2).
122
credit extended to enable the grantor to acquire rights in the asset to the extent
the credit is used for that purpose”.365
The first thing to notice about acquisition security right under the
MPSRP is that it has a limited scope as there are specific types of collateral with
respect to which an acquisition security right can be created— corporeal assets
and intellectual property. Does this mean that acquisition security right may not
be obtained with respect to incorporeal assets that are not intellectual property?
The following scenario might reveal the problem with the approach taken by the
MPSRP clearly.
Illustration 5.1.
Awash International Bank (AIB) decides to sell Non-Performing Loans
(NPLs)366 owed to it by various debtors to Refinance Group — a specialized
debt buyer. Refinance Group obtains a loan from Abyssinia Bank to finance
the debt acquisition. Abyssinia Bank enters into a security agreement with
Refinance Group, taking security rights in the NPLs being bought by Refinance
Group. What type of security right does Abyssinia Bank have in the scenario?
How does the MPSRP treat the security right in question?
In this scheme, if Refinance Group defaults on the loan provided by

Abyssinia Bank, the latter has the right to satisfy its claim from the debts
bought by Refinance Group. Abyssinia Bank has provided a loan that enabled
Refinance Group to buy the NPLs from AIB. This means that its security right
secures payment of the loan extended to enable the debtor (Refinance Group) to
acquire rights in the asset (the NPLs). Thus, it should have acquisition security
right in theory. Nevertheless, the right to payment from NPLs is an incorporeal
right(asset) which is neither a corporeal asset nor an intellectual property. As
such, it does not fall within the meaning of acquisition right under Article 2(2)
365
MPSRP Article 2(2)].
366
A non-performing loan or non-performing exposure is a loan with respect to which the
borrow has defaulted from a certain duration of time and is assessed to be unlikely to meet
its obligation. See European Banking Authority, EBA Final draft Implementing Technical
Standards on Supervisory reporting on forbearance and non-performing exposures under Article
99(4) of Regulation (EU) No 575/2013(2014), p. 13.
123
of the MPSRP. This is certainly absurd because there is no reason for which
Abyssinia Bank should not have acquisition security right merely because the
collateral is not a corporeal asset or an intellectual property.
The issue raised above is not merely academic — it has a

business(financing) implication. Pursuant to Article 56(1)(b) of the MPSRP,
acquisition security right in consumer goods, equipment, or intellectual property
has priority as against a competing non-acquisition security right created by the
grantor provided that a notice with respect to the acquisition security right is
registered in the Collateral Registry within seven working days after the grantor
obtains possession of the asset or acquires a right in intellectual property. In our
example, if the right of Abyssinia Bank were treated as an acquisition security
right, it would have the right to register notice of its security right within seven
days after Refinance Group acquires rights in the NPLs. Any other security
right other creditors might have on the assets of Refinance Group would be
subordinate to the security right of Abyssinia Bank on payments from the NPLs,
even if registered prior to Abyssinia Bank’s security right as long as the latter
registers its right within the seven days’ window. Nevertheless, with the MPSRP
not recognizing acquisition security right in incorporeal rights, Abyssinia Bank
would be in a disadvantageous position. The system would certainly negatively
impact the financing of NPLs and other transactions involving incorporeal rights
that are not intellectual property.
The US legal regime is slightly different with respect to acquisition

security rights. Although at times, technical and overwhelmingly detailed
compared to its Ethiopian counterpart, UCC Article 9 provisions would be
of great importance for a systematic and robust understanding of the rule in
Ethiopia. Noted earlier, in the US acquisition security rights are referred to
as purchase money security interests, while the obligation secured is called a
purchase-money obligation. Acquisition security right has a limited scope under
UCC Article 9 as well because it does not apply to account receivable (intangible
asset) that is used in the illustration above.
124
UCC Article 9 § 9-103 defines purchase-money obligation as “an

obligation of an obligor incurred as all or part of the price of the collateral or for
value given to enable the debtor to acquire rights in or the use of the collateral if
the value is in fact so used.”367 Furthermore, it defines purchase money collateral
as “goods or software that secures a purchase-money obligation incurred with
respect to that collateral.”368 From these definitions, it can be inferred that an
acquisition security right applies to goods and software. Goods are defined as
all things movable excluding intangibles such as accounts receivables.369 Thus,
acquisition security right under UCC Article 9 secures payment of purchase
money provided in cash by the creditor or for the price of goods supplied by
the creditor.”370
For the security right to qualify as PMSI, first, the creditor must have
extended “enabling” loan — a loan that makes it possible for the debtor to
acquire rights in property that the debtor did not previously have.371 Second,
purchase money loan must be traced to identifiable, discrete items of property.372
If the loan is extended for a purpose other than financing a particular item, there
is no PMSI as it is the case when the loan cannot be traced to a particular item of
good.373 Seen from the perspective of secured creditors, generally, there are two
basic categories of PMSI creditors — (a) creditors who finance the purchase
of the collateral through direct capital [cash] and (b) creditors who provide the
good that becomes the collateral in a certain capacity arising from certain legal
relationships(e.g., a supplier, lessor, and seller).
The exclusion of acquisition security right in accounts receivables both

under the MPSRP and UCC Article 9 is difficult to justify. One of the drafters
of UCC Article 9, Grant Gilmore stated that “In the nature of things it is almost
impossible to conceive of a situation, other than the kind which practitioners
refer to as “academic,” in which intangible money claims could be made the
subject of a purchase money.”374 Nevertheless, attempting to take security right
in an intangible to secure the purchase price has proved to be real than academic.
373
Ibid.
125
In 2003, the Supreme Court of Oklahoma passed a judgment in which

it held that security right in account receivables does not enjoy acquisition
security right super-priority.375 In First Bethany Bank & Trust N.A. v. Arvest
United Bank, first Bethany provided a financing loan to Syntrix. The loan
was secured by present and future(after-acquired) accounts receivables. The
security right of First Bethany Bank was perfected (registration has been filed
and it was effective against thirds parties). Subsequently, Arvest United Bank
extends loans for financing specific accounts receivables taking a security
interest in the account receivables for the purchase of the loan. When Syntrix
filed for bankruptcy, Arvest Bank sought to recover its claim from the accounts
receivables it has financed as it argued that it has priority on those particular
receivables as an acquisition security right holder. The court ruled that accounts
receivables are not covered under acquisition security rights, because the priority
in regard to security rights in accounts receivables is determined by the general
rules of priority which gives priority to the party that has registered its security
interest first (First Bethany Bank).
This is an unfortunate result as an acquisition loan extended for the

purpose of purchasing a car is no different from an acquisition loan extended
for the purchase of financing accounts receivables. The drafter of the MPSRP
being heavily influenced by UCC Article 9 has borrowed this idiosyncratic rule
and implemented it without further thought.
5.6. Acquisition Security Right Super-priority

The MPSRP grants a super-priority to an acquisition security right competing
with a non-acquisition security right under specific conditions. It provides that
an “acquisition security right in consumer goods, equipment, or intellectual
property has priority as against a competing non-acquisition security right created
by the grantor if the acquisition secured creditor is in possession of the asset or a
notice with respect to the acquisition security right is registered in the Collateral
Registry within seven working days after the grantor obtains possession of the
375
First Bethany Bank & Trust N.A. v. Arvest United Bank, 77 P. 3d 595, 2003 OK 64 (2003).
126
asset or acquires a right in intellectual property.”376 As such, the super-priority

of an acquisition security right is subject to the condition of perfection(notice
to third-parties) of the security right either through the possession of the asset
by the acquisition secured creditor or the registration of a notice at CRO within
seven working days, after the grantor obtains possession of the asset or acquires
a right in intellectual property.
The rules regarding super-priority of acquisition security rights are

similar under UCC Article 9 subject one deviation. In the US, the acquisition
secured creditor has twenty working days to prefect the acquisition security right
since the debtor takes possession of the collateral377 while it is seven working
days in Ethiopia.
The super-priority of acquisition security right in inventories is

subject to another condition both under the MPSRP and UCC Article 9. The
acquisition secured creditor has the duty of notifying earlier non-acquisition
secured creditors with security right covering inventories.378 Detailed analysis
of the priority of acquisition security rights is provided in chapter nine. At this
juncture, it is important to observe that the general scheme of the law is to
give priority to acquisition security rights. The MPSRP embraces this scheme
adequately notwithstanding the flaw in the scope of acquisition security right. In
this regard, the MPSRP needs to be revisited to ensure that acquisition security
ights are recognized in a wider category of assets including incorporeal rights,
especially accounts receivables.
5.7. Specific Acquisition Security Rights — Title Financing

Generally, acquisition security rights can be divided into two categories. The
first category includes the security right of a creditor who extends a loan for the
purchase of an asset. This may be referred to as non-tile financing acquisition
security right because it does not depend on the secured creditor obtaining or
maintaining ownership title in the collateral. The second category includes
376
MPSRP Article 56(1)
377
UCC § 9-324(a).
378
MPSRP Article 56(2) & UCC § 9-324(a).
127
title financing devices where the security right depends on the secured creditor
maintaining ownership title to the collateral. Transactions leading to title-based
acquisition security rights are conveniently referred to as title financing.
Title financing is a transaction where the financier has the title to the
ownership of the asset while the debtor obtains possession of the asset within
the framework of the relevant legal arrangement.379 Examples of title financing
devices include retention of ownership, financial leasing, and commercial
consignment. Regarding the treatment of title finance in domestic laws, two
patterns can be identified — to treat title finance outside the realm of the law
of security rights, such as contract, and financial leasing laws, and (b) to re-
characterize them as secured transactions following the functional approach.
The latter approach is adopted by the MPSRP similarly to UCC Article 9. In
this section, a detailed analysis of consignment and financial leasing under the
MPSRP and UCC Article 9 is provided.
5.7.1. Commercial Consignment

Consignment is one of the most slippery legal concepts. In a 1979 article,
Harrington wrote “Few widely used commercial devices have had so checkered
and volatile legal history as the consignment. And few such devices have
been able to survive so long and tortuous legal history and yet retain so many
elements of confusion and disarray.”380 Several years later, commentators
and courts in the US are still struggling to tame consignment under the law
of security interests. The most important confusion around consignment is
related to distinguishing consignment agreements that create security rights
(fake consignment or disguised security) from those that do not create security
rights (true consignment or sale or return).381 The distinction between the two
determines whether the law of security interests applies to the consignment in
379
Philip R. Wood, Title Finance, Securitization, Derivatives, Set-off and Netting (Canada:
Sweet & Maxwell, 1995), p. 4.
380
William D. Harrington, “The Law of Consignments: Antitrust and Commercial Pitfalls,”
34, no, 2 Business Lawyer1979): 431.
381
Willa Gibson, “Untangling the Web of Consignment Law: The Journey from the Common
Law & Article 2 to Revised Article 9,” William & Mary Business Law Review 10 (2019): 430.
128
question, a task that has proven to be enormously challenging for courts in the US.
5.7.1.1. True Consignment and Disguised Security

On a basic level, a true consignment is a transaction whereby goods are
delivered by one party, the consignor to another, the consignee who sells the
goods on behalf of the former.382 The purpose of a true consignment is to allow
the consignee to sell the goods in the consignment without having to bear the
risk of lack of market for the goods in question.383 In true consignment, the
consignor retains the title and ownership of the good, establishes the price for
the good, and is entitled to recall the goods(ask for the return of the goods)
any time before sale.384 Furthermore, in a true consignment, the consignee’s
return(benefit) is a payment of commission rather than profit from the sale of the
goods.385 From a practical point of view, in true consignment, the consignor owns
the good in consignment, leaving the consignee with no proprietary interest in
the good. This is in contrast with sale with retention of title where despite the
seller maintaining title, the buyer also has some proprietary interest to the extent
of the price it has paid. In true consignment, since the consignee does not pay
the price of the good until it is sold, the consignee has no proprietary interest in
the consigned goods. Thus, the consignor’s interest in the consigned good is not
security interest, rather it is full ownership, as security interest secures payment
of the price (making the proprietary interests less than full ownership). In true
consignment, as the consignee is not expected to pay the price (returns the good
if it cannot sale), the goods do not secure payment of the price of the goods. The
consignee acts as an agent of the consignor.386
Comparatively, in disguised security (fake consignment), the consignor

has a reservation of title to secure payment by the consignee of the price of the
382
Ibid., 420
383
Richard W. Duesenberg, “Consignment under the UCC: A comment on the emerging
principle,” The Business Lawyer 26, No. 2(1970): 565.
384
Willa Gibson, “Untangling the Web of Consignment Law,”420
385
Ibid., 432.
386
John Dolan, “The UCC’s Consignment Rule Needs an Exception for Consumers,” Ohio
State Law Journal 44(1983): 25.
129
goods and the consignor is a disguised secured creditor.387 In a fake consignment,

the consignee must pay the price of the goods consigned, although payment may
be deferred; has no right to return the goods if the sale could not be successful (is
required to purchase the goods by itself), and keeps the profit from the goods.388
Courts in the US have been trying to develop tests to distinguish between true
consignment and disguised security to determine the applicability of the proper
legal regime to the transaction. With this background, the following sub-sections
turns consignment as a security device under the MPSRP.
5.7.1.2. Commercial Consignment under the MPSRP— Meaning

and Scope
The MPSRP applies to commercial consignment. But what is the statutory
meaning of commercial consignment for the purpose of the MPSRP? Under
what conditions does the MPSRP apply to commercial consignment? To explore
these issues, let us begin with an example.
Illustration 5.2
Abay Car, a dealer and CMC Car, a retailer that sells cars to consumers, enter
into an agreement whereby Abay Car provides Toyota cars to CMC Car. The
Agreement has the following clauses:
i. Abay Car remains the owner of the supplied cars.
ii. CMC Car sells the cars at a price that it deems fit according to the market.
iii. CMC Car pays the price agreed upon with Abay Car once 10 % of the
supplied cars are sold.
iv. CMC Car keeps all profits derived from the sales.
v. If the supplied cars are not sold in 12 months after being delivered to
CMC Car, CMC car has the obligation to pay the price agreed upon
to Abay Car and the full ownership of the cars will be transferred to
CMC Car.
387
Ibid.
388
Willa Gibson, “Untangling the Web of Consignment Law,” 431.
130
Question
How should the above transactions be characterized? Does Abay Car have the
obligation to register it at the CRO?
The transaction indicated in the scenario is a false(fake) consignment

agreement. Abay Car has retained the ownership of the cars until CMC pays
the price agreed upon. At the same time, CMC has the right to sell the cars and
make a profit if it pays the price agreed upon, to Abay Car. If CMC Car is not
able to sell the cars in 12 months from taking delivery, it must pay the price of
the car —it must buy them. This is a simple fake consignment where the parties
have created a security right for Abay Car in the cars to secure payment of the
price of the cars in a form of reservation of title. Does the MPSRP apply to this
transaction and should the transaction be registered at the CRO?
The MPSRP has only one provision where the commercial consignment
is explicitly mentioned. This provision is Article 2(27) where the movable
property is defined to include among others, commercial consignment.389
Although the MPSRP does not directly state that it applies to commercial
consignment, it is clear that it is intended to apply to commercial consignment as
it applies to security rights in movable property that secure payment of credit or
performance of an obligation.390 The ownership right retained by the consignor
in false consignment secures payment of the price of the consigned goods. In
our example, Abay Car has security right in the car and thus must register notice
at the CRO for its security to be effective against third parties.
Nevertheless, while the approach taken by the MPSRP raises no

interpretive challenges in the case of false consignment (disguised security)
shown in illustration 5.2, it could present major challenges with respect to true
consignment. Since commercial consignment is not governed by a sui generis
law in Ethiopia and if utilized well, it can take different forms, parties using
the device might not necessarily know whether the MPSRP applies to their
389
390
MPSRP Article 3(1).
131
transaction and about their rights and obligations.
A careful review of Ethiopian law shows that commercial consignment

is not adequately regulated in any branch of civil law. The Ethiopian bankruptcy
law recognizes a transaction of similar nature to commercial consignment. Under
the ECOMC, “goods consigned to the debtor for a deposit or sale on behalf of
the owner may, if they exist in kind, in whole or in part, be recovered from the
debtor.”391 The law, without defining consignment recognizes a transaction in
which one party may receive goods from another for a deposit or sale on behalf
of the latter. Not only does the law entitle recovery of the goods but also unpaid
prices from purchasers or settlements for value.392 Hence, the bankruptcy law
gives priority right to the consignor over the property under consignment in
the event of bankruptcy. The DCC has removed the provision that refers to
consignment. The ECC has provisions dedicated to the so-called commission to
buy and sale, “a contract of agency whereby the agent, called the commission
agent, undertakes to buy or to sell in his own name but on behalf of another
person, called the principal, goods, securities or other fungible things.”393 This
type of contract under the ECC is governed largely by the rules of the ECC
governing agency.394 Thus, they are not seen to be a commercial consignment
contract. As the MPSRP and other laws provide no definition for consignment,
the question that practitioners and policymakers will inevitably grapple with is
whether the MPSRP applies to all forms of consignments. If the MPSRP applies
only to a specific type of commercial consignment, under what condition?
Illustration.5.3
Abay Car, a dealer and CMC Car, a retailer that sells cars to consumers, enter
into an agreement whereby Abay car provides Toyota cars to CMC Car. The
Agreement has the following clauses:
i. Abay Car remains the owner of the supplied cars.
391
ECOMC Article 1074.
392
393
394
132
ii. CMC Car shall sell the cars at a price determined by Abay Car.
iii. CMC Car shall forward the proceeds of sale to Abay Car once 10% of the
supplied cars are sold.
iv. CMC Car shall be given 5% of the sales as commission.
v. Abay Car shall have the right to request the delivery of the cars at
any time before a sales agreement is reached between CMC Car and
customers.
vi. CMC Car has the right to terminate this contract at any time and return
the cars to Abay Car.
vii. During the effectiveness of this agreement, CMC car shall display the cars
in its store according to specifications given by Abay Car. A deviation
from expressly agreed-upon terms of the display may lead to penalties
including loss of commission due to CMC car.
Question
How should the above transaction be characterized? Does Abay Car have
the obligation to register notice regarding this transaction at the CRO
under the MPSRP?
In the above example, Abay Car, the consignor has title to ownership
of the car; determines the sales price and dictates how CMC car conducts its
business with regards to the sale of the cars supplied. CMC Car has no duty to
buy the cars if a sale is not completed(successful). Furthermore, CMC is paid
a commission, rather than collecting profit from sales. In a nutshell, CMC Car
is acting as an agent of Abay Car. All sales are deemed to have been conducted
by CMC on behalf of Abay Car. If the cars are lost, due to reasons not under the
control of CMC Car, Abay Car bears the loss (this may depend on the specific
agreement). This type of consignment is qualified as true consignment, rather
than disguised security. Abay Car has no security right in the cars, as it owns the
cars. Thus, the transaction is not required to be registered at the CRO.
Illustrations 5.2. and 5.3 demonstrate that merely stating that the law
133
applies to commercial consignment is not sufficient to apply it properly in

practice. Although both transactions qualify as commercial consignment, only
one of them qualifies as a true consignment (illustration 5.3) while the other
qualifies as disguised security (illustration 5.2). The law of security rights should
apply only to disguised security. However, how can the two be distinguished?
The UNCITRAL LGSTL states that “if the consignee is obligated to pay
the price in all events, but with payment deferred until the assets have been sold
by the consignee and the ownership of the assets is retained by the consignor
to function as security (like a retention-of-title transaction), then it fits into
the category of an acquisition financing transaction.”395 The recommendation
of UNCITRAL LGSTL suggests that true consignment does not fall within
the ambit of the law of security rights. However, this recommendation did
not make it to the MPSRP, which is perplexing given the fact the MPSRP is
alleged to be based on the UNCITRAL LGSTL and there is a need to prevent
the interpretive difficulty around distinguishing between a true consignment
and disguised security.
In the US, commercial consignment law has gone through several

reforms. Initially, the consignment was governed by common law until it was
brought under Article 2 of the UCC that governs sales.396 UCC Article 2 applied
to true consignment (sale or return/sale on approval), leaving disguised security
to UCC Article 9.397 In 1999, a revision of UCC Article 9 was conducted and a
definition of the consignment was provided under § 9-102 (a)(20).398 Today, §
9-102 (a)(20) governs commercial consignment under UCC Article 9.
Before proceeding to analyze consignment under § 9-102 (a)(20), having

a cursory review of how courts in the US distinguished between true commercial
consignment and disguised security would be beneficial as it provides rich
insight into how reform in this area could be carried out. Courts have formulated
395
396
Willa Gibson, “Untangling the Web of Consignment Law,” 417.
397
Ibid.
398
Ibid.
134
different approaches to distinguishing between true commercial consignment

and disguised security, a task that would be of paramount importance to
Ethiopian legal professionals, practitioners, judges, and policymakers.
The dominant approach is a case-by-case analysis of the facts and

circumstances to construe the parties’ intentions to determine whether the
transaction involves an agency relationship where the consignee is a mere
representative of the consignor or it creates security right for the consignor
in the goods.399
Some courts adopted the so-called all-inclusive approach which requires

analysis of the economic realities surrounding the transaction to determine the
parties’ intentions.400 Courts consider several factors to determine whether the
parties intended to create a true consignment or a disguised security right. In re
Ide Jewelry Co., the US Bankruptcy Court of Southern District of New York
laid out the factors that can aid in determining whether the transaction is true
consignment or disguised security.401 Accordingly “facts which support the notion
that a consignment was intended as security include: (i) setting of price by the
consignee, (ii) billing consignee upon shipment, (iii) commingling of proceeds
and failure to keep proper accounts by the consignee, (iv) mixing consigned
goods with goods owned, by the consignee, and (v) consignor purporting to
retain title to goods until paid.”402 The court identified the following, as facts
indicating that a transaction was not intended as security and that it constitutes
a true consignment:403
i. Consignor’s retention of control over price.

ii. Consignee’s authority to sell being subjected to the express consent of the
consignor as to the sale price.
399
Willa Gibson, “Untangling the Web of Consignment Law,” 431. Strickland Div. of Rebel
Lumber Co., 437 So. 2d at 1244.
400
Ibid.
401
In re Ide Jewelry Co., 75 B.R. at 969, 978.
402
Ibid.
403
Ibid.
135
iii. Consignor’s right to recall the goods.

iv. Consignee’s payment of a commission rather than a profit on the sales.
v. The segregation of the consigned property from other property of the
consignee.
vi. Consignor’s right to inspect sales records and the physical inventory of
the goods in the consignee’s possession.
vii. Absence of the consignee’s obligation to pay for the goods unless they are
sold.
The preceding factors are mainly aimed at distinguishing between

transactions that resemble sales with retention of title (disguised security) on the
one hand and an agency (commission agency) where the consignee is merely
acting on behalf of the consignor on the other hand.
The policy rationale behind subjecting false consignment to the law of

security rights is to address the false wealth (ostensible ownership) problem
where the consignee in possession of the consignor’s goods appears to third
parties that it is in possession of goods it owns, thereby misleading third
parties.404 Prior to the 1999 revision, this goal was achieved primarily through
UCC Article 2(sales law) which excluded disguised securities from the ambit
of sales law.405 Where third parties know that the consignee is dealing in goods
belonging to the consignor for instance because the consignee posts a sign(under
state sign laws) that it is selling goods on behalf of the consignor or that the
consignee is generally known to third parties to sale goods on behalf of the
consignor, UCC Article 9 did not apply to the consignment.406 Revised UCC
Article 9(1999) created a unified set of rules for commercial consignments that
404
Tibor Tajti, “Consignments, and the Draft Common Frame of Reference,” 367. See also In
Re Georgetown Steel Company 318 B.R. 352 (United States Bankruptcy Court, South Carolina,
2004). “the policy behind the UCC’s treatment of consignments ... is to protect creditors of
the consignee from claims of consignors that have undisclosed consignment agreements with
the consignee that create secret and undisclosed competing interests in the inventory held by a
consignee.”
405
Tibor Tajti, “Consignments, and the Draft Common Frame of Reference,” 367.
406
Willa Gibson, “Untangling the Web of Consignment Law,” 423-430.
136
slightly changed pre-1999 rules.
UCC § 9-102 (a)(20) defines consignment as “a transaction, regardless

of its form, in which a person delivers goods to a merchant for the purpose of
sale and:
a. the merchant:
i. deals in goods of that kind under a name other than the
name of the person making the delivery.
ii. is not an auctioneer, and
iii. is not generally known by its creditors to be
substantially engaged in selling the goods of others.
b. with respect to each delivery, the aggregate value of the
goods is $1,000 or more at the time of delivery.
c. the goods are not consumer good immediately before the
delivery, and
d, the transaction does not create a security interest that
secures an obligation.
Most of the requirements of commercial consignment under § 9-102 (a)

(20) are aimed at excluding commercial consignments where it is obvious to
third parties that the consignee does not own the goods under its possession. In
these cases, it is unnecessary for the consignor to comply with the registration
of notice requirement that secured creditors should comply with, to make their
security right effective against third parties. By contrast, if a party that has a fake
consignment fails to register a notice, it will lose in case the consignee has given
a competing security right in the good under consignment.407
UCC Article 9 also excludes consignment of consumer goods and

consignment of goods involving a value below a certain amount.408 These
exclusions are meant to remove transactions in which compliance with UCC
407
Strickland Div. of Rebel Lumber Co., 437 So. 2d at 1244.
408
UCC § 9-102 (a)(20).
137
Article 9 would entail more costs than benefits. Section 9-102(a)(20)(C)

excludes from Article 9, consignments of any goods that were consumers goods
immediately before delivery to a merchant to spare consumers who supply
goods in consignment from complying with complex UCC Article 9 registration
system to be protected in bankruptcy, although this has been criticized to
perversely undermine consumer rights.409 Transactions creating security interest
also do not fall in the definition of consignment for the obvious reason that UCC
Article 9 by definition applies to security interest while § 9-102 (a)(20) aims to
catch unconventional transactions creating security rights.410
A functional reading of UCC § 9-102 (a)(20) clearly shows that Article 9
does not apply to true commercial consignment because it excludes transactions
if the merchant deals in goods of that kind under a name of the consignor,411 or is
generally known by its creditors to be substantially engaged in selling the goods
of others.412 In these cases, commercial consignments are based on agreements
that provide a wide control over the activities of the consignee to the consignor
as in our illustration 5.3. The result of the application of UCC § 9-102 (a)(20)
and section 2-326 is the same. This is confirmed in Official Comment 2 to section
9-319 which states that “insofar as creditors of the consignee are concerned, this
Article to a considerable extent reformulates the former law, which appeared in
former sections 2-326 and 9-114, without changing the results.”413
UCC Article 9’s provisions on commercial consignment are not
necessarily flawless as not every element of defining commercial consignment
in UCC § 9-102 (a)(20) may be applied to a concrete case without difficulty.
Nevertheless, the analysis so far demonstrates that determining when the law
of security rights should apply to a commercial consignment involves a careful
409
In re Haley & Steele, Inc., No. 051617BLS, 2005 WL 3489869, (Mass. Sup. Ct. Nov. 14,
2005). “[i]t is unlikely that the drafters wished to leave the consumer consignor worse off than a
commercial consignor, yet that would be the outcome if consumer consignments (now excluded
from Article 9) are governed by 2-326.”
410
Willa Gibson, “Untangling the Web of Consignment Law,” 466-467.
411
UCC § 9-102 (a)(20)(A)(i).
412
UCC § 9-102 (a)(20)(A)(iii).
413
U.C.C. § 9-319 Comment 2 (Am. Law Inst. & Unif. Law Comm’n 2017).
138
policy analysis and choice. In the light of this, the fact that the MPSRP merely
states that it applies to consignment without additional rule(s) in an area that is
packed with “confusion and disarray”414 is regrettable.
Another question relating to commercial consignment under the MPSRP

is whether commercial consignment is treated as an acquisition security right
and enjoys acquisition security right super-priority and under what condition
(if any). Although the answer to this question requires some cross-reading, it is
affirmative. First, consignment is arguably an acquisition security right under
the MPSRP which defines acquisition security right as “a security right in a
corporeal asset or intellectual property, which secures the obligation to pay any
unpaid portion of the purchase price of the asset or other credit extended to
enable the grantor to acquire rights in the asset to the extent the credit is used
for that purpose.”415
Although consignment may involve the delivery of goods to the

consignee, without any advance payment being made to the consignor and in this
sense the collateral secures payment of not just a portion of an unpaid price but
the whole unpaid price, the consignment good ultimately secures payment of an
unpaid purchase price, the latter being the main essence of acquisition security
right. The MPSRP says “an unpaid portion of a purchase price” presupposing
partial initial payment which may not always be made. Nevertheless, the
wording of the provision seems insignificant because whether the consignment
good secures payment of the full price or partial price (an unpaid portion of a
purchase price) it creates acquisition security right.
The above only confirms that consignment gives rise to acquisition

security rights. It does not necessarily indicate that the security right in
consignment goods has super-priority over other security rights. Regarding this,
Article 56 of the MPSRP should be consulted. Paragraph 2(b) of this provision
states that “An acquisition security right in inventory has priority as against a
414
William D. Harrington, “The Law of Consignments: Antitrust and Commercial
Pitfalls,” 431.
415
MPSRP Article 2(2).
139
competing non-acquisition security right created by the grantor if a notice with

respect to the acquisition security right is registered in the Collateral Registry
before the grantor obtains possession of the asset.”416 If consignment does give
rise to acquisition security right, in practice goods delivered in consignment
constitute inventory — “corporeal assets held by the grantor for sale or lease in
the ordinary course of the grantor’s business, including raw and semi-processed
materials.”417 Under Article 56, in case of conflict between acquisition security
right in inventory and a non-acquisition security right, the former prevails if it is
registered in the CRO before the debtor obtains possession.
The series of interpretive exercises carried out in relation to commercial

consignment could have been easily prevented by (a) defining commercial
consignment and (b) clearly stating that it enjoys acquisition security right super-
priority. UCC Article 9 does both. It confers the right of the consignor in the
consignment goods, an acquisition security right status by explicitly stating that
“the security interest of a consignor in goods that are the subject of consignment,
is a purchase-money security interest in inventory. “418 The reason for conferring
super-priority to consignor’s security right in the consignment goods is that the
consignor is the supplier of the goods and has the title to the goods. As such, it
is reasonable to ensure that the price of the goods is recovered by the consignor
before other creditors can satisfy their claims related to the consignment goods.
It is unfortunate that the MPSRP did not get inspiration from the rich body of
statutory rules, cases, and commentaries available in the US on this.
5.7.2. Financial Leasing

Another crucial acquisition financing scheme is financial leasing. Leasing is
broadly defined as “a contract between two parties where one party [the lessor]
provides an asset for usage to another party [the lessee] for a specified period
of time, in return for specified payments.”419 “For the duration of the lease, the
416
MPSRP Article 56(2)(b).
417
418
UCC § 9- 103(d).
419
Mathew Fletcher, et al, Leasing for Development: Guideline for Emerging Economies
(Washington D.C., IFC, 2005) 1.
140
lessee makes periodic payments to the lessor at an agreed rate of interest. At

the end of the lease period, the equipment is either transferred to the ownership
of the business, returned to the lessor, discarded, or sold to a third party”.420
Although this definition focuses on business leasing, leasing is significant in
supplying consumers goods.
Leasing is generally classified as operating and financial leasing. “In

the case of financial leasing, the purpose of the transaction is, foremost, the
financing of the leased asset. The aggregate of payments made by the lessee
serves as full compensation for the costs of investment made by the lessor.”421 To
that end, the duration of the lease is linked to the life span of the leased good,422
or the price of the good will be paid during the duration of the lease. “In case
of an operational lease, the payments made by the lessee serve as compensation
for the use of the leased asset.”423 This classification has accounting and tax
implications. The law of security interests also operates based on this difference.
Adopting the functional approach to security right, the MPSRP has brought
leasing under its umbrella. As demonstrated later, the drafting of the MPSRP
suffers from serious flaws in relation to financial leasing.
5.7.2.1. Financial Leasing under the MPSRP

In Ethiopia, financial leasing has been regulated until recently by the 1998
Capital Goods Leasing Proclamation.424 Although hire-purchase, a specific type
of financial leasing has similar functions as security rights, it was not recognized
formally as a secured transaction. The MPSRP has changed this by bringing
hire-purchase under its umbrella. How do the provisions of the MPSRP address
financial leasing as a security device and what challenges might be faced in
applying the provisions of the MPSRP?
420
Ibid.
421
D. Faber & B. Schuijling, “Financial Leasing and Its Unification by UNIDROIT,” Electronic
Journal of Comparative Law 14, no. 3 (2010): 2.
422
Ibid.
423
Ibid.
424
See The Capital Goods leasing Proclamation No. 103/1998.
141
Article 2(17) of the MPSRP defines financial leasing as “a type of

leasing by which a lessor provides a lessee against payment of mutually agreed
installments over a specified period with the use of specified capital goods
under which the lessor shall retain full ownership right on the capital goods
during the period of the lease agreement and subject to agreement between the
two parties, the lessee may have an option to purchase the capital good outright
after the termination of the lease period at an agreed price.”425 Financial leasing
is different from operating leasing where the lessee pays only for the right to use
the asset with no possibility to own it.426
As financial leasing has its variations, the MPSRP does not automatically
confer it the status of a secured transaction. Only one type of financial leasing
— hire-purchase qualifies as a secured transaction. The MPSRP defines hire-
purchase in Article 2(21) as “a type of leasing by which a lessor provides a
lessee with the use of specified capital goods, against payment of mutually
agreed instalments over a specified period under which, with each lease
payment, an equal percentage of the ownership is transferred to the lessee and
upon effecting of the last payment, the ownership of the capital goods shall
automatically be transferred to the lessee.”427 The MPSRP recognizes that
movable property includes security rights in hire-purchase.428 As the MPSRP
applies to security rights in movable property, it applies to security rights in
hire-purchase. Nevertheless, by limiting its application to hire-purchase, the
MPSRP unnecessarily excludes financial leasing agreements other than hire-
purchase that may give rise to security rights. There are other variations of
inancial leasing that should clearly have been brought within the scope of the
law. Hire-purchase, as defined by the MPSRP should fulfill the following four
key criteria cumulatively:
i. It is a type of leasing by which a lessor provides a lessee with the
425
426
427
428
142
use of specified capital goods.

ii. Against payment of mutually agreed instalments over a specified
period under which.
iii. With each lease payment, an equal percentage of the ownership is
transferred to the lessee.
iv. Upon effecting of the last payment, the ownership of the capital
goods shall be automatically transferred to the lessee.
If one of the above criteria is missing, the transaction does not qualify as
hire-purchase and the MPSRP does not apply to it. It means that the lessor is not
treated as a secured creditor and registration of notice regarding the transaction
at the CRO is not required. This may lead to the application of the old leasing
law to a financial leasing transaction that is similar to a hire-purchase agreement
for all intents and purposes.
For instance, a car lease agreement with a duration of fifteen years that
does not envision transfer of the ownership to the lessee at the end of the fifteen
years term does not qualify as hire-purchase under the MPSRP because the
agreement does not envision automatic transfer of ownership of the car to the
lessee. Similarly, a car lease agreement for seven years with the right or even
duty of the lessee to renew the contract for seven more years does not qualify as
a hire-purchase agreement for the same reason. Nevertheless, from an economic
point of view, the lessee, in reality, might pay the price for the car and the car
would have no economic value by the end of the lease. This means that from
economic point of view, the lessee actually pays for the ownership of the car than
for its use although the contract does not anticipate the transfer of ownership
to the lessee under any condition. This transaction which is functionally and
economically similar to hire-purchase will fall outside the realm of the MPSRP
because the law adopted a formalistic definition of hire-purchase instead of
recognizing that there are other financial leasing arrangements that need to be
brought under the realm of the law of security rights.
The MPSRP’s approach has a practical impact on lessees who have paid
143
for the economic value of the good but are yet considered to be paying only
for the use of the car. In case of default by the lessee, the lessor has the right to
rescind the contract and take possession of the good by giving 30 days’ notice
to the lessee.429 If the lessee is declared bankrupt, the lessor has priority on
the leased good because “the lessor does not lose his/her ownership right on
the goods even though the lessee is judicially bankrupt.”430 This means that
even if the lessee has paid for 90% of the economic value of the good, the
lessor still has the right to take possession of the good and sell it to recover
its claim. If the transactions fall under the MPSRP, repossession would be
subject to certain conditions that may deter the lessor from easily depriving the
lessee of its property right.
The US approach to determining whether financial leasing is a secured

transaction is more nuanced and comprehensive. UCC Article 9 makes a
distinction between a true lease and secured sale (disguised security) because
it applies only to the latter. The task of distinguishing between true lease and
transactions that are labeled as a lease but that create security right is left to
the courts — something that has proved to be challenging.431 This distinction
is ultimately the criterion to determine whether UCC Article 9 is applicable to
the transaction in question. Nevertheless, the UCC did not leave courts without
a clue as to how to distinguish true lease from disguised security. Accordingly,
leasing is a secured transaction if it meets the following criteria: (a) it is not
terminable by the lessee and one or more of the following four criteria is met:432
i. that the original term of the lease equals or exceeds the remaining
economic life of the asset.
ii. that the lessee is bound to renew for the remaining economic life
or to become the owner of the asset.
429
MPSRP Article 6(2).
430
MPSRP Article 8(2).
431
Laura J. Paglia, Laura J. “U.C.C. Article 2A: Distinguishing Between True Leases and
Secured Sales,” St. John’s Law Review 63, no. 1(1998) 72.
432
See Herbert Kronke, “Financial Leasing and its Unification by UNIDROIT – General
Report,” 29. See also UCC, §1-203.
144
iii. that the lessee may renew for the remaining economic life for no
or nominal additional payment.
iv. that the lessee may become the owner at the end of the lease term
for no or nominal433 additional payment.
“Courts have held that, even if none of these four criteria is met, the
transaction may be characterized as a disguised security interest if the lessor has
no reasonable expectation of a meaningful residual value in the goods.”434 In
other words, if the lessor knows that at the end of the lease, the property would
have no use, then the lessee is paying for ownership of the property and if the
lessor has a retained title, that only secures payment of the leasing fee. The
essence of the criteria is to distinguish the transactions where the parties are
intending to agree on a sale, leaving the lessor with no value in the good at the
end of the lease from transactions where the lessor can expect reasonable value
of the good at the end of the term. Treating the former as secured transactions is
sensible since the lessee indeed pays the price of the good, although gradually
but surely, and obtains ownership right in the good. The general policy guideline
is that the closer the transaction resembles a sale, the more likely it is to be
classified as disguised security. That means in particular, that the transaction is
subject to registration of notice and enforcement rules of UCC Article 9.
The problem with the way financial leasing is regulated under the
MPSRP is that it potentially defeats the purpose of modernizing Ethiopian
secured transactions law— adopting a functional approach and embracing
transactions that secure payment or performance of an obligation. In financial
leasing where the lessee pays installments for a prolonged period of time,
equivalent to the remaining economic life of the asset, the title retained by
the lessor secures performance of an obligation. Why should this transaction
not be covered by the MPSRP merely because there is no clause that
envisions the transfer of the ownership of the asset to the lessee? There is no
433
Laura J. Paglia, Laura J. “U.C.C. Article 2A: Distinguishing Between True Leases and
Secured Sales,” 72.
434
Herbert Kronke, “Financial Leasing and its Unification by UNIDROIT – General Report,” 29.
145
satisfactory answer to this question.
5.8. Conclusion
The MPSRP’s provisions governing floating security rights are reasonable. A
secured creditor can acquire security right in the debtor’s present and future assets
under the MPSRP. While drafting a floating security agreement, practitioners
should avoid potential problems that could stem from poor drafting of security
agreements where the precise scope of the floating security right is not defined.
Being proactive would prevent unnecessary litigation that could emerge from
this. Nevertheless, on a policy level, the rules governing floating security right
under the MPSRP are sound.
The MPSRP has several provisions dedicated to acquisition security

rights. In line with the prevailing approach in modern law of security rights,
the MPSRP re-characterizes the so-called title financing transactions as secured
transactions. Moreover, acquisition security rights have super-priority in case of
conflict with non-acquisition security rights. In this regard, there are loopholes
in the law that call for legislative reform.
The first major defect of the MPSRP is that it does not permit acquisition
security rights in incorporeal assets that are not intellectual property. As
illustrated earlier, this has no economic justification and is likely to have an
adverse effect on receivables financing. The second challenge is the lack of
clarity regarding the commercial consignment. The parties usually draw up an
agreement that creates a security right, but they try to avoid the obligation of
registering notice by alleging that it is not a security agreement. In the sphere of
commercial consignment, the various forms that it may take means that the law
needs to define its boundary, which the MPSRP fails to do. A starting point is to
create a clear distinction between true consignment and disguised security and
to bring only the latter under the ambit of the MPSRP. The US experience in this
area could be of significant help for reform in Ethiopia.
The third major flaw is the restrictive and formal approach to the treatment
of financial leasing which excludes transactions similar to hire-purchase from
146
the scope of the MPSRP. The US approach to determining whether financial

leasing is a secured transaction is more nuanced and comprehensive. The
transaction is considered as disguised security where the original term of the
lease equals or exceeds the remaining economic life of the asset, even if the
transfer of ownership of the asset to the lessee is not envisaged. By the same
token, if the lessee is bound to renew the agreement for the remaining economic
life of the asset or to become the owner of the asset, the transaction is classified
as secured transactions. The MPSRP could adopt a more nuanced approach
and be consistent with the objective of modernizing Ethiopian law of security
interests, — treating similar transactions similarly based on the economic reality
behind the transactions than based on formal labels.
Chapter Six: Security Rights in Intangibles Assets
6.1. Introduction
Modern law of security interests permits and facilitates lending secured, not only
by tangible property but also intangible assets. In the present-day, intangible
assets are becoming increasingly important as business models that utilize
intangible assets such as patents, trademarks, and software technologies are
becoming the quintessence of success. Unsurprisingly, the MPSRP recognizes
that and dedicates adequate provisions to governing security rights in intangible
assets. The MPSRP defines an incorporeal asset, a synonym of an intangible
asset as “all types of movable property other than corporeal assets that shall
include receivables, deposit accounts, and intellectual property rights.”435
This chapter provides an in-depth analysis of security rights in various

intangible assets. The chapter covers security rights in business (business
mortgage), accounts receivables (or simply receivables), and intellectual
property rights. The coverage of business mortgage in this chapter is consistent
with the definition of business given by the ECOMC as an incorporeal asset
notwithstanding the fact that it consists of tangible assets as well. Moreover,
the MPSRP does not abolish business mortgage as governed by the ECOMC
although it brings it under its umbrella and the MPSRP prevails in case of any
potential conflict between the provisions of the ECOMC and the MPSRP’s
provisions.
435
MPSRP Article 2(22). This definition is a verbatim copy of the definition of intangible assets
provided by the UNCITRAL Legislative Guide on Secured Transactions. See UNCITRAL
Legislative Guide on Secured Transactions, 458.
148
Unlike in other aspects of security rights, UCC Article 9 has sophisticated

and unnecessarily complex legal rules regarding security rights in intangible
assets. To illustrate this, it suffices to highlight the artificial distinction between
various intangible assets that are meant to accommodate idiosyncratic business
practices that prevail in the US. UCC Article 9 classifies intangibles into
various categories — general intangibles, payment intangibles, and chattel
papers. It defines general intangible as “personal property, including things in
action and excludes accounts receivables, chattel papers, and other intangible
things.”436(Emphasis Added) General intangible includes in particular payment
intangible.437 While some of the categories of intangible are common, others are
peculiar and sometimes artificially created by UCC Article 9 with no equivalent
in other jurisdictions and thus of no assistance to understanding the MPSRP.
Last but not the least, a business mortgage has no functional equivalent in the
US, as US law recognizes floating security interest that covers the businesses’
present and future assets.
Due to the above reasons, this chapter does not provide the typical
comparative analysis that the book has adopted as the author believes that making
a comparison, unless necessary to answer specific legal questions emerging
from the MPSRP would add more confusion than clarity. Furthermore, the law
in this area (intellectual property and business mortgage) is fairly developed in
Ethiopia with the exception of receivables financing. What has changed with the
enactment of the MPSRP is that security rights in these assets are now governed
by a single law. Consequently, the adequate understanding of the rules under
MPSRP does not require an in-depth comparative analysis, save with respect to
security rights in accounts receivables.
6.2. Business Mortgage

Under the MPSRP, a valid security right (business mortgage) can be created as
the enterprise/business activity is defined by the MPSRP as movable property.438
The MPSRP also defines incorporeal assets as all types of movable property other
than corporeal assets that shall include receivables, deposit accounts, intellectual
property rights. The definition of incorporeal contains an illustrative list of three
149
specific assets. Although business is not listed, it falls within the category of
incorporeal assets; this stems from the definition of business provided by the
ECOMC which remains valid since the MPSRP does not define business.
A business mortgage is a security device that allows the debtor to give

its business as collateral under the ECOMC.439 Under Ethiopian law, to grant a
business mortgage, first, the debtor must be a businessperson (trader), whether
natural or legal person.440 Second, although the parties can limit the scope of the
business mortgage,441 by default it applies to the debtor’s business.442
The ECOMC provisions governing business are complex with general

rules, exceptions, and cross-references, which makes it difficult to extract a
concise definition of business. Article 124 of the ECOMC defines business as
“an incorporeal movable consisting of all movable property brought together
for the purpose of carrying out the commercial activities listed under Article
5.443 This definition of business clearly treats the concept of business as an
incorporeal asset although it covers corporeal assets. Based on other provisions
of the ECOMC code along with Article 124, the following can be listed as the
major components of business:
i. Corporeal chattels, i.e., equipment and goods.444

ii. The right to lease the premise in which the business is located.445
iii. Incorporeal assets such as goodwill, intellectual property rights,
contractual claims arising from non-compete clause, etc.…446 and
439
ECOMC Articles 171-193.
440
ECOMC Article. 171(1).
441
442
443
ECOMC Article 124. See also Article 5 for the list of commercial activities.
444
ECOMC Article. 128.
445
ECOMC Article 129.
446
ECOMC Articles 124, 127, 130 et seq.
150
iv. Debts of the trader in exceptional cases.447
The Business has a broad scope and the assets that constitute it are not
static rather they are shifting depending on the nature of the business. If the
trader buys and sells equipment, the equipment in its store shifts from time to
time during the trader’s normal course of trade. The trader may also acquire
intangible assets such as a trademark that increases the value of its business.
The trader can subject these shifting assets to a security right by using a business
mortgage. In this sense, the business mortgage can be regarded as some form of
floating security right because the security right floats over the shifting assets
constituting business. Literature suggests that in other civil law countries as
well, security right over the business of the debtor is considered as floating
security right.448
Under the ECOMC, a business mortgage can cover shifting equipment/

goods. What happens to a lender who extends a secured loan to the debtor to
finance specific equipment (computers for example) by taking security right in
the equipment in question and the business mortgagee wants to enforce its right
against the equipment? Since the business mortgage extends to equipment, in
case of conflict between the right of the business mortgagee and the right of the
subsequent financier of a specific asset, the security right of the financier of the
specific asset prevails if/since/as far as it qualifies as acquisition security right
which has priority over non-acquisition security right (the business mortgage).
Besides understanding the scope of business mortgage, it is important to bear in
mind that a security right in business is subject to filing at the CRO.449
At this juncture, it is worth thinking about whether a business mortgage
447
ECOMC Article 129. One of the exceptions where liability forms part of the business is
payment to employees by a transferee of a business including termination compensation. See
ECC Article 2587.
448
In Belgium, it is referred to as pledge over business, in France, pledge over business
(“nantissement de fonds de commerce”), and in Luxembourg, pledge on general business
(gage sur fonds de commerce). See Deloitte, Deloitte Legal Guide to Cross-Border Secured
Transactions Law, (Luxembourg: Deloitte Legal, 2013), 18, 55 & 85.
449
MPSRP Article 91(1)(c).
151
would remain a useful security device after the introduction of the floating
security right by the MPSRP. It is to be remembered that by using floating
security right, the business(debtor) can grant security right in its present and
future assets as well as tangible and intangible assets. Any asset that can be
covered by the default provisions of the ECOMC applicable to business can be
covered by floating security right under the MPSRP. If so, why did the drafter
decide to maintain a business mortgage? This question is addressed in the
UNCITRAL LGSTL which states that:
… in many legal systems, concepts, and terms such as “enterprise

mortgage” and “fixed and floating charge” have been important because
they performed a role in business financing that regular security rights
were not able to accomplish. However, where States opt to create a
functional, integrated, and comprehensive regime for the granting of
non-possessory security rights and also to enable grantors to encumber
all their present and future assets in the same agreement, the need for
these existing devices is significantly reduced, if not eliminated. While
the Guide does not recommend that States dispense with enterprise
mortgages and fixed and floating charges, it does recommend that States
adopt the concept of an all-asset security right, a concept that performs the
same functions as these traditional devices (see recommendation 17).450
Thus, it is apparent that the choice to maintain a business mortgage is

mainly because it does not defeat the overall purpose of the reform. Secured
parties might opt to use business mortgage if that is within their practice and
they see an advantage in using the default provisions of the ECOMC in defining
its scope. Others might opt to use the floating security right under the MPSRP.
There is no inconsistency in having the two devices function at the same time.
6.3. Security Right in Account Receivable

Account receivable is an important borrowing basis for a debtor. The MPSRP
450
152
allows the creation of a security right over a receivable.
6.3.1. Scope and Non-Assignability Clause

Under the MPSRP, a receivable is defined as “a right to payment of a monetary
obligation, excluding a right to payment evidenced by a negotiable instrument,
a right to payment of funds credited to a deposit account, and a right to payment
under security.”451 The MPSRP defines receivable as the right to payment of a
monetary obligation. It excludes the right to payment evidenced by a negotiable
instrument, a right to payment of funds in a deposit account, and the right to
payment under security (shares, bonds, and other financial contracts).
UCC Article 9 defines receivable in a more detailed fashion. Per § 9-102

(a) (2) “Account”, “means a right to payment of a monetary obligation, whether
or not earned by performance, (i) for a property that has been or is to be sold,
leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered
or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for
a secondary obligation incurred or to be incurred, (v) for energy provided or to
be provided, (vi) for the use or hire of a vessel under a charter or other contract,
(vii) arising out of the use of a credit or charge card or information contained
on or for use with the card, or (viii) as winnings in a lottery or other game of
chance operated or sponsored by a State, governmental unit of a State, or person
licensed or authorized to operate the game by a State or a governmental unit of
a State. The term includes health-care-insurance receivables.” 452
While the MPSRP’s style of defining receivable can be regarded as

flexible because it gives judges a leeway to include any payment of monetary
obligation within the meaning of receivable, it also poses the danger that
different interpretations may be made by different judges.
In a transaction creating security right in an account receivable, there

are three parties involved. The first party is the debtor or the grantor providing
the security right in the account receivable (the debtor and grantor could be
451
452
UCC (2010) § 9-102 (a) (2).
153
different depending on whether the grantor is the debtor itself). The second
party is the secured creditor. The third party is the party that owes the debt
to the debtor(grantor) commonly known as account debtor (the debtor of the
receivable in the jargon of the MPSRP).
Illustration 6.1
A makes a monthly installment payment to B for a car lease.
B uses this installment payment as collateral to access a loan from C.
Questions
Who is the debtor?
Who is the account debtor (the debtor of the receivable)?
Who is the secured creditor?
What is the collateral?
In the example above, B is the debtor, A is the account debtor (the debtor
of the receivable) and C is the secured creditor. The collateral is the receivable
— the installment payment. Under MPSRP, security right in account receivables
is created in the same way as security right in movable assets is created. It is also
subject to filing in the CRO.
The MPSRP has a rule which prevents an unnecessary limit from being
placed on receivables financing. Under this rule, a “security right in a receivable
is effective as between the grantor and the secured creditor and as against the
account debtor despite an agreement limiting the grantor’s right to create a
security right entered into between the grantor and the debtor of the receivable
or any subsequent secured creditor.”453
Thus, in our example, any agreement between A and B preventing B from

granting security rights in the installment fee is not valid as B can enter into a
security agreement with C regardless of the prohibition clause. The justification
for this is simple. The payment of the debt by A to B is impersonal. There is no
453
MPSRP Article 9(1).
154
reason for which B should not be replaced by C in collecting the installment fee
from A in case B defaults on its debt to C. If a limit that prevents the grantor
from using a payment due to him/her from as collateral is upheld, receivables
financing would unnecessarily be impeded. From the assignee’s perspective, if
it must inquire whether there is a contractual clause of prohibition of assignment
every time it takes security right in a receivable, it will place an unnecessary
burden on the assignee and would increase transaction cost.454 Thus, Article
9(1) of the MPSRP disregards any such contractual limitation of the right of
a grantor to create security right over the receivable, thereby protecting the
interests of secured creditors. Nevertheless, the MPSRP does not prevent the
account debtor from holding the assignor (the debtor) liable for breach of non-
assignability clauses.455 Such liability comes only in a form of compensation for
breach of the agreement.
It is worth mentioning that Article 9(1) of the MPSRP is applicable

to receivables that arise only out of contracts for the supply or lease of goods,
services (except financial services), contracts for the sale, lease, or license of
intellectual property rights and contracts for the construction, sale, or lease
of immovable property.456 In all these cases non-assignability clause does not
prevent the granting of security rights while it may lead to liability of the grantor.
Nevertheless, the MPSRP excludes financial services from the scope

of this provision. Thus, if a financial institution and the assignor/grantor have
entered into a non-assignability clause, it may prevent the creation of security
right in a receivable based on financial service. Financial service is a broad
activity including credit services, payment services as well as insurance services,
to mention the most common ones. The implementation of this provision may
pose a challenge. Assuming that the definition of financial service does not cause
difficulty, it is questionable whether the different treatment of financial services
and other services is justifiable. Pursuant to Article 9(2) of the MPSRP, a non-
454
UNICTRAL Legislative Guide on Secured Transactions Law, 94.
455
MPSRP Article 9(2).
456
MPSRP Article 9(2).
155
assignability clause in an insurance policy may prevent the beneficiary from

using its right to receive indemnity as a security right while a non-assignability
clause between the grantor and a company will not prevent the grantor from
using the right to collect equipment leasing fee as collateral. There does not seem
to be a sound policy reason for this differential treatment of similar transactions.
In this regard, UCC Article 9 adopts a different approach. First, non-

assignability clauses are generally ineffective.457 Thus, the contract between the
grantor of security right in accounts receivable and the debtor of the receivable
may not prohibit the granting of security right in accounts receivable. Unlike
under the MPSRP, UCC Article 9 does not recognize a liability for breach of non-
assignability clauses, although this falls under contract law. The rule is similar
whether the receivable emerges from financial services or other sources. This
means that a non-assignability clause does not prevent the creation of security
rights across the board including in financial services. The only exception to this
is that the entire section in UCC Article 9 dealing with the ineffectiveness of the
anti-assignment clause does not apply to healthcare insurance receivables.458
The provision addresses receivables in Medicare and Medicaid where specific
regulation allows only healthcare insurance companies to collect benefits from
the government.459 Thus, this rule for instance does not apply to indemnity
payment under an insurance policy where the anti-assignment clause would be
ineffective.
6.3.2. Notification and Registration of Notice with Respect to

Receivables
Under the MPSRP, the debtor of receivable should be notified of the security
right in the receivable created in favor of the secured party. This is to ensure that
the debtor of the receivable performs its obligation according to the terms of the
contract with the assignor. The “notification of a security right in a receivable is
457
UCC § 9-406(d). The provision allows limited exceptions.
458
UCC § 9-406(i).
459
Healthcare Financing Anti-Assignment Limitation, LexisNexis (08-23-2019), https://www.
lexisnexis.com/lexis-practical-guidance/the-journal/b/pa/posts/healthcare-financing-anti-
assignment-limitations
156
effective when received by the debtor of the receivable if it reasonably identifies

the encumbered receivable and the secured creditor.”460 If the debtor of the
receivable is not so informed by the secured creditor, it has the right to discharge
its obligation pursuant to its original contract with the grantor.461
Based on the guidance that the MPSRP provides on the identification of

the collateral and the secured creditor,462 it is believed that the type and date of
the underlying contract as well as the nature and amount of obligation it entails,
and the name and address of the secured creditor should be clearly included in
the notification provided to the debtor. If the debtor of the receivable has received
notification of more than one security right in the same receivable by the same
grantor, the debtor can be discharged by paying as per the first notification it has
received.463 In relation to this, the debtor of the receivables can raise all defenses
and rights that could have been raised against the grantor,464 such as period of
limitation, aside from the right of set-off that is available to it at the time of
notification of the security right.465
What happens if the account debtor receives a notification to pay

a certain amount of the debt to C1 and the other amount to C2? Would the
notification be sufficient under the MPSRP? There is no rule under the MPSRP
which renders the notification ineffective because the account debtor receives
a notification of assignment to two different secured creditors. UCC Article 9
adopts a different approach. A notification of the security right to the account
debtor is ineffective, if the notification notifies the account debtor to make
less than the full amount of any installment or other periodic payment to the
assignee, even if, (a) only a portion of the account, chattel paper, or payment
intangible has been assigned to that assignee; (b) a portion has been assigned
to another assignee, or (c) the account debtor knows that the assignment to that
assignee is limited.466 This rule protects the account debtor from being subjected
to payment demands from several creditors. Thus, a debtor that wishes to use its
account receivable as collateral should ensure that it does not split the accounts
receivable between more than one creditor. The MPSRP does not have a similar
466
UCC (2010) § 9-406(b)(3).
157
rule. While the approach under the MPSRP is flexible and gives parties leeway
to structure receivables financing according to their needs, it may also cause an
inconvenience to an account debtor in terms of dealing with multiple creditors.
A possible compromise would be to give anti-assignment clause effectiveness
if it prevents assignment by way of security of accounts receivables for several
creditors.
The last point worth noting is that a security right in accounts receivable
is effective against third parties only if a notice has been registered at the
CRO.467 Unlike the MPSRP, UCC Article 9 also subjects the sale of an account
receivable to its filing rules.468 Commentators criticize the obligation to file in
case of sale of receivables on the ground that it adds a burden on the seller and
the buyer to comply with filing while in fact, the transaction is not a secured
transaction.469 However, filing of sale of receivables is meant to tackle potential
fraud from the account debtor towards a subsequent lender who might extend
a loan against the sold account receivable because there is no public record of
the sale where to ascertain the title to the account.470 Therefore, in this regard,
lenders and borrowers are better off under Article 9.
6.3.3. Security Right in Account Receivable — Three Observations

Overall, the provisions of the MPSRP pertaining to security rights in receivables
are sound except for three issues that require rethinking. First, the MPSRP treats
financial services and other services in case of non-assignability agreement
differently without a clear policy reason. Second, the MPSRP permits the
potential creation of security rights in accounts receivable to multiple creditors.
467
468
UCC § 9-109(a)(2).
469
See Thomas E. Plank, “Assignment of Receivables under Article 9: Structural Incoherence
and Wasteful Filing,” Ohio State Law Journal, 68(2007): 233.
470
See UCC 2009/2010 Official Comment, 879. The official comment does not directly state the
purpose of subjecting of transfer of full ownership to filing as fraud prevention. However, it does
imply it establishing that in case of conflict between unperfected interest of the buyer of account
receivable and perfected interest of a lien creditor, the latter prevails. The presupposition is that
if the debtor might sale the account receivable and subject the same account receivable to the
security right of subsequent lender thus committing fraud.
158
The third rule that must be considered is the requirement of registration of the
sale of accounts receivables at the CRO. As the law stands now, if B sells its
right to receive installment payment from a leasing agreement and notifies the
lessee and subsequently grants security right in the same collateral, the secured
creditor has no means of knowing that the collateral (account receivable) was
already sold. This can expose an unwary secured creditor to fraud.
6.4. Security Right in Intellectual Property

The MPSRP regards intellectual property rights as movable property. As such,
its provisions unless specifically stated otherwise, are applicable to security
rights in intellectual property rights. To that effect, the MPSRP states that
“intellectual property” will have a meaning that is given to it in the intellectual
property law.”471
The use of intellectual property rights as security is envisaged in the

MPSRP in line with the Ethiopian intellectual property laws that entitle owners
of intellectual property rights to exploit them in accordance with the law,472 since
one way of exploiting intellectual property is through providing it as a collateral
to obtain credit. Ethiopian intellectual property law(s) do not mention security
rights in intellectual property rights, unlike other types of rights in intellectual
property such as licenses.473
The provision of the MPSRP governing security rights in intellectual

property is straightforward. The MPSRP states that it applies to intellectual
property and refers to the intellectual property law for the meaning of intellectual
property. This approach is not different from the approach in UCC Article 9
where intellectual property rights can be included under general intangibles.474 It
is worth noting that UCC Article 9 neither defines intellectual property nor lists
it as an example of a general intangible. Nevertheless, the official commentary
471
472
Inventions, Minor Inventions, and Industrial Designs, Proclamation, No. 123/1995; Article
26, Trademark Registration and Protection Proclamation No. 501/2006, Article 22(1).
473
Dagnachew Worku, “Valuation and Commercialization of Intellectual Property Rights in
Ethiopia”, (LL.M. Thesis, Addis Ababa University), (January 2016), 56.
474
UCC § 9-102(a)(42).
159
to UCC Article 9 mentions intellectual property as one of the sub-categories

of general intangibles.475 As it is the case in Ethiopia, all security rights in
intellectual property rights under UCC Article 9 must be made effective against
third parties by registering notice.476
The MPSRP merely states that “intellectual property” will have a

meaning that is given to it in the intellectual property law.”477 In this regard,
the law makes an unwarranted assumption about the existence of a body of law
called intellectual property law that defines intellectual property rights. There
is no such law and therefore there is no legal/statutory definition of intellectual
property. This can be slightly concerning as the MPSRP does not list intellectual
property as one component of movable property, although it mentions incorporeal
assets (a generic term). The assumption seems to be that intellectual property is
an incorporeal asset and thus qualifies as movable property.
Intellectual property very broadly means the legal rights which result
from intellectual activity in the industrial, scientific, literary, and artistic fields.478
As recognized by the convention establishing world intellectual property
organization (“WIPO”), intellectual property includes right relating to:
Literary, artistic, and scientific works, performances of performing

artists, phonograms and broadcasts, inventions in all fields of human
endeavour, scientific discoveries, - industrial designs, trademarks, service
marks and commercial names and designations, protection against unfair
competition.479
From a secured transactions perspective, what is of greater significance

is to realize that intellectual property rights are an important lending base for
businesses. Thus, as long as the particular intellectual property has value against
which an enforcement of loan can be made, the MPSRP allows granting of
security right in that asset. This could include, but not limited to the following:
i. using the right to receive a royalty payment from the use of a trademark, a
tradename, a copyrighted work, or a patent as collateral.
ii. giving security right in the non-exclusive licensing right to use a patented
160
invention.
iii. using the right to distribute a copyrighted work or produce a patented
product as collateral.
6.5. Conclusion
The reform of the Ethiopian law of security interests has brought about much-
needed certainty regarding the use of incorporeal assets as collateral. Rules
previously scattered across the ECC, the ECOMC, and other statutes are now
consolidated under the MPSRP. The rights and obligations of secured creditors
with respect to their security rights in incorporeal assets are clear. The MPSRP
has taken the desperately needed but obvious step forward in the right direction.
While some of the rules regarding security rights in accounts receivables

may require rethinking, the MPSRP has overall workable legal rules. With
regards to security rights in intellectual property rights, the MPSRP is as good
as any other modern law of security interests. Security rights in the intellectual
property must be created according to the MPSRP and are subject to registration
of notice at the CRO.
Chapter Seven: Security Rights in Proceeds
7.1. Introduction
The recognition of the right of the secured creditor in the proceeds of the
collateral is an important component of enhancing access to financing as
secured creditors, in making lending decisions, take into account the risk of loss
of the collateral without remedy, once the collateral is disposed of. Regarding
proceeds, the central question the law must answer is: what happens if the debtor
sells the asset in which the creditor has a security right or if the collateral gets
destroyed by a fire accident and an insurance company pays an indemnity or the
debtor returns the good in which there is a security right to the manufacturer
because of the defect and receives a replacement good or if the patent in which
there is security right is licensed and a fee has been received by the debtor? In
these and other similar instances, does the right of the secured creditor extend to
the proceeds— the cash proceeds from the sale of the collateral, the replacement
good, the indemnity, or the licensing fee? The law of proceeds addresses
this fundamental question.
Although countries differ on whether the secured creditor’s right extends

automatically to the proceeds of the collateral, it is generally recognized that
security right should “automatically extend to proceeds because this is in line
with the usual expectation of the parties and minimizes the parties’ burden of
specifying in the security agreement whether and to what extent the security
agreement extends to proceeds.”480
480
UNCITRAL Legislative Guide on Secured Transactions Law, 85-86, Paras 72-96.
162
The concept of proceeds is not easily definable since there are various
dimensions to the collateral that may qualify as proceeds but are termed
differently in different jurisdictions. In particular, natural fruits and civil fruits
of the collateral, manufactured products resulting from the collateral as raw
material, cash proceeds resulting from lease, sale, or other dispositions of the
collateral are all products of the collateral for which different rules may apply in
different countries. Moreover, when the collateral commingles with other goods
either as a raw material in production process or as cash proceed, the law must
make it clear whether the security agreement extends to all of these and under
what condition(s). This chapter provides a concise account of security rights in
proceeds under the MPSRP.
7.2. Lack of Comprehensible Concept of Proceeds under Pre-2019

Law
Pre-2019 Ethiopian law of security interests lacked a unified set of rules
governing proceeds. It addressed the concept of proceeds with respect to each
security device. As such the rules regarding proceeds were scattered across
different parts in the ECC and the ECOMC.
Starting with pledge, due to the possessory nature of pledge under

the ECC, it is not legally and factually possible for the pledged property to
be disposed of without the creditor’s knowledge and permission. Thus,
sophisticated rules governing proceeds in pledge were not available and perhaps
not needed under the ECC. Nevertheless, in the instance where the pledged
item has collectable fruits, the ECC gives the secured creditor the right to apply
those fruits to cover the cost of preservation of the property and payment of the
principal debt and the interest.481 Thus, the right of the pledgee extends to the
proceed understood as fruits.
Regarding mortgage of immovable property, the ECC provides that the

mortgagee has the right to pursue the property wherever the property lies.482
The ECC allows the mortgagee to attach the property in the hands of third party
481
ECC Article 2841.
482
ECC Article 3059.
163
to whom the mortgagor transferred. 483 As an immovable property is easily

traceable unless it is destroyed by hazardous events such as fire, this provision
ensures that the creditor’s in rem right is persevered in case the immovable is
disposed of. The mortgage also extends to fruits such as rents as of the day of
attachment of the immovable property by the secured creditor,484 indemnities
for insurance and compensation for expropriation.485 The ECC therefore in
effect automatically extends the right of the mortgagee to the proceeds through
its various provisions. Nevertheless, these rules are obviously associated with
individual security devices, in this case, the mortgage of an immovable.
In Pre-2019 law, it was difficult to understand whether security interest

extended automatically to proceeds with respect to non-possessory security
devices without examining several provisions in the ECC and the ECOMC. By
far, the most comprehensive non-possessory security device under Ethiopian
law has been a business mortgage where the debtor can encumber the sum
total of its corporeal and incorporeal assets (see supra § 6.2). When the debtor
disposes of its business in which there is an enforceable business mortgage,
the creditor has the preferential right in the proceeds.486 In the case of secured
creditors with conflicting rights, the senior creditor (seniority being determined
based on the date of registration) has priority while creditors whose mortgage
registered on the same date rank equally.487 This provision effectively extends
the secured creditor’s right to proceeds.
As the preceding analysis shows, the notion of proceeds lacked a

common definition and rules. The MPSRP has changed this by introducing a
single concept of proceeds and a unified set of rules.
7.3. The Automatic Extension of Security Rights to Proceeds

Under the MPSRP, a security right in an asset extends to the proceeds of the
483
484
ECC Article 3068.
485
ECC Article 3069.
486
487
164
asset.488 The approach taken by the MPSRP is similar to the one prevailing under
UCC Article 9 where the security agreement extends to the proceeds without
the parties being required to state this in the security agreement.489 For instance,
a security interest in a trademark also covers the income that is derived from
licensing the trademark (royalties). It must be clarified at the very outset that
the automatic extension of security right to the proceeds does not mean that the
security right in the proceed is automatically effective against third parties.
The MPSRP defines “proceeds” as “whatever is received in respect of

the collateral, including what is received as a result of a sale or other disposition
or collection, lease or license of the collateral, fruits, insurance proceeds, claims
arising from defects in, damage to or loss of the collateral, and proceeds of
proceeds.”490 Comparatively, UCC Article 9 defines proceeds as “cash received
from the sale, lease, license or disposition of the collateral, rights arising out of
the collateral, whatever is collected on, or distributed on account of, collateral, to
the extent of the value of collateral, claims arising out of the loss, nonconformity,
or interference with the use of, defects or infringement of rights in, or damage
to, the collateral; or to the extent of the value of the collateral and to the extent
payable to the debtor or the secured party, insurance payable by reason of the
loss or nonconformity of, defects or infringement of rights in, or damage to,
the collateral.”491
Read literally, UCC Article 9 has clearly longer list of what is regarded
as proceeds. For instance, claims arising out of infringement of rights in the
collateral such as payments for breach of intellectual property rights are listed
under UCC Article 9 as a proceed while it is not listed under the MPSRP.
Nevertheless, the list of proceeds under the MPSRP is only illustrative as the
relevant provision begins with the phrase “whatever is received in respect of
the collateral.” It is argued that the concept of proceeds under UCC Article 9
488
MPSRP Article 7(1).
489
See UCC § 9-203 (f).
490
491
UCC (2010) § 9-102(a) (64).
165
is broad that it expands the secured creditor’s right in bankruptcy because it

allows the creditor to have a security interest in the post- bankruptcy petition
asset of the debtor.492 Nevertheless, Harris and Mooney argue that the broad
definition of proceeds under UCC Article 9 is necessary to expand the debtor’s
lending base and thereby increases the debtor‘s ability to obtain financing.493
The argument that the concept of proceed extends the secured creditor’s right
to post-bankruptcy petition asset is not persuasive as the concept does not
embrace an asset that does not drive from the collateral in which the secured
creditor had a right.
The rule that security right in the collateral automatically extends to the
proceed does not say anything about the effectiveness of the security right in the
proceed against third parties. The latter depends on the specific rule applicable
to the type of collateral. Generally, the priority of a security right also extends
to the proceeds of the encumbered asset.494 A proceed of a security right that is
made effective against third parties, which are in the form of money, receivables,
negotiable instruments, or right to payment of funds credited to a deposit
account, is also effective without any further act.495 The rule is similar under
UCC Article 9 where the perfection of security interest with respect to original
collateral suffices to perfect the security interest in the proceeds without the
need to register another notice.496 This rule suffers from exceptions for instance
where security interest in proceeds may need to be perfected if the perfection of
the original collateral has expired(see infra § 9.6).
7.4. The Survival of Security Rights in Commingled Proceeds

When the asset which is encumbered by a security right is disposed of by the
debtor or the grantor, the security right extends to the proceed. Sometimes, the
492
G. Ray Warner, “Article 9‘s Bankrupt Proceeds Rule: Amending Bankruptcy Code Section
552 Through the UCC ―Proceeds Definition,” Gonzaga Law Review 46, no. (2010/11): 525-
526.”
493
Steven L. Harris & Charles W. Mooney, Jr., “Revised Article 9 Meets the Bankruptcy Code:
Policy and Impact,” 9 American Bankruptcy Institute Law Review 85, (2001): 96.
494
MPSRP Article 51.
495
MPSRP Articles 14(1) & 58.
496
UCC (2010) § 9-315(c).
166
proceed may be commingled with other assets. The law ensures that the security
right extends to the proceed even if it is mixed with other assets. The rules on
commingled proceeds differ depending on the nature of the asset involved —
corporeal assets and funds.
7.4.1. Commingling in case of Corporeal Assets

The MPSRP states that “A security right in a corporeal asset that is commingled
in a mass of assets of the same kind or product extends to the mass or product.”497
The MPSRP defines “mass or product as corporeal assets that are so physically
associated or united with other corporeal assets that they have lost their separate
identity.”498 Since the asset with which the proceed commingles has also value,
the right in the proceed obviously should not extend to the entire mass or product.
Thus, the right in the mass or product extends only to the extent of the value of
the collateral(proceed). Any excess value goes to the party with whose asset the
commingling took place. There are also instances where the asset with which
the proceed commingled is an asset in which there is equal ranking security
right. In this case, if the value of mass or product does not cover the value of the
debts, the parties should have an equal share in the mass or product.
These rules are enshrined in Article 52 of the MPSRP.499 The rules

are virtually similar to UCC Article 9 § 9 -336 rules on a security interest in
commingled corporeal proceeds where in case of commingling of proceeds with
respect to which security rights are perfected equally, rank equally in proportion
to the value of the collateral.500 In other cases, the proceeds of the collateral that
has priority in ranking take priority. 501
7.4.2. Commingling in case of Funds

In case of the proceeds in a form of fund or money, the practical application of
the rule extending security rights to mixed proceeds can be tricky due to the
involvement of competing proprietary interests and potential dissipation of part
of the mixed funds. There can be various scenarios in which commingling of
the fund could occur. The debtor could commingle the proceed with its own
fund or with a fund of another secured creditor. It may spend part of the fund in
either case and the amount of fund left could be insufficient to cover the secured
167
creditor’s claim. The law must address these various scenarios adequately.
The governing provision of the MPSRP Article 7(2) states that where
proceeds in the form of funds credited to a deposit account or money are
commingled with other assets of the same kind:
(a) the security right extends to the commingled assets,

notwithstanding that the proceeds have ceased to be identifiable.
(b) the security right in the commingled assets is limited to the amount
of the proceeds immediately before they were commingled and,
(c) if at any time after the commingling, the amount of the
commingled funds or money is less than the amount of the proceeds
immediately before they were commingled, the security right in the
commingled funds or money is limited to the available balance at the time
of the claim.
7.4.2.1. Commingling with the Debtor’s Own Fund

If the debtor mixes the fund traceable to the collateral with its own fund and
the mixed fund has not been spent, the creditor can recover the proceed(fund)
traceable to its security right without facing a challenge. Even if the debtor has
spent some of the fund and the fund traceable to the collateral has been reduced,
the creditor’s claim persists although limited to the amount of fund available
immediately before the commingling [Article 7(2)(b)]. This happens when the
debtor deposits fund originating from the sale of collateral and spends some
of it and later replenishes the account with its own fund. In this case, even if
the fund(proceed) has been reduced, the subsequently added fund cannot be
traced by the creditor because the creditor’s proprietary remedy is limited to
the fund available immediately before the commingling [Article 7(2)(b)]. But
what happens if the debtor has commingled the proceed with its own fund and
has spent some of the commingled funds (after the commingling)? Here is an
example. D has 100,000 ETB in its bank account. D owes C 100,000 ETB. D
sells the asset in which C has security right at 100,000 ETB and deposits the fund
in the same bank account making the balance 200,000 ETB. Immediately after
168
depositing the proceed, D spends 90,000 ETB on company shares and 50,000
ETB on holiday which reduces the balance to 60,000 ETB. In this circumstance,
the question is what is the amount of money that C can trace?
The example above presents a more complex scenario of commingling.

In this scenario, Article 7(2)(b) is clearly not helpful because it says that “the
security right in the commingled funds is limited to the amount of the proceeds
immediately before they were commingled.” Here, the amount of proceeds
immediately before commingling, which is 100,000 ETB is no more available.
Some of it is spent on holiday and some on company shares. The fund available
is 60,000 ETB. It is important to bear in mind that this remainder fund is arguably
traceable both to the collateral and the fund belonging to the debtor.
The more suitable provision is Article 7(2)(c) which states that “if at any
time after the commingling, the amount of the commingled funds or money is
less than the amount of the proceeds immediately before they were commingled,
the security right in the commingled funds or money is limited to the available
balance at the time of the claim.” With 90,000 ETB spent in company shares
and 50,000 ETB in holiday (dissipated fund), the fund available at the time
of claim is 60,000 ETB which is less than the proceeds. Thus, Article 7(2)(c)
does not provide an appropriate solution either. A possible interpretation of this
provision is to say that the creditor can trace the money spent in share as well
as the 60,000 ETB until it recovers its 100,000 ETB. This interpretation is also
problematic as the debtor’s own fund which may be used to satisfy potential
unsecured creditors’ claims should also be accounted for. Thus, the provision
governing tracing of proceeds in commingled assets is problematic even where
the proceeds commingle with the debtor’s own fund.
As the law of tracing applied in the law of security interests is similar to

equitable tracing, it would be helpful to look at how a claimant can trace a fund
commingled in the debtor’s own asset under UK equitable tracing law. In the
UK equitable tracing, where the defendant has mixed the claimant’s money with
its own, it is the defendant’s obligation to separate its asset from the claimant’s;
if the defendant fails to do so, the fund will be considered to belong to the
169
claimant.502 If the defendant is able to separate its own fund from the claimant’s,
the claimant can only trace that part which is traceable to its asset.503 But what
if the claimant mixed the creditor’s and its own fund and spent some of the
funds after the commingling? English law departs from the assumption that the
claimant can trace only its own fund, not the fund belonging to the defendant
for the latter can potentially be claimed by other unsecured creditors. However,
because some of the money might have dissipated (e.g., spent on holiday as in
our example) while some invested in property (e.g., share in our example), it
would be difficult to determine whose money was spent on holiday and whose
money is invested in company shares. In such cases, English Law gives the
claimant the right to choose from two important presumptions, whichever is the
most favorable to it.504 The first presumption called the Re Hallett presumption505
holds that the defendant is presumed to have spent its own money first while
the second presumption called the Re Oatway Presumption506 holds that the
defendant is presumed to have spent the claimant’s money first.
In our example, if C were to choose the Re Hallett Presumption, D

would be presumed to have invested the 90,000 ETB from its own fund. The
subsequent 50,000-holiday expense would be considered to be the remainder of
the D’s fund (10,000 ETB and 40,000 ETB) from the C’s fund. Thus, C can trace
the 60,000 ETB left in the bank account. However, this means that C would be
treated as an unsecured creditor to claim the remaining 40,000 ETB. The Re
Hallett Presumption, therefore, works against C in this instance. If the C were to
choose the Re Oatway Presumption, D would be presumed to have spent the C’s
money first, meaning the investment in company shares is considered to be from
the C’s fund. This means that C can trace the 90,000 ETB in the company shares
and potentially recover the entire 100,000 ETB if the company shares have
increased in value. If the company shares have decreased in value, C would
502
Graham Virgo, The Principles of Equity and Trust Law, 664.
503
Ibid. See also in Re Tilley’s Will Trusts: ChD 1967.
504
Graham Virgo, The Principles of Equity and Trust Law, 664.
505
In Re Hallett’s Estate [1880] 13 Ch D 696.
506
In Re Oatway; Hertslet v Oatway: ChD 1903.
170
be able to recover whatever it could not recover, as an unsecured creditor from

the 60,000 ETB that is still available in the bank account. As can be observed,
choosing one or the other presumption, at the discretion of C is based on which
presumption would lead to maximum recovery.
Noted earlier, Article 7 of the MPSRP does not address the situation
where the debtor mixes proceed with its own money and spends some of the
funds and it is not clear whose money had been spent first. The provision needs
to be revisited taking the cue from the English law of equitable tracing.
7.4.2.2. Commingling of Competing Creditors’ Funds

When the proceeds that commingled belong to competing creditors, tracing
by the secured creditor becomes even more difficult in certain cases. There
would be no difficulty if (a) there are no conflicting security rights involved or
(b) the security rights rank unequally. In these cases, the party with security
right(vis-à-vis unsecured creditor), the party with perfected security right(vis-à-
vis a party with unperfected security right), or the party with security right that
ranks first in priority has the right to satisfy its claim first from the proceeds to
the extent of the value of the proceed immediately before commingling.507 The
challenge arises when proceeds of security rights in the fund that rank equally
are commingled and there is an insufficient fund to satisfy the creditors’ claims.
Illustration 7.1.
TransCorp is a company that sells motor vehicles. It obtains a 4,000,000 ETB

loan from the Commercial Bank of Ethiopia (CBE) granting security right in
four tractors. Subsequently, it receives another loan of 4,000,000 ETB from
Oromia Development Bank (ODB) giving security rights in five Omnibuses.
Both have registered their security rights. One day, TransCorp defaults on both
loans. CEB and ODB realized that all the tractors and omnibuses were sold
by TransCorp. The proceeds(fund) amounting to 2,000, 000 ETB from sale
of the tractors and 2,000,000 ETB from the sale of omnibuses were deposited
at Wegagen Bank. This is the only fund that the CBE and ODB could trace.
507
MPSRP Article 8(2)(a) &(c).
171
Unfortunately, TransCorp has spent most of the proceed deposited at Wegagan

Bank on a holiday trip to Europe and United States for its executives. The fund
available at Wegagen Bank is 2,000,000 ETB while TransCorp owes a total of
8,000,000 ETB to CBE and ODB. As such the remainder of the fund at Wegagen
Bank does not cover claims of the two creditors.
Question: who gets paid and how much?
In the example above, two funds that are proceeds of collateral have commingled.
Article 7(2)(c) of the MPSRP states that where proceeds in the form of funds
credited to a deposit account or money are commingled with other assets of the
same kind: if at any time after the commingling, the amount of the commingled
funds or money is less than the amount of the proceeds immediately before
they were commingled, the security right in the commingled funds or money is
limited to the available balance at the time of the claim.
Article 7(2)(c) of MPSRP says that the security right in our example is
limited to the fund available after the commingling if less than the amount of
claim. This means the security rights of both CBE and ODB are limited to the
2,000,000 ETB. It would be easy to apply this provision if one of the secured
creditors has a security right which is not effective against third parties. For
instance, if ODB’s security right was not perfected, CBE takes the 2,000,000
ETB. If the security rights of both creditors are perfected (are effective against
third parties, having equal ranking and the facts say so), the logical outcome
under Article 7(2)(c) is for both CBE and ODB to share the 2,000,000 ETB
equally. In the same example, if TransCorp had added additional funds to the
bank account, coming from the sale of assets over which neither CBE nor ODB
has security right, their claim remains limited to the 2,000,000 ETB.
Illustration 7.2.
Building on our example (7.1), let’s assume that CBE’s and ODB’S security
rights are effective against third parties. Let us assume further that 2,000,000
ETB proceeds from the tractors (CBE) were deposited at Wegagen Bank on
July 20, 2020 and 2,000,000 ETB proceeds from the sale of omnibuses (ODB)
172
were deposited on October 20, 2020. After the executive holiday spending,
TransCorp has only 2,500,000 ETB in the account. To whom should this 2,500,
000 ETB be paid? Do CBE and ODB get paid proportionately (50% each)? The
following table shows the timeline of deposit and spending.
Wegagen Bank Account Transaction
Date In Out Balance

July 5, 2020 0:00 0:00 0:00
2,000,000 ETB (Proceed 2,000, 0000
July 20, 2020
of tractor- CBE) ETB
1000,0000 ETB
1,000,000
August 2020 - (Holiday in
ETB
Europe)
October 20 2,000,000 ETB (Proceed 3,0000,000
2020 of Omnibus- ODB ETB
November 500,000 ETB 2,500,000
10, 2020 (Holiday in US) ETB
In the example above, if we apply the rule in 7(2)(c), CBE and ODB must
share the remaining 2,500,000 ETB equally as a proceed from their collateral
in a form of money. Both parties have extended 4,0000,000 ETB loans each,
both have security rights that are perfected, and TransCorp has commingled the
proceeds of their collateral. Nevertheless, ODB might argue that the outcome
is unfair because TransCorp has clearly, spent more of the proceed coming from
CBE’s proceeds on holiday than the fund coming from ODB’s proceed. By the
time proceeds from ODB’s collateral commingled with proceeds from CBE’s
collateral, the fund originating from CBE’s collateral was only 1,000,000 ETB.
Should ODB not be allowed to trace and recover the money that came from the
sale of omnibuses, if it can prove the origin of the money?
The answer to this question can be contentious. On the one hand, it is

173
possible to argue that the MPSRP should have adopted a more nuanced approach,
where the essential rule under Article 7(2)(c) is supplemented by the additional
rules for cases where the debtor has spent commingled proceeds of collaterals in
which secured creditors have equally ranking rights and the proceed originating
from one collateral is spent earlier than the proceed emanating from the other
collateral. On the other hand, it can be contended that this puts one secured
creditor at the mercy of the debtor and a chance because the debtor spent the
money that it happened to have first. The secured creditor whose money has
been spent less did not work for it. Thus, giving ODB in our case the entire
2,000,000 and giving CBE 500,000 advantages ODB for no justifiable reason
other than the chance that the tractors in which CBE had security right were
sold first and TransCorp spent them. The outcome would be different if the
omnibuses were sold first and TransCorp spent the proceeds first.
UCC Article 9 follows a different approach in this regard. Section

9-315 (b)(2) states that “Proceeds that are commingled with other property are
identifiable proceeds: if the proceeds are not goods, to the extent that the secured
party identifies the proceeds by a method of tracing, including the application
of equitable principles, that is permitted under law other than this article with
respect to commingled property of the type involved.508 Thus, under UCC
Article 9, just because the commingled proceeds are funds, it does not mean
that it is not identifiable or that the parties involved are assumed to have an
equal share in the available fund. The parties can trace their collateral(proceed).
Nevertheless, the law of tracing based on equitable principles and applied

to secured transactions has not been free of criticism. There are three different
approaches to tracing each with shortcomings. The widely used approach is the
so-called the lowest intermediate balance, a rule essentially says that if the debtor
has spent the fund which is the proceed and the secured creditor’s proceed(fund)
has dropped below a certain amount, even if the fund is replenished later and
has increased, the secured creditor’s fund remains at the lowest intermediate
508
UCC (2010) § 9-315 (b)(2).
174
balance.509 In case the debtor spends the fund after commingling with its own
fund, it is assumed to have spent its own fund first.510 The lowest intermediate
balance rules seem to be adopted by the MPSRP. Article 7(2)(c) of the MPSRP
says that if at any time after the commingling, the amount of the commingled
funds or money is less than the amount of the proceeds immediately before
they were commingled, the security right in the commingled funds or money is
limited to the available balance at the time of the claim.
Here is another illustration to explain the lowest intermediate balance

rule. The secured creditors proceed was 2,000,000 ETB and the debtor spends
500,000 ETB out of it, dropping the proceeds to 1,500,000 ETB. Subsequently,
the debtor replenishes the account with 1,000,000 ETB making the total balance
2,500,000. But the secured creditors proceed stays at 1,500,000 ETB (which
is the lowest intermediate balance before commingling). This is so even if the
debtor used its own money to replenish the account. The fact that the debtor
replenished the account with its own money does not change the entitlement
of the secured creditor that can trace only the money which originates from
its collateral. This is because tracing is a proprietary remedy that applies only
to the collateral or the property that substitutes it; the proceed.511 Thus, money
that did not originate from the collateral cannot be traced and the secured
creditor must pursue a separate lawsuit to satisfy its claim from property or
money not related to the proceeds.
The problem with the lowest intermediate balance is that it does not
adequately address the situation where there are competing claims in the fund
such as two secured creditors with equally ranking claims. Article 7(4)(c)
does not give an answer to the case of commingling in which there are equally
509
Ibid.
510
William Stoddard, “Tracing Principles in Revised Article 9 § 9-315(b)(2): A Matter
of Careless Drafting, or An Invitation for Creative Lawyering,” Nevada Law Journal,
3(2002):140.
511
Graham Virgo, The Principles of Equity and Trust Law, 636(“… one is a proprietary
remedy that enables the claimant to assert rights against particular property that remains in the
defendant’s possession. This property may be the original property in which the claimant had
property rights or that has been substituted for the original property.”)
175
ranking security rights. The solution adopted in scenario 7.1. where CBE and
ODB share the proceeds equally is a commonsense application of tracing rules
but the MPSRP does not provide a legal basis for it. In the US, courts apply
the so-called hybrid principle (lowest intermediate balance pro rata) where
competing secured parties get the fund pro rata to their claims.512
A second approach to tracing is the First-in-First Out (FIFO) rule which

is prevalent again in Anglo-Saxon equitable tracing law.513 According to this
rule, the money that was deposited first is regarded to have been spent first.
Following the FIFO principle, in our example (7.2), CBE would be entitled
to get 500,000 ETB proceed only, as 1,500,000 ETB of the proceed of its
collateral is deemed to have been spent first by TransCorp in two holiday-trips.
Thus, ODB would get the whole 2,000,000 ETB (the entire amount of proceed
it could trace). The result seems unfair to one party but one of the essences
of sharing a commingled proceed is that it is difficult to distinguish the assets
after they commingled. If a party can prove that the proceed originating from
their collateral is identifiable and traceable, it is possible to argue that that party
should be entitled to trace the proceeds of its collateral.
Finally, US courts also apply the Last-in-First-Out (LIFO) rule which

is the reserve of FIFO.514 If this rule is adopted, the party whose fund has been
deposited in the debtor’s account first would benefit because the latest deposit
is deemed to have been spent first. In our example (7.2), the 2,000,000 ETB of
ODB’s was deposited last. Subsequently, a withdrawal of 500,000 ETB was
made leaving the balance of 1,500,000 ETB. Prior to that, the debtor spent
another 1,000,0000 ETB. This is also debited from the 2,000,000 ETB of ODB.
Thus, ODB goes with 500,000 ETB putting it in the same situation that CBE
was when the FIFO rule was applied.
512
Ibid., 144-145.
513
Barlow Clowes v Vaughan [1992] 4 All ER 22
514
William Stoddard, “Tracing Principles in Revised Article 9 § 9-315(b)(2):” 147-150.
176
7.4.2.3. A More Holistic and Policy Oriented Tracing Rules for

Commingled Funds
Article 7 of the MPSRP is clearly ill-equipped to deal with various scenarios in
which proceeds of a security right are commingled. The various rules of tracing,
if applied individually could also lead to an unfair outcome. Thus, the outcome
of applying the LIFO rule can be as equally arbitrary as applying the FIFO.
Where a country has not adopted a clear rule regarding tracing, it would invite
serious litigations. In our example, applying the FIFO rule, the 2,000,000 ETB
goes ODB and 500,000 goes to CBE while using the LIFO rule in the same
case, 2,000,000 goes to CBE and 500,000 goes to ODB completely reversing
the position of the parties.
The application of the FIFO rule can be relaxed to make it less harsh
on a party. In the scenario examined earlier, applying the FIFO, it is possible to
give 750,000 ETB instead of 500,000 ETB to CBE because the last spending of
500,000 occurred after the depositing of the 2,000,000 ETB proceeds of OBD’s
collateral, and as such the spending should be divided between CBE and ODB.
In this regard, the LIFO rule is slightly rigid to adjust. On a policy level, the
analysis so far depicts a clear picture of the problem that could be faced under
the MPSRP which seems to adopt only one principle of tracing a commingled
proceed —the lowest intermediate balance with no supplementary principle.
Both the FIFO and LIFO principles are arbitrary and depend on complete
chances of the debtor spending one fund or the other first in a timeline.
In this regard, UK law has an important insight to provide. In general,

UK law adopts the FIFO rule for equitable tracing in case funds belonging to
competing claimants are mixed.515 Nevertheless, when applying the FIFO rule
is perceived to be unfair, courts disregard it and apply the pari passu rule which
allows various claimants to trace proportionately to the value of their fund.516
The analysis so far demonstrates that the MPSRP should be amended
515
Clayton’s Case, 1815-1816) 1 Mer 572.
516
See Barlow Clowes v Vaughan [1992] 4 All ER 22 & Commerzbank AG v IMB Morgan
[2004] EWHC 2771 (Ch)
177
to provide a clear guideline on tracing commingled funds. First, as a starting

point, the law should adopt the lowest intermediate balance pro rata that allows
parties with equally ranking security rights to share commingled proceeds
proportionately to their claims (calculated percentage-wise). Second, this
rule should be supplemented by other policy considerations of fairness and
protection of vulnerable parties. Thus, the FIFO or LIFO rule should be applied
only in limited instances where it does not lead to an unfair outcome. Where the
secured party is a consumer creditor or a small and medium enterprise creditor,
the priority should be to ensure that vulnerable parties recover their fund, in
priority to big commercial lenders. If applying FIFO or LIFO rule would favor
the financially vulnerable creditor, the law should allow the application of either
rule with the view to ensuring that the vulnerable creditor recovers its claim
first. In cases of other creditors, the clean application of the lowest intermediate
balance pro rata could be favored.
The aim of the law should not be to mechanically resolve priority issues.
It should rather be providing a fair solution that considers the interest of creditors
who are in a weaker financial position and may be left to go through expensive
litigation to recover their claims.
7.5. Conclusion
Regarding the extension of security interest to proceeds, the available options
are for the law to recognize the automatic extension of the creditor’s right to the
proceeds unless the parties agreed otherwise or for the secured creditor to extend
its right to proceeds through a specific clause in the security agreement. The
latter approach involves transactions cost because it requires the identification
of proceeds in the security agreement or entering into a security agreement for
those that are not identified in the original security agreement and registering
notice in the collateral registry. To reduce transaction costs and to increase the
debtor’s lending base, the favored approach is to allow the security agreement
to automatically extend to the proceed.
In this approach, the definition of proceeds that is unified for all security
rights unless the context requires otherwise is necessary. This is what the
178
MPSRP and UCC Article 9 do. Although the concern by commentators that
UCC Article 9’s broad definition of proceeds has an overarching effect on the
right of unsecured creditors in a bankruptcy situation is raised,517 an argument
that can be made with equal force under the MPSRP, it suffices to state that
the automatic extension of security interest to proceeds is compatible to the
parties’ expectation and enhances access to credit. Furthermore, the notion that
unsecured creditors would be unfairly disadvantaged in bankruptcy due to the
extension of security rights to proceeds is difficult to justify given the fact that a
proceed is the direct result of the collateral over which unsecured creditors have
no claim if it was not for the disposition of the collateral or the event leading to
the proceeds. In this regard, the MPSRP has made a sound policy choice. The
relative simplicity of the rule that anything the security agreement automatically
extends to anything directly traceable to the collateral makes it easy to follow
for practitioners, judges, and parties involved in secured transactions.
Nevertheless, the MPSRP’s lack of clarity regarding tracing and recovery

of proceeds that commingled, in case of fund/money when the proceeds are from
two or more equally ranking security rights is concerning. The law needs to be
revised with specific tracing rules, adopting a holistic approach that focuses not
only on settling disputes mechanically but on taking into consideration policies
such as the protection of vulnerable creditors and fairness.
G. Ray Warner, “Article 9‘s Bankrupt Proceeds Rule: Amending Bankruptcy Code Section
517
552 Through the UCC ―Proceeds Definition,” 525-526.

Chapter Eight: Perfection — Effectiveness of Security Rights
Against Third Parties
8.1. Introduction
There are substantive and formal requirements for the validity of a security
agreement between the secured creditor and the debtor (or grantor). A security
agreement needs to fulfil the following substantive requirements (a) an
agreement between the grantor and the secured creditor, (b) the right of the
grantor in the asset to be encumbered, or the power to encumber it unless it is a
future asset, in which case the right in the asset is not acquired yet and thus it is
not a requirement.518 Furthermore, a security agreement must be evidenced by a
writing that is signed by the grantor, identify the secured creditor and the grantor,
describe the secured obligation, and the collateral.519 A security agreement that
fulfils all the requirements of Article 5 of the MPSRP is legally binding between
the grantor and the secured creditor.
Nevertheless, additional steps need to be taken for the security right to

have an effect against third parties. There are generally four methods by which a
security right becomes effective against third parties. These are control, possession,
notice filing in the collateral registry, and automatic effectiveness(perfection).
In the jargon of US secured transactions law, the process by which security right
is notified to third parties and thereby becomes effective against them is called
perfection.520 Thus, security rights can be perfected (made effective against third
518
MPSRP Article 5(1)-(3).
519
MPSRP Article 5(5).
520
180
parties) by control, possession, and notice filing and automatically. In UCC

Article 9, exceptionally, a security right may be perfected by compliance with a
law that sets the requirements for rendering the security right effective against
third parties.521
This chapter examines the four methods of perfection under the MPSRP
with a comparative perspective from UCC Article 9. For the sake of convenience,
the term perfection will be used throughout the chapter to mean the effectiveness
of security rights against third parties.
8.2. The Rationale for Perfection

Perfection of security rights serves two purposes. The first one is to deal with
ostensible ownership problem or false wealth problem by giving third parties
notice(information) as to the existence of security right in the property of the
debtor so that interested parties can assess the risk of dealing with the debtor.522
Ostensible ownership problem occurs when the party in possession of a property
is not the owner of the property and deals with third parties by hiding this
fact from them. The collateral registry system enables third parties including
potential buyers and secured creditors to check if the property of the debtor they
are dealing with is encumbered.523 While ostensible ownership is naturally not
a problem in the case of possessory pledge because of its possessory nature, it
poses a significant problem in all non-possessory security rights.
The second main purpose of perfection is to help determine priority

among creditors with conflicting proprietary rights in the collateral.524 In this
sense, “Perfection is a legal conclusion that a security interest is enforceable
against third parties.”525 Whether the method of perfection is control, possession,
521
UCC § 9-311(b).
522
Douglas G. Baird & Thomas H. Jackson, “Possession and Ownership: An Examination of the
Scope of Article 9,” Stanford Law Review 35, no. 2(1983): 183.
523
Douglas G. Baird, “Notice Filing and the Problem of Ostensible Ownership,” The Journal
of Legal Studies, 12 no. 1 (1983): 53.
524
UCC (2010) § 9-322 & MPSRP Articles 45 et seq.
525
William D. Warren & Steven D. Walt, Secured Transactions in Personal Property, 7th ed
(USA: Foundation Press, 2007), 51.
181
or notice filling, it is used as a basis to settle conflicting proprietary rights in the

collateral.
8.3. Methods of Perfection

There are several methods of putting third parties on notice as to the status of an
asset that they potentially deal with—control, possession, and filing. Automatic
perfection is an exception where the secured creditor does not need to take any
step for the security right to be effective against third parties. As such, there are
only a few instances in which it operates.
8.3.1. Perfection by Control

The secured creditor’s right is effective against third parties when the creditor has
control of the collateral with respect to certain defined collaterals. The MPSRP
recognizes control as one method of rendering security rights effective against
third parties526 similarly to UCC Article 9.527 The crucial questions to answer
in this regard are: what are the types of security rights that can be perfected by
exercising control over the collateral and what does control mean? The types of
security rights that can be perfected by control are security rights in claims and
documents embodying the right to payment or performance of obligations with
respect to which (a) possession is factually impossible or unnecessary and (b) a
system of control rather than possession or filing a registration is a more suitable
method of perfection.
Under the MPSRP, two categories of security rights can be perfected

by control. These are security rights in right to payment of funds in a deposit
account528 and security rights in electronic securities. 529 The relevant provisions
of the MPSRP are narrower in scope compared to the provision of UCC Article
9 which prescribes investment property (security), deposit accounts, letter-of-
credit rights, or electronic chattel paper to be perfected by control.530
526
527
UCC § 9-314.
528
MPSRP Article 17.
529
MPSRP Article 19.
530
UCC § 9-314(a).
182
While UCC Article 9 recognizes broader assets susceptible to control,

the MPSRP takes a more stringent approach. Accordingly, under UCC Article
9, security rights in the letter of credit (a letter issued by a bank guaranteeing
payment on behalf of a buyer usually in international trade), a chattel
paper,531 and investment property (including a security, whether certificated or
uncertificated, security entitlement, securities account, commodity contract, or
commodity account).532
By contrast, the MPSRP perfection by control is applicable only

to electronic securities —shares and bonds registered and transferable
electronically but not represented by a certificate.533 This provision apart from
being narrow due to its failure to include other securities for instance registered
shares not traded on a stock exchange, seems to be out of touch with the reality
of the Ethiopian financial market. In the current commercial environment,
shares and bonds registered and transferred electronically are rare in Ethiopia,
making the rule nearly impracticable. Second, registered shares and bonds can
be transferred validly only if the name of the transferor is struck out and the
name of the transferee is entered in the relevant registry. This means that some
form of control on registered shares is possible even if it is not transferable
electronically or the owner has a certificate. For instance, if it is indicated in the
share registry of the company that the relevant share shall not be transferred to a
third party without the consent of the secured creditor, this is an adequate control
mechanism. The limited scope of the MPSRP in terms of recognizing security
rights that can be perfected by control is not based on sound policy rationale.
531
“Chattel paper is a record or records that evidence both a monetary obligation and a security
interest in specific goods or lease of goods...” Suppose that a car dealer enters into a contract
of sale where the buyer pays the price in installment and the dealer has a security interest in
the car until the full price is paid. This transaction is a first-generation chattel paper because
it involves the dealer’s security interest in specific good (the car) and the right to payment of
money (the loan). If the seller now borrows money granting security right in the installment
payment and its security right in the car, this transaction is a chattel paper (second generation
transaction). Margit Livingston, Chattel Paper Priorities Under U.C.C. Article 9, Lexisnexis.
http://www.lexisnexis.com/legalnewsroom/corporate/b/business/archive/2008/05/06/chattel-
paper-priorities-under-u.c.c.-article-9.aspx>.
532
See UCC § 9-102(49).
533
183
The last question regarding perfection by control is the meaning of

control. There is no general definition of control both under the MPSRP and
UCC Article 9 as both define control with respect to the individual collateral.534
The manners of exercising control under the MPSRP are simple.
With respect to the security right in payment of fund credited in a

deposit account, the secured creditor can acquire control through three possible
methods. The first one is when a security right is created in favor of the financial
institution.535 For the sake of clarity, a simple example might be of help. Robo
Tech is a company that has patent rights in many technological products. It has
a deposit account with the Commercial Bank of Ethiopia where payment of
licensing fee is credited on monthly basis. Robo Tech wants to obtain a loan
from the Commercial Bank granting the latter security right in its payment of
the licensing fee. In this example, as soon as the security right in favor of the
Commercial Bank is created, the Commercial Bank acquires control over the
deposit account of Robo Tech. The security right is effective against third parties
without additional steps. Third parties who wish to provide a loan to Robo Tech
by taking the security interest in the same deposit account would easily know
that the deposit account is already encumbered by the security interest of the
Commercial Bank.
The second method of acquiring control over a fund paid in a deposit

account is by entering into a control agreement.536 With respect to rights to
payment of funds credited to a deposit account, a control agreement “means an
agreement in writing among the financial institution, the grantor and the secured
creditor, according to which the financial institution agrees to follow instructions
from the secured creditor with respect to the payment of funds credited to the
deposit account without further consent from the grantor.”537 Using a control
agreement, the bank might agree not to allow withdrawal of funds or online
534
Robert M. Fishman et al eds. Secured Transactions, §2.14
535
536
537
MPSRP Article 9(b).
184
payments from the deposit account by the debtor without the authorization of
the secured creditor.
The third method of control of security right in payment of money

credited in a deposit account is when the secured creditor becomes the deposit
account holder.538 This method of control requires the debtor to give access to the
deposit account to the secured creditor either by making the secured creditor an
exclusive customer or joint account holder with respect to the deposit account.
Whether the debtor chooses to make the secured creditor an exclusive or joint
account holder depends on different factors and the agreement of the two parties.
From the secured party’s point of view, the fact that it is a joint account holder
and thus is in control of the fund does not mean that things would not go awry.
The debtor can decide to terminate receiving payment in the deposit account in
question. If that happens, there might not be money in the deposit account that
the secured creditor can satisfy its claim from. Thus, a secured party should
continuously monitor the deposit account over which it has control.
Control over electronic security can be exercised by the secured creditor

either (a) by the notation of the security right or entry of the name of the secured
creditor in the books maintained by or on behalf of the issuer for the purpose of
recording the name of the holder of the securities, or (b) through the conclusion
of a control agreement.539 The method of control recognized with respect to
electronic securities can equally apply to non-electronic registered securities.
The owner of the registered share with respect to which a share certificate
has been issued can grant security right in the share and enter into a control
agreement, “an agreement in writing among the issuer, the grantor and the
secured creditor, according to which the issuer agrees to follow instructions
from the secured creditor with respect to the securities without further consent
from the grantor.”540 This means that a further encumbrance in the collateral will
not be created as the existing security right can easily be discovered by checking
538
MPSRP Article 9(c).
539
MPSRP Article 19.
540
MPSRP Article 9(a).
185
the record at the share registry(with the issuer). The same can be achieved by an
entry in the record maintained by or on behalf of the issuer indicating that the
registered share is encumbered. This brings back the question asked earlier: Is
there a sound policy justification to limit control only to electronic securities?
8.3.2. Perfection by Possession

The second method of rendering security rights valid against third parties is
possession. The idea behind perfection by possession is that if the secured
creditor has possession of the collateral or a document representing it, the debtor
would not be able to engage in fraudulent transactions as the collateral would
not be available to the debtor. Whaley and McJhon argue “It is premised on the
assumption that anyone considering acquiring an interest in the property would
naturally wish to see it (possibly also take possession of it) that such inspection
would necessarily reveal the creditor’s possession.”541 But what security
right can be perfected by possession? This is the most important question that
practitioners and other stakeholders need to answer to ensure compliance with
the law and security and certainty of their transactions.
The MPSRP Article 13 states that “a security right in movable property

shall be effective against third parties if (2) the secured creditor has possession of
the corporeal asset that is money, negotiable instruments, negotiable documents,
and certificated securities or subject to Article 56.”542 There are two general
classes of assets with respect to which perfection by possession is possible.
First, if the secured creditor has possession of money (a corporeal asset

that is money), it is sufficient to render the security right in the money effective
against third parties. The underlying logic for this is quite intuitive. Once the
secured creditor enters into possession of the money, it is highly unlikely for
the debtor to grant security right in the money because the likelihood of a third
party willing to enter into a transaction affecting money that is in the possession
of a third party is very low. Thus, the law reasonably says that he who takes a
541
See Linda J & Stephen L. Sepinuck, Problems and Materials on Secured Transactions, 2nd
ed (Thomson Reuters, 2010), 274.
542
186
security interest in money (for instance), which is not in the possession of the
debtor shall be bound by the security right of the person who has the possession
of the money in question.
The second class of assets whose possession suffices to render the

security right effective against third parties are documents embodying the right
to claim payment or performance of an obligation. This class includes negotiable
instruments such as bill of exchanges, promissory notes, negotiable documents
such as bill of lading and warehouse receipts and certificated securities including
bearer and registered shares and bonds.543 As these documents are indispensable
to demonstrate one’s proprietary right, once they are in the possession of the
secured creditor, it becomes impossible for the debtor to grant another proprietary
right to a third party. Thus, the possession of these documents by the secured
creditor is considered sufficient to put third parties on notice.
In Ethiopia, the scope of perfection by possession is excessively limited.

The relevant provision states that a security right in movable property shall
be effective against third parties “if the secured creditor has possession of the
corporeal asset that is money, negotiable instruments, negotiable documents,
and certificated securities or subject to Article 56.” Comparatively, under
UCC Article 9, “a secured party may perfect a security interest in negotiable
documents, goods, instruments, money, or tangible chattel paper by taking
possession of the collateral.”544 In addition to the collaterals identified by the
MPSRP, UCC Article 9 allows the perfection of security interests in goods (all
movable goods except intangibles). There are limited exceptions where notice
filing is mandatory for various reasons under UCC Article 9 but the scope of
perfection by control is much wider because the debtor is free to surrender the
possession of the collateral to the secured party to make the security agreement
effective against third parties even with respect to a corporeal chattel.
In this regard, the MPSRP needs to be carefully rethought to allow
543
MPSRP Article 2(4) defines certificated securities as “a document evidencing ownership of
share/bonds registered in the name of the holder or issued to a bearer.”
544
UCC § 9-313.
187
perfection by possession in a broad range of assets. The current legal rules

appear to be influenced by the hostility toward possessory pledges and have
taken an extreme approach by limiting the freedom of the parties with regard to
how they want their security right to be effective against third parties.
8.3.3. Automatic Perfection and Perfection by Compliance with

Law
Automatic perfection refers to the effectiveness of security against third parties
immediately upon the security agreement being signed without a further step
being taken by the parties.545 The MPSRP does not formally recognize automatic
perfection. However, at least one type of security right becomes effective against
third parties without registration of notice, possession, or control agreement —
security right in right to payment of fund in the deposit account. Under Article
17(1) of the MPSRP, the secured creditor acquires control over a right to payment
of funds credited to a deposit account upon the creation of the security right in
favor of the financial institution. While this provision defines the conclusion
of security agreement as a control, in reality, there is no step that the secured
creditor must take, besides concluding the security agreement. Under Article
62(2) “A security right in a right to payment of funds credited to a deposit
account with respect to which the secured creditor is the financial institution has
priority over a competing security right made effective against third parties by
any method other than by the secured creditor becoming the account holder.”
The effect of Article 17(1) and 62(2) is that a bank with which the
debtor has a deposit account can take security right in the fund by entering
into a security agreement. In case of conflict between a security right in the
same fund perfected by registration, the security right of the bank has priority.
The only manner of overriding this security right is for a secured creditor to
become the account holder. Nevertheless, a bank that has security rights in a
deposit account under its control would not change the ownership of the account
from the debtor to a new secured creditor. In conclusion, because the bank is
545
Christopher G. Bradley, “Disrupting Secured Transactions Law,” Houston Law Review 59
(2019): 982.
188
in possession and control of the customer’s bank account by default, a security

agreement granted in favor of the bank in the deposit account becomes effective
against third parties without an additional step being taken. This is equivalent
to automatic perfection.
Under UCC Article 9, there are provisions that clearly recognize

automatic perfection.546 First, Purchase money security rights in consumer
goods (acquisition security right in consumer goods) is perfected automatically;
meaning, the creation of security right suffices for perfection without additional
requirement.547 The reason automatic perfection exists is, in this case, is that
requiring notice filing costs more than the benefits.548 Nevertheless, this revives
the ostensible ownership problem that perfection tries to prevent as third parties
are left in the dark as to whether the consumer’s asset is encumbered.549 Second,
security interests in various assets perfect automatically under UCC Article 9
when the security agreement is signed. These include the security right of a
collecting bank (in a deposit account for instance), security right created by
the assignment of the insurance receivable to the insurance healthcare service
provider, security right of an issuer in a letter of credit in many other types of
security rights.550 The underlying policy behind the rule is that in some cases, the
secured creditor is in possession or control of the asset in which it has security
right. Thus, it does not need to take any step to make that right effective against
third parties. Furthermore, third parties are unlikely to be misled by the debtor
as the debtor is not in control of the asset. Thus, UCC Article 9 allows automatic
perfection in these cases.
Under UCC Article 9, certain security rights are perfected through

compliance with other laws making it unnecessary to comply with registration
of a notice under Article 9.551 Accordingly, the security interest in a motor
vehicle is perfected through a lien on the certificate of title as per state vehicle
code.552 A Similar rule of perfection applies to trademarks and patents.553 This
551
UCC § 9-311(b).
552
Linda J & Stephen L. Sepinuck, Problems and Materials on Secured Transactions, 245.
553
Ibid., 244.
189
type of perfection is not recognized under the MPSRP. Although this is not a
major defect, it might create an unnecessary burden on secured creditors to
comply with other statutes than the MPSRP. In this regard, the policymakers
should generally resist any temptation to creates rules that require perfection of
security rights other than by registering at the CRO as this would unnecessarily
complicate the registration and search system.
8.3.4. Perfection by Notice Filing

Another form of perfection of security interests is notice filing. The notice filing
system, to the best of the author’s knowledge, at least in its refined form is
pioneered by UCC Article 9. It is a system of alerting third parties of the existence
of security rights in the debtor’s assets. It is considered efficient compared to
the so-called authenticated registration system that prevails mostly in civil law
countries, which requires registration of documents(contracts) for the security
right to be effective against third parties in contrast with the registration of only
information about the collateral and the debtor.
8.3.4.1. Authenticated Registration — the Outdate System

The rule of authenticated registration is best illustrated by the Ethiopian
mortgage laws. Under the ECC, a mortgage however created, does not produce
any effects except from the day when it is entered in the register of immovable
property at the place where the immovable mortgaged is situated.554 Business
mortgage contract must be entered into in writing and registered in a month
of the drawing up of the mortgage contract at the regional or city bureau of
commerce and industry or a regional or city authority entrusted with the power
to register mortgages.555 With regard to real property securities, the ECC states
that “all acts purporting to create, modify or extinguish a right of mortgage or
antichresis” shall be entered in the register of mortgages in addition to all “acts
purporting to transfer a debt secured by a mortgage or a right of antichresis or
purporting to assign the benefit of priority attributed to such right by the law.”556
554
ECC Article 3052.
555
556
ECC Article 1573.
190
Similarly, in an application for business mortgage registration, the applicant is

required to attach the contract or other evidence which is the basis for the request
of registration.557 As these provisions indicate, at the very least, the registration
system requires depositing the security agreement at the relevant register. Given
the fact that registering a real property mortgage or business mortgage has
serious implications, every registry might require authentication of legal acts
before they can register it.558 This means that real property mortgage, business
mortgage, and other security agreements prior to the MPSRP are more likely
than not, required to be authenticated before being registered. The authentication
involves submitting original contracts and copies thereof for verification by the
Documents and Act Authentication and Registration Officer (DARO)559 The
process includes verifying if the document is signed by an authorized person
and authority (if any).560 This system obviously involves some transaction costs
(time and money).
The main advantage of the authentication and registration system is its

paternalistic nature where a state authority or a notary checks the validity of the
security agreement while parties have more chance to check the validity of their
agreements at the stage of registration. However, the disadvantage of this process
is its inflexibility.561 The deposit of the entire copy of the agreement adds an
unnecessary cost to the already lengthy and expensive procedure. Furthermore,
because authentication requires the entire document to be produced to the
authority in charge, the parties or their representatives must be physically present
557
A Proclamation to Provide for Business Registration, Proclamation No. 98/1998
Article 3(3).
558
Although the Acts and Documents Authentication and Registration Proclamation, 2015
does not list real estate mortgage or business mortgage to be authenticated, it does state that
“documents that shall be authenticated and registered in accordance with the appropriate law
should be authenticated as per the requirements of the proclamation. See The Proclamation to
Provide for Authentication and Registration of Acts and Documents, Proclamation No. No.
922/2015, Article 9(1)(a).
559
Ibid., Article 8.
560
Ibid.
561
See Robert I. Donnellan, “Notice and Filing under Article 9,” Missouri Law Review 29, Issue
4 (1964): 1.
191
at the authority. If electronic filing is to be adopted, the traditional method of

authentication ad registration is not viable. Thus, the MPSRP introduced a new
system— notice filing.
8.3.4.2. Notice Filing System— Advantages

The notice filing system primarily gives subsequent creditors (or third parties)
general information about the existence of security rights in the property of the
debtor. As the system is pioneered by and developed in the US, it is helpful
to have insights into how UCC Article 9 filing system works. Essentially, as
Donnellan points out:
“The stated aim of Article 9 of the Uniform Commercial Code is to

provide a simple and unified structure within which the immense variety
of present-day secured financing transactions can go forward with less
cost and greater certainty. This laudable objective can be achieved under
Article 9 because it permits the use of notice filing and provides for
certainty and convenience in the mechanics of filing and recording. The
main purpose of any filing system for security transactions is to give notice
to others. Too often this purpose has been overlooked by the courts and
lawyers in their slavish attention to details such as unnecessary minutia
in describing collateral and the requirements for acknowledgments and
affidavits.”562
UCC Article 9 filling system achieves certainty and reduces the cost of
filling mainly because the amount of information required for filing is limited.
Notice Filing (also called financing statement because the secured creditor
submits information about supplying financing to the debtor563) is sufficient if it
indicates the name of the debtor, name of the secured party or the representative
of the secured party and the collateral,564 and the additional information
required under section 9-516 including the address of the secured creditor.565
562
Ibid.
563
See, UCC § 9-102(39) (Defining financing statement).
564
UCC 9-502(a) 1-3.
565
UCC § 9-516.
192
UCC Article 9 notice filing system does require the description of collateral to
which the security right applies but the collateral description does not need to
be painstakingly specific rather it needs to be sufficient to reasonably identify
the collateral — descriptions by listing, category, by type as defined under UCC
Article 9 and by type, are all acceptable methods of description both under
Article 9 as well as case law.566
The most important aspect of UCC Article 9 filing that should be

accentuated is that it does not require submission of an authenticated copy of the
security agreement or any extract thereof. The notice filing system is based on
the policy that subsequent prospective creditors (or third parties) should inquire
about the particulars of the transaction from the earlier creditor after being
alerted about the existence of security right affecting the debtor’s asset by the
notice duly filed. They can approach to seek the debtor’s approval of a prepared
statement of account that shows the debtor’s indebtedness — the refusal or failure
of the debtor to approve or contest the information or collaborate in verifying
the information about its indebtedness is a sign that the debtor is hiding credit
information and therefore it is a warning to the prospective creditor.567 This
system is efficient as it achieves the purpose of public notification of transactions
at the least transaction cost possible, both in terms of saving time and money.
The notice filing system shifts the burden of finding out the precise
nature of the transaction to subsequent searchers (prospective creditors) due
to the essential nature of the information provided. Nevertheless, this entails
relatively minor transaction costs on the side of the prospective creditor, a
cost that can be tolerated and justified in the interest of maintaining the overall
efficiency benefit of the filing system.568
There are two major grounds of objection to the filing system. These are
566
UCC V §9-108.
567
Hausmann, “the Value of Public-Notice Filing under Uniform Commercial Code Article 9,”
444. See UCC (2010) § 9-210(b).
568
Jens Hausmann “the Value of Public-Notice Filing under Uniform Commercial Code Article
9,” 445.
193
fraudulent filing and the compromise of the debtor’s privacy.569 With regards to
fraudulent filing, the suggested solutions are “the debtor’s consent, preliminary
authentication of the creditor, declaration by the creditor assuming liability for
damage that may occur to a security provider or third parties.”570 On the question
of privacy, Veneziano argues that filing does not require providing a complete
account of the debtor’s patrimonial affairs, and therefore there is no invasion of
the debtor’s privacy.571
8.3.4.3. Notice Filing System under the MPSRP

The MPSRP has adopted the notice filing system for the advantages it offers
discussed earlier (see supra § 8.3.3.2).572
First, a central CRO is to be established by regulation where notices

regarding security rights in movable assets are to be filed.573 The Collateral
Registry is “an electronic system for receiving, storing and making accessible
to the public information about security rights and non-consensual rights
in movable property.”574 It is established per the provisions of the MPSRP575
and will be administered by the CRO.576 The establishment of the Collateral
Registry is part of making the system more efficient by eliminating different
registries for essentially similar transactions. Second, under the MPSRP, “A
security right in movable property shall be effective against third parties if a
notice with respect to the security right is registered in the Collateral Registry
by the secured creditor.”577 But what precisely is a notice with respect to the
569
Anna Veneziano, The DCFR Book on Secured Transactions: Some Policy Choices made by
the Working Group in the Future of Secured Property Law in Europe eds. Sjef Erp van, Arthur
Salomons, and Bram Akkerman(Berlin: Sellier European Law Publishers, 2012) 130.
570
Ibid.
571
Ibid.
572
MPSRP Article 13(1)
573
MPSRP Article 20 & 95. Until the establishment of such a registry, the National Bank
of Ethiopia administers an online collateral registration system, https://emcr.nbe.gov.et/Home/
About.
574
MPSRP Article 2(5).
575
MPSRP Article 21.
576
MPSRP Article 20.
577
194
security right? As this is one of the innovative features of the MPSRP, the level
of ease with which notice filing could be achieved is a major criterion to assess
the efficiency of the system.
The notice filing system in Ethiopia is mainly governed by Articles

20-45 of the MPSRP. These provisions cover, inter alia filing of the initial
notice, authorization requirement, amendments, identification of the parties,
collateral description, error corrections, post-registration changes, duration of
registration, search from the public record of the collateral registry by third
parties, cancellation of registration, archiving and liability of the collateral
registry office. Many of the provisions are clear and address detailed issues,
some covering bureaucratic matters, not raising critical policy or interpretive
issues. Some of the rules need to be supplemented by a directive to be issued
by the CRO.
For systematic analysis, the most important rules on notice filing

under the MPSRP can be placed under six important pillars. These are (I) no
contract authentication rule, (II) authorization by the grantor, (III) identification
of parties and the collateral, (IV) electronic filing and search, (V) one notice
system, and (VI) others. In the others category, rules that pose little or no policy
and interpretive dilemma due to their simplicity and clarity can be included and
they will not be discussed here. The identified pillars are geared toward creating
an efficient notice filing system.
I. No Contract Authentication
The first principle that can be extrapolated from the notice filing rules is the
principle of no contract authentication. Under this principle, the CRO does
not conduct registration or authentication of the contract. Authentication
is understood to mean checking the veracity of a document including by
195
comparing copies with original and confirming the authenticity of signatures.578

The CRO only receives, registers, stores, and makes accessible to the public
information regarding security rights.579 The principle is similarly incorporated
in UCC Article 9 where (a) financing statement (notice filing) does not require
a deposit of an authenticated contract(even an unauthenticated contract) rather
only information regarding the collateral and the parties.580
Commenting on the reasons for which the filing office may not reject a
notice filing, Burnham states that the aim of drafters of Revised (UCC Article
9) “was to limit the discretion of the filing office; the office is to mechanically
check the filing but to exercise little judgment.581 Thus, the filing office does not
need to authenticate a contract and exercise judgments regarding the substantive
validity of security agreements.
II. Authorization by the Grantor

The second principle closely linked to the no-contract authentication principle
is authorization by the grantor where the registration of security right must
be authorized by the grantor of the security right.582 In this regard, the written
agreement of the grantor is sufficient, including the original security agreement.583
Under the MPSRP, when the security agreement is presented to the CRO as
evidence of authorization of the registration of the security right, the office is
not empowered to question, verify and authenticate the security agreement.584
Authorization by the grantor is necessary to ensure that fraudulent filing is not
578
See FDRE, Acts and Documents Authentication and Registration Proclamation, No.
922/201, Federal Negarit Gazzet, Legal Notice No. 39 (Addis Ababa, 2016). Article 2(1) of this
proclamation states “to authenticate a document” means to sign and affix a seal by witnessing
the signing of a new document by the person who has prepared such document or the person
it concerns and after ascertaining that this formality is fulfilled, or to sign and affix a seal on
an already signed document by ascertaining its authenticity through an affidavit or specimen
signature and/or seal.”
579
MPSRP Article 21.
580
See UCC § 9-502(a).
581
Scott J. Burnham, The Glannon Guide to Secured Transactions 142.
582
583
MPSRP Article 22(2) & 5.
584
196
made. The debtor’s authorization is required under UCC Article 9 as well.585
III. Identification of Parties and Collateral
The third principle under the MPSRP notice filing rules is the identification
of parties and collaterals. Both under the MPSRP and UCC Article 9, the
debtor or the grantor or obligor in the language of UCC Article 9586, need to
be identified by notice filing as should the secured creditor or its representative
be.587 Furthermore, the addresses of the parties should be provided in the notice
filing.588
The MPSRP envisions the assignment of a unique grantor identifier

to be created according to a directive to be issued and to be provided to the
grantor.589 According to the directive issued by the National Bank of Ethiopia,
the grantor identifier number is Tax Identification Number (TIN) for Ethiopian
natural persons, and Passport number for Non-Ethiopians while it is TIN
for businesspersons.590 Secured creditor identifier is the same as the grantor
identifier.591 UCC Article 9 does not require a debtor identifier number as debtors
are identified by their names.592
The notice filing also needs to identify the collateral using serial numbers
where available and the collateral falls in the category of assets that can be
identified by a serial number,593 by listing name and by known categories of
collateral.594 If the debtor has disposed of the collateral and collateral changes
585
UCC § 9-509 (a) & (b).
586
UCC § 9-102 (59).
587
See MPSRP Article 27 & UCC § 9-509 (a) - (c).
588
MPSRP Article 27 & UCC 9-516(b), 9-520(a).
589
MPSRP Article 27(1)(a) & Article 28(1)(a).
590
See National Bank of Ethiopia, Operationalization of Collateral Registry Directive No.
MRC/01/2020 Article 11.
591
Ibid Article 12.
592
UCC § 9-502(a)(1).
593
MPSRP Article 2(46) defines a “serial-numbered collateral as “motor vehicle, trailer,
agricultural machineries(-[sic], construction machineries[sic] or industrial machineries and
others that have a serial number permanently marked on or attached by the manufacturer.”
594
MPSRP Article 30(1)-(6).
197
hand, the registration based on the name on its own does not say anything about
the actual status of the collateral.595 Thus, the identification of the collateral in the
registration of notice provides additional information that the registration by the
debtor does not provide. In this regard, the MPSRP’s rules are reasonable both
in terms of simplifying the registration system and diversifying the methods of
identifying the collateral.
In addition to identifying the grantor, the secured party, and the

collateral, the initial notice should contain addresses of the parties, the period
of effectiveness of registration (maximum of ten years subject to renewal more
than once) as well as other information that may be required by the directive.596
IV. One Notice System
The MPSRP requires the secured creditor to file a single notice that covers
different security rights if the debtor is the same.597 This is significantly innovative
compared to a system that might require the secured creditor to register or file
notices with respect to every security agreement that it concludes even with the
same debtor.
V. Electronic Registration and Search System
The MPSRP’s provisions governing collateral registry and registration
foresee electronic registration and search system with no parallel paper-based
registration system in place. The third recital of the MPSRP underlines that
establishing a single comprehensive electronic registration regime for secured
transactions in movable property to determine priority rights among competing
claimants is necessary. All the MPSRP’s provisions are dedicated to setting out
details on how electronic filing and search work.
A notice can be filed by the secured party only by creating a user account
at the collateral registry.598 Similarly, an amendment can be made to a notice
595
596
MPSRP Article 27(1)(c), (e) & (f).
597
MPSRP Article 23.
598
MPSRP Article 24(1)
198
filing by using the same user account and by an authorized person.599 A

registration or search may be rejected if the registrant or searcher does not enter
information in the designated field.600 This quick review of the key provisions
governing registration and search demonstrates that the MPSRP is intended to
create an electronic registration system with no parallel paper-based registration
system. The directive issued by the National Bank of Ethiopia that establishes
the electronic collateral registry envisions no paper-based registration system
either.601 This is similar to the system in Malawi under the 2013 Personal
Property Security Act which is also based on UNCITRAL LGSTL mandating
the establishment of exclusively electronic collateral registry.”602
The policy rationale for electronic registration and search system is
easy to understand. Secured creditors are not required to carry a bag full of
contracts and visit the CRO to file a notice regarding security rights. If the
system runs smoothly, notice filing can be completed from ones’ desk at home
or in the office. The same is true for search. Nevertheless, this means that the
system should be robust enough to support various supporting documents being
submitted in electronic version during the registration process including the
debtor’s authorization agreement for the notice filing and possibly the security
agreement or a part thereof as proof of the debtor’s authorization. The system
can even be built to automatically notify the debtor via email that a notice
filing has been submitted affecting their property. This can revolutionize the
registration system in Ethiopia and where its functions would significantly
reduce transaction costs. Thousands of secured creditors could file registration
at the same time if the infrastructure works well. The same is true for searching
in the collateral registry by interested third parties.
Nevertheless, the choice to implement an exclusive electronic filing
system is out of touch with the reality in Ethiopia. According to 2017 World Bank
599
600
601
National Bank of Ethiopia, Operationalization of Collateral Registry Directive No.
MRC/01/2020.
602
The Personal Property Security Act of Malawi (2013) Section 49.
199
data, Ethiopia ranks third (ranked among countries doing worse) in the world
in terms of electricity access deficit,603 with 71 Million people with no access
to electricity based on 2014 statistics.604 Although the situation has improved
today, it has not changed radically. According to the African Infrastructure
Country Diagnosis report (2010), “the coverage of Information Communication
Technologies in Ethiopia is the lowest in Africa.”605 As of 2010:
GSM signals cover barely 10 percent of the population, compared
with 48 percent for the low-income country benchmark; and the
GSM subscription rate is only 1.6 percent of the population in
Ethiopia, compared with 15.1 for the low-income country benchmark.
Furthermore, whereas the typical African country adds 1.7 percent
of the population to the GSM subscriber base per year, the figure for
Ethiopia is only 0.1 percent. Internet bandwidth in Ethiopia is only 0.3
megabits per second per capita, compared with 5.8 megabits per second
per capita for the low-income country benchmark.606
The preceding data reveals that as of 2010 more than 50 percent of the
Ethiopian population living in rural areas does not have access to the internet, a
situation that has not substantially changed today and highly unlikely to change
in the next several decades. Even where there is access to the internet, there is
limited internet bandwidth which means that a slow connection could render
the operation of office works relying on the internet difficult, sometimes with
intolerable degrees of blackouts for hours or even days. Nonetheless, in a country
where electricity is meagerly accessible to the majority of the people and where
less than 50 % of the population has access to the internet, implementing an
exclusive electronic filing system is not a viable solution. Even if internet use
603
International Bank for Reconstruction and Development/The World Bank, “State of
Electricity Access Report” (Washington D.C: The World Bank, 2017), XIV
604
Ibid 18.
605
Vivien Foster and Elvira Morella “Ethiopia’s Infrastructure: A Continental Perspective”
(Washington D.C, The International Bank for Reconstruction and Development / The World
Bank, 2010), 15.
606
Ibid.
200
grows above 50%, users who have the required internet bandwidth to file online
registration would be limited. Certainly, rural Ethiopians would not benefit
from the system anytime soon.
To ensure access for the broader stakeholder to the collateral registry,

certain countries adopted hybrid system—electronic and paper-based registration
systems. Ontario (Canada) had operated with a hybrid filing system for decades
until it implements exclusively electronic filing in 2007.607 In the US where
electronic filing is utilized efficiently, paper-based filing is still allowed in the
majority of the states608 including in New York.609 When the countries that
are the origin of the idea have not implemented it overnight, it is not wise for
Ethiopia to implement exclusively electronic filing.
8.3.5. Mandatory Perfection and Optional Perfection Methods?

The MPSRP allows security rights to be made effective against third parties
through notice filing, possession, control, and the mere creation of security right
in case of security right in right to payment of fund in a deposit account (see
supra § 8.3.3). However, the MPSRP does not clearly state that one or the other
form of perfection is mandatory for any type of security right. The question is
therefore whether the MPSRP treats all perfection methods equally or whether
there are perfection methods that are mandatory? Understanding this allows
secured parties to take the right steps to prevent unnecessary costs and avoid the
possible subordination of their security rights.
Unfortunately, the MPSRP is vague on this question and calls for careful
analysis. This requires going beyond the rules of perfection to the rules on the
priority of security rights. The MPSRP starts with the rule that the priority of
security rights is determined by filing registration. It provides that “subject to
the provisions of this Part (part five of the proclamation dealing with priorities),
priority among competing security rights created by the same grantor in the
607
Marek Dubovec, “UCC Article 9 Registration System for Latin America,” Arizona Journal
of International & Comparative Law 28, no. 1(2013): 123.
608
Ibid.
609
https://www.dos.ny.gov/corps/fees_ucc.html.
201
same collateral is determined according to the order of registration, without

regard to the order of creation, of the security right.”610 This rule has several
exceptions to be discussed later. However, the point of immediate relevance
is that the MPSRP, in many cases allows perfection through more than one
method notwithstanding the fact that Article 46(1) lays the principle that priority
among security rights is determined by the date of registration. It means that in
certain instances, a security right perfected using one method prevails over a
security right perfected using another. This effectively makes one perfection
method superior to another. Consequently, secured creditors who thought that
all perfection methods are equal would pay a heavy price when they realize that
a perfectly valid method of rendering a security agreement effective against
third parties is actually an inferior method of perfection. Several provisions can
be used to demonstrate this point (see infra § s 8.3.5.1 & 8.3.5.2).
8.3.5.1. Methods of Perfection are Permissive

The MPSRP has various provisions suggesting that the various methods of
perfection are optional, and the secured creditor has the right to choose one among
the available options of perfection. In this regard, Article 15 enshrines the rule that
a security right continues to be effective against third parties despite a change in
the method for achieving third-party effectiveness, if there is no time gap when
the security right is not effective against third parties. Under this provision, if
a secured party chooses to cancel a registration of notice regarding its security
right and take possession of the collateral such as a negotiable instrument, the
security right is effective against third parties as long as there is no gap between
the cancellation of the registration and taking possession of the collateral.
A time gap between the two events exposes the secured creditor to possible
subordination of its security right to a security right perfected during that gap.
8.3.5.2. But Some Methods of Perfection are Superior and

Effectively Mandatory
At least in four cases, perfection through possession overrides perfection through
registration making the former superior or effectively mandatory. First, under
610
202
Article 61(1) a “security right in a negotiable instrument that is made effective

against third parties by possession of the instrument has priority over a security
right in the instrument that is made effective against third parties by registration
of a notice in the Collateral Registry.”611 Second, under Article 64(1) a “security
right in a corporeal asset made effective against third parties by possession
of the negotiable document covering that asset has priority over a competing
security right made effective against third parties by any other method.”612
Third, a “security right in certificated securities made effective against third
parties by the secured creditor’s possession of the certificate has priority over
a competing security right created by the same grantor in the same securities
made effective against third parties by registration of a notice in the Collateral
Registry.”613 Finally, a “security right in a right to payment of funds credited
to a deposit account that is made effective against third parties by the secured
creditor becoming the account holder has priority over a competing security
right that is made effective against third parties by any other method.” 614
Illustration 8.1
A obtains a security interest in B’s 1000 Quintals of teff stored at Mojo

Warehousing. On March 1, 2020, A registers a notice regarding its security right
at the CRO. On March 10, when B approached C for a loan and indicated the
possibility of granting security rights in 1000 Quintals of Teff stored at Mojo
Warehousing, C conducted a search and learned that the asset in question is
already encumbered by A’s security right. Irrespective of that, on April 15, C
concludes a security agreement taking security right in the same 1000 Quintals
of Teff and took possession of the warehouse receipts. When B defaulted on its
loan to both A and C, both parties want to enforce their claims against the 1000
Quintals of teff.
The applicable provision in this scenario, Article 64(1) makes it clear
611
612
613
614
203
that security right in a corporeal asset made effective against third parties by
possession of the negotiable document covering that asset has priority over a
competing security right made effective against third parties by any other method.
Therefore, C’s security right has priority over A’s security right notwithstanding
the fact that A’s security right was created and registered first because the law
makes possession a superior method of perfection.
The rule under MPSRP has at least two undesirable effects. Unwary
Secured creditors might lose their priority because a subsequent secured
creditor took possession of the negotiable instrument or document. This is more
so because the MPSRP does not explicitly state that one method of perfection is
superior to the other. As the law stands now, if an unsuspecting secured creditor
perfected its security in warehoused goods through registration, a subsequent
secured creditor could extend the loan and obtain security right in the same
collateral knowing that there is existing security right. If the subsequent creditor
takes possession of the warehouse receipt, it wins in a battle for priority versus
the earlier creditor. Is this a system that is desirable?
8.3.5.3. There should be Mandatory Methods of Perfection

The MPSRP should be amended to include clear rules of mandatory methods of
perfection for certain assets. Under UCC Article 9, except otherwise provided,
a security interest in a deposit account may be perfected only by control while
security interest in money may be perfected only by possession.615 With regard
to a deposit account, control is a mandatory method of perfection while with
respect to money, it is possession. The policy rationale behind these rules is
clear.
A prospective lender wanting to obtain a security interest in a fund paid

in a deposit account can easily inquiry at the financial institution whether there
is an existing security right in the deposit account. If the bank has entered into
a control agreement that requires it to receive the instruction of the existing
secured creditor to approve transactions affecting the deposit account, the bank
615 UCC § 9-312(b)(1) & (3).

204
can confirm that fact to the potential lender. It does not make practical and
business sense to file a notice at the CRO to achieve this.
Regarding money, the rationale for perfection by possession is even

clearer. Security right in money should be effective against the third party if
the secured creditor has possession. As money changes hands at a fast pace,
it would be impracticable to conduct a search at the CRO to verify whether
there is a security right in the money concerned before accepting the money or
obtaining a security interest in it. Third-party transferees of money should take
it free of security right unless they have received it gratuitously or acquired
it knowing that the money is being transferred to defraud the creditor. In this
regard, the MPSRP states that “A transferee that obtains possession of money
that is subject to a security right acquires its rights free of the security right
unless that person has knowledge that the transfer violates the rights of the
secured creditor under the security agreement.”616 This rule should operate in an
exceptional situation where the debtor either stole the money subject to security
right from the secured creditor or acquired it illegally. In the normal course of
things, since the money should be in the possession of the secured creditor, it
can never be transferred to a third party, other than the secured creditor itself.
Under UCC Article 9, as much as control and possession are mandatory

for certain assets, filing is mandatory for some collaterals, such as accounts
receivable and other incorporeal assets including intellectual property rights,
fixtures, and an assignment of a beneficial interest in a trust.617 In other cases,
filing is permissive.618 In the light of the confusion that may be caused by the
vagueness of the MPSRP, the rules on perfection should be revisited to have
clear principles on mandatory and permissive fling methods.
8.4. Conclusion
The MPSRP has introduced an efficient system of rendering security rights
effective against third parties. The establishment of the CRO that registers
616
MPSRP Article 63.
617
UCC §9-310(a),
618
Robert M. Fishman et al eds. Secured Transaction, §2.9.
205
notice regarding of all non-possessory security rights is unquestionably a big

leap forward for a country that did not have a unified registration system for
non-possessory security rights. The MPSRP has also simplified the registration
system, above all, by not requiring the registration of security agreements.
Security rights are also rendered effective against third parties through multiple
methods (registration of notice, possession, control, and arguably through
automatic perfection).
Nevertheless, there are gaps that must be filled by further legislation.

First, the exclusive electronic collateral registration system should be
supplemented by a paper-based registration system for rural Ethiopia and even
in urban Ethiopia where parties wish to file paper-based registration. Second,
the MPSRP should be amended to clarify whether there are mandatory methods
of perfection. In this regard, possession can be an example of mandatory method
of perfection for a security right in money (as it is the case in the US). As the law
stands now, it is not clear whether certain methods of perfection are mandatory
although the effect of the application of priority rules clearly suggests so. This
needs to be clarified.
206
Chapter Nine: Priority and Security Rights
9.1. Introduction
The rules of perfection, besides preventing potential fraud, are aimed at setting
a system of determining priority among various claimants of proprietary interest
in the debtor’s asset. Conflicts could arise between the claims of a secured
creditor and an unsecured creditor, a consensual secured creditor, and a non-
consensual secured creditor as well as a secured creditor and a third-party
acquirer. The MPSRP has a comprehensive system of determining priority
enshrined in Articles 45-65. While the general schemes of the rules of priority
are understandable, the priority rules are based on flawed perfection rules. As
such, in certain instances, outcomes do not make practical and commercial sense.
This chapter takes the reader through the essential rules for determining
priority when conflicting claims relating to the collateral arise. With the
schematic analysis provided in the chapter, readers would be able to work with
the provisions of the MPSRP without difficulty.
9.2. First to Perfect by Filing Notice

Under the MPSRP, in principle, the priority of competing security rights over the
same collateral and perfected through notice filing (registration) is determined
based on the order of registration. In this regard, the MPSRP provides that “…,
priority among competing security rights created by the same grantor in the
same collateral is determined according to the order of registration, without
208
regard to the order of creation, of the security right.”619 As such, the time of
registration of a notice at the CRO is the principal way of determining the
priority of competing security rights that are perfected through registering
notice. The rule of priority by the order of registration has been regarded as
“the most effective way to provide creditors with the means to determine their
priority with a high degree of certainty at the time they extend credit.”620 This
is because the entry of a security right in a public registry provides potential
creditors with unequivocal information on the existence of a security right in
collateral. The time of entering the registration can be determined to its second
with precision. The rule of first to perfect by the filing is the same under UCC
Article 9 where priority is determined by the date of notice filing — the first in
time becomes first in right.621
Illustration 9.1
CBE started negotiating a loan agreement with Zeway Farm. Zeway Farm wishes
to grant security rights in its flowers to be harvested and various farm equipment.
The assets were identified, and the loan amount was tentatively agreed upon.
The parties have also exchanged draft loan and security agreements. On January
10, 2021, the CBE registers a notice at the CRO about its security right with the
firm belief that the contract will be signed. On January 15, 2021, AIB granted
a loan to Zeway farm and took security rights in the same assets. The next day,
AIB registers a notice at the CRO. On February 1, 2020, CBE finally decides
to sign the loan and security agreement which Zeway farm accepted. A month
later, on April 1, 2021, Zeway farm defaults on its loan, CBE and AIB wish to
enforce their security rights. Whose security right has priority?
Both under the MPSRP [(Article 46(2)] and UCC Article 9, the creditor
can register a notice before acquiring security right in the debtor’s asset(s),
which is considered valid to perfect the security right, if the security right is
619
620
UNCITRAL Legislative Guide on Secured Transactions, 193.
621
See UCC § 9-322(a). James J. White & Robert S. Summers, Principle of Secured Transactions
(Thomson West, 2007), 156-157.
209
duly acquired later.622 This so-called First to File or Perfect Rule (FTFOP) rule
allows a secured creditor who is negotiating a security agreement with the debtor
to register a notice before the agreement is concluded. Thus, regardless of the
fact that CBE has signed its security agreement later than AIB, by the virtue of
registering a notice earlier, its security right has priority.
Under the FTFOP, it is argued that it is possible for a debtor to technically

transfer a property that it does not have interest in, against the doctrine of Nemo
Dat Quod Habet (one cannot give what one does not have).623 The hypothetical
situation in the scenario provides an example for this. The FTFOP arguably
contradicts Nemo Dat doctrine when there are two creditors where the first
creditor registers a notice at point 1 and enters into a valid security agreement at
point 4 while the second creditor enters into a security agreement and registers a
notice affecting the same asset of the debtor at point 2 and point 3 respectively. In
this situation, at point 4, meaning when the first creditor entered into the security
agreement with the debtor, the asset has already been subjected to security right
at point 2 and the security agreement has been registered at point 3 and hence the
debtor does not have the right to transfer the property any longer.624 However,
since the FTFOP rule gives priority to the creditor that registered notice earlier,
meaning at point 1, it effectively helps the debtor to transfer the property to the
creditor in question. The key question to ask is whether FTFOP rule should
allow a debtor to engage in multiple transactions potentially fraudulent because
certainly, only one transaction stands the eventuality of financial distress or
bankruptcy.
Article 46(2) of the MPSRP has introduced the FTFOP rules which
622
See UCC (2010) § 9-502 (d) which states “A financing statement may be filed before a
security agreement is made or a security interest otherwise attaches.” See also Steven L. Harris
& Charles W. Mooney, Jr., “Revised Article 9 Meets the Bankruptcy Code: Policy and Impact,”
300. The MPSRP Article 46(2) states that “The priority of a 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 grantor acquires rights
in the asset or the power to encumber it, is determined according to the time of registration.”
623
Steven L. Harris & Charles W. Mooney, Jr., “Revised Article 9 Meets the Bankruptcy Code:
Policy and Impact,” 301.
624
Ibid., 300, 303-304 & 309-310.
210
aligns with the rule that “knowledge of the existence of a security right on the
part of a secured creditor does not affect its priority.”625 In other words, the fact
that a secured creditor knew of the existence of another security right in the
same collateral at the time of the creation of the security right cannot be used
as a defense by the earlier secured creditor to deny it a priority, if a notice with
respect to the security right created later in time is registered earlier than the
security right created earlier. It follows that a secured creditor gets priority if it
has registered its security right at the CRO earlier than any other pre-existing
security right, even though it was aware that another security right exists in the
same collateral but unregistered.
The implication of these rules is that practitioners should check the CRO
immediately before entering into a security agreement as notice could have been
registered by another creditor that has been simultaneously negotiating a security
agreement with the debtor, without signing the security agreement. Financially
distressed debtors could exploit this to obtain loans from two(multiple) creditors
using the same collateral.
9.3. Security Rights Perfected through Possession vs. Registration

of Notice
The general rule on determining the priority of security rights under the MPSRP
is overridden by several exceptions. The first exception stems from specific
security rights that are perfected through more than one method of perfection,
where security right in the same collateral is perfected through registration of
notice and possession or control and possession.
Illustration 9.2
A grants a loan to B and takes security right in certificated security (a registered
share certificate) issued by FinCorp. A registers a notice regarding the security
right at the CRO on December 20, 2020. C grants a loan to B and takes security
right in the same registered share certificate and takes possession of the certificate
on December 25, 2020. If B defaults on its loan to both A and C, whose security
right has priority?
625
MPSRP Article 48.
211
The first to file rule says that the party that filed and perfected first(B)
has priority. However, that rule applies if both security rights were perfected
by registration of notice which is not the case here as one security right is
perfected by possession. The MPSRP has series of specific rules on settling
the question of priority in these types of instances. The cardinal rule is that
security rights perfected through registering notice rank inferior to security
rights perfected through possession, perfection through possession being the
strongest method of perfection.
In response to the question in our scenario, the MPSRP provides that a
“security right in certificated securities made effective against third parties by
the secured creditor’s possession of the certificate has priority over a competing
security right created by the same grantor in the same securities made effective
against third parties by registration of a notice in the Collateral Registry.”626
Hence although the security right of B was registered earlier than C taking
possession of the registered share certificate, the latter prevails in the battle
for priority. With respect to the security rights in negotiable instruments, the
MPSRP states that a “security right in a negotiable instrument that is made
effective against third parties by possession of the instrument has priority over
a security right in the instrument that is made effective against third parties by
registration of a notice in the Collateral Registry.”627 Similarly, a “security right
in a corporeal asset made effective against third parties by possession of the
negotiable document covering that asset has priority over a competing security
right made effective against third parties by any other method.”628
A slightly different rule relates to security rights in funds in a deposit
where the secured creditor that perfects it by becoming the account holder has
priority over a competing security right that is made effective against third
parties by any other method.629
The preceding rules underscore that, in cases of conflicts between
626
627
628
629
212
security rights perfected through possession and any other method of perfection
(including the filing of a notice), the security right perfected through possession
gets priority. The priority of security rights perfected through possession over
those perfected through filing is also recognized under UCC Article 9. In
summarizing the basic priority in this regard, White and Summers wrote:
Because the drafters chose to permit perfection by possession and by
certain other non-filing acts, they could not just give priority to the first
to file. However, they went as far as possible and 9-322(a) is the result:
the first to file wins if both competitors perfect by filing. Since filing
is a public act, the timing of which can be proved by accuracy from
public record… likewise if one or both parties perfect by means other
than filing, priority goes to the one who first perfected or filed, whichever
came first.630
The trouble with the approach taken by the MPSRP is that there is not
a single method of perfection that is prescribed expressly as mandatory with
respect of certain collaterals whereas, under UCC Article 9, the mandatory
methods of perfection are clearly spelled out. Thus, the system in the US is more
predictable, and secured creditors know the rules from the get-go.
9.4. Security Rights Perfected through Control and Registration of

Notice
Under the MPSRP, an acquisition security right could prevail over a competing
non-acquisition security right under some conditions.
On the one hand, the MPSRP stipulates that “an acquisition security right
in consumer goods, equipment, or intellectual property has priority as against
a competing non-acquisition security right created by the grantor provided
that: (a) the acquisition secured creditor is in possession of the asset, or (b) a
notice with respect to the acquisition security right is registered in the Collateral
Registry within seven working days after the grantor obtains possession of the
630
James J. White & Robert S. Summers, Principle of Secured Transactions, 156-157.
213
asset or acquires a right in intellectual property.”631 Hence, if the acquisition

secured creditor either possesses the collateral or registers its security right at
the CRO within seven working days after the grantor obtains possession of the
collateral, it has priority over a competing non-acquisition security right.
On the other hand, the MPSRP states that “an acquisition security right
in inventory has priority as against a competing non-acquisition security right
created by the grantor if: (a) the acquisition secured creditor is in possession of
the asset, or (b) a notice with respect to the acquisition security right is registered
in the CRO before the grantor obtains possession of the asset, and (c) the holder
of the acquisition security right notifies a secured creditor that has registered
a notice against the collateral of the same kind that it has or intends to obtain
an acquisition security right.”632 As such, an acquisition secured creditor over
an inventory should possess the collateral in order to secure the priority of its
claim. Alternatively, it must register its security right at the CRO before the
grantor obtains possession of the asset. In either case, the acquisition secured
creditor should inform the competing non-acquisition secured creditor of its
intended or actual security right over the collateral (for a detailed discussion
regarding the notification requirement, see infra § 9.5.1.2).
9.5. Super-Priority of Acquisition Security Rights
It has been discussed that security rights obtained to secure repayment of

acquisition financing may conflict with security rights in the debtor’s present
and future assets that float over the debtor’s shifting assets. Because acquisition
money finances the acquisition of a new asset, the security right associated with
that asset gets special protection in a form of acquisition security right super-
priority or purchase money security super-priority (UCC Article 9).
9.5.1. Acquisition Security Rights vs. Non-Acquisition Security

Rights
In trying to determine the priority of acquisition security right and non-
631
MPSRP Article 56 (1).
632
MPSRP Article 56 (2).
214
acquisition security right, the rules differ depending on whether the collateral
in which the acquisition security right is taken in inventory or non-inventory
collateral or whether the acquisition secured creditor provided money for
acquisition or supplied the good that is the collateral.
9.5.1.1. Acquisition Security Rights in Non-Inventory Good

A simple illustration might be helpful to discuss the rules of priority when
acquisition security rights and non-acquisition security rights conflict. A bank
extends a loan to a farm business that produces and distributes crops. The bank
has security rights in all the existing and future assets of the business. Let us
imagine further that the bank registers notice at the CRO (its security right is
perfected). The farm business needed the expansion of production and decided
to buy tractors. A supplier of tractors provided two tractors with partial payment,
maintaining security right in the tractors for the unpaid price. It can be added
that the tractor supplier registered a notice regarding its security right within six
working days since the delivery of the tractors. It is to be noted that the floating
security right which is perfected gives the bank security right in the tractors —
“future or after-acquired property security interest”. With filing for bankruptcy
of the farm business, the bank wants to enforce its claim against the tractors;
So does the tractor supplier. It is in such situations that the question of priority
arises, the question precisely being who has priority right over the tractors. Is
it the bank that has its security right perfected before the tractor supplier or the
tractor supplier?
The MPSRP recognizes the need to give super-priority to acquisition

security rights. It provides that “an acquisition security right in consumer goods,
equipment, or intellectual property has priority as against a competing non-
acquisition security right created by the grantor” if “the acquisition secured
creditor is in possession of the asset” or “a notice with respect to the acquisition
security right is registered in the Collateral Registry within seven working days
after the grantor obtains possession of the asset or acquires a right in intellectual
property.”633
633
MPSRP Article 56(1)
215
In our example, the security right of the supplier of the tractors is

registered within seven days after the debtor takes possession of the tractors.
Therefore, the supplier’s security right has priority over the security right of the
bank. The rules on the priority of acquisition security rights under the MPSRP
is similar to those under UCC Article 9. The relevant provision in UCC Article
9 states:
Except as otherwise provided in sections (g) purchase money security
in goods other than inventory or livestock has priority over conflicting
security interest in the same goods... if the purchase-money security
interest is perfected when the debtor receives the possession of the
collateral or within 20 days thereafter.634
This provision establishes the priority of acquisition security right over
any other conflicting security right provided that the acquisition security right
was perfected within 20 days since the debtor received the delivery of the
collateral.635 In connection with this, the acquisition security right enjoys such
priority over other security right perfected before the right of the acquisition
financier. The reason for this is that the acquisition security right secures an
obligation incurred to enable financing a particular item and therefore the
financier should have priority regarding that particular item vis-à-vis other
secured creditors.
One difference between the provision of MPSRP and UCC Article 9

is that while the acquisition secured creditor should file its security right in
Ethiopia in seven days since the delivery of the collateral to the debtor or should
take possession of the collateral, in the US, the acquisition secured creditor
should file registration in twenty days. While the twenty days period could lead
to uncertainty of transactions, the seven days window is more suitable as it
does not unreasonably undermine valid security rights that are entered into by
creditors who are unaware of the acquisition security right. The problem with
a longer period of time is that creditors that are unaware of the existence of
634
See UCC, §9-324(a).
635
UCC § 9-317(a) (2).
216
acquisition security right could extend loan and perfect it only to end up losing
their priority right to the acquisition secured creditor who registered notice later
(without violating the 20 days limit).
A problematic aspect of the MPSRP which recognizes the super-priority

of acquisition security rights is that it is unclear regarding when possession by
the secured creditor should be taken. The relevant provision gives acquisition
security right priority if “the acquisition secured creditor is in possession of the
asset” or “a notice with respect to the acquisition security right is registered
in the collateral registry within seven working days after the grantor obtains
possession of the asset or acquires a right in intellectual property.”636 The secured
creditor should register notice within seven working days after the debtor takes
possession of the collateral or acquires a right in the intellectual property. But
when should the secured creditor take possession in the alternative? Should the
secured creditor take possession within seven working days as in the case of
registering the notice or can possession be taken even later?
The most sensible interpretation is to say that the acquisition secured

creditor should take possession in seven working days after the debtor acquires
right in the collateral or register a notice within seven working days because
the purpose of the rule is to ensure that third parties are made aware of the
existence of acquisition security right in as short time as possible. Adopting a
different interpretation would be problematic. An acquisition secured creditor
could provide a loan by entering into a security agreement, fail to register a
notice within the seven working days grace period, and then maintain priority by
taking possession within thirty working days. Meanwhile, a subsequent secured
creditor could have granted a loan with security right in the same collateral with
the belief that the property of the debtor is unnumbered. This does not seem to
be the intended result.
This problem does not exist under UCC Article 9 which states “... if
the purchase-money security interest is perfected when the debtor receives the
636
217
possession of the collateral or within 20 days thereafter.” Since UCC Article

9 uses the term “perfected” which means rendering it effective against a third
party by possession, registration, or control, the requirement of 20 days applies
to all modes of perfection. Thus, in the US, the acquisition secured creditor
should perfect it within 20 days after the debtor takes possession, by the method
of the creditor’s choice.
9.5.1.2. Acquisition Security Rights in Inventory Good

With respect to security rights in inventory, the rule of priority is slightly
different. Under Article 56(2) of the MPSRP “an acquisition security right in
inventory has priority as against a competing non-acquisition security right
created by the grantor if, (a) the acquisition secured creditor is in possession of
the asset or (b)a notice with respect to the acquisition security right is registered
in the Collateral Registry before the grantor obtains possession of the asset and
(c) the holder of the acquisition security right notifies the secured creditor that
it has registered a notice against the collateral of the same kind, that it has or
intends to obtain acquisition security right. Unlike in the case of acquisition
security right in equipment, the super-priority for the acquisition security right
in inventory depends, in addition to registering notice or taking possession, on
notifying the previously secured creditor who has registered their security right
in the collateral in which the holder of the acquisition security right has obtained
or intends to obtain acquisition security right.637
A provides a loan to B, a motor vehicle vendor, and has security right

in its future inventories perfected by registering notice. B used that loan for
paying annual rent, restructuring office, salaries, and for supplies. C, a second
creditor provides a loan to B for the purchase of several motor vehicles by taking
security right in the inventories (the specific motor vehicles it has financed) and
perfects it by registering notice. In this case, A is a non-acquisition secured
creditor while C is an acquisition secured creditor. A’s security right extends to
any inventory received by B (as it has security right in all future inventories).
Since a security right can be created to secure future advance, it is also possible
637
218
that the arrangement between A and B involves A advancing loan every time
there is incoming inventory without necessarily financing a particular item. C’s
security right applies to the specific motor vehicles that it has financed (specific
inventories). It is in this type of scenario that a conflict arises between perfected
security right in the debtor’s future inventories and acquisition security right in
the same inventories.
In this case, C’s acquisition security right in the motor vehicles has
priority provided that C has taken possession of the collateral or registered
notice and has notified A of taking or having the intention to take security
right in the motor vehicles that B finances. It is worth asking why the duty of
notification is imposed on the acquisition secured creditor in case of security
right in inventories while it is not required with respect to acquisition security
rights in non-inventory collaterals.
The rule requiring the acquisition secured creditor having a security

right in inventory to notify a previous non-acquisition secured creditor having
security right in the same type of collateral is the same under UCC Article 9
notwithstanding the fact that there are certain deviations and exceptions that are
not relevant here.638 The explanation for the notification requirement given under
UCC Article 9 hinges on inventories financing practice. Official Comment 4 to
§ 9-324(UCC Article 9) explains the reasons for the requirement of notification
as follows:
The arrangement between an inventory secured party and its debtor
typically requires the secured party to make periodic advances against
incoming inventory or periodic releases of old inventory as new
inventory is received. A fraudulent debtor may apply to the secured
party for advances even though it has already given a purchase-money
security interest in the inventory to another secured party. For this
reason, subsections (b)(2) through (4) and (c) impose a second condition
for the purchase-money security interest’s achieving priority: the
purchase-money secured party must give notification to the holder of a
638
UCC § 9-324(a)- (c).
219
conflicting security interest who filed against the same item or type of
inventory before the purchase-money secured party filed or its security
interest became perfected temporarily under Section 9-312(e) or (f). The
notification requirement protects the non-purchase-money inventory
secured party in such a situation: if the inventory secured party has
received notification, it presumably will not make an advance; if it has
not received notification (or if the other security interest does not qualify
as purchase-money), any advance the inventory secured party may make
ordinarily will have priority under Section 9-322.639
In the absence of notification, in our example, it is possible for A to

extend a further loan to B without being aware of the acquisition security right.
Where no notification was given to A who is a non-acquisition secured creditor
(notification is given after additional loan was extended by A), C will not have
priority in the proceeds.
Another question worth asking is whether the MPSRP requires the

notification to be sent to the non-acquisition secured creditor in case of inventories
if the acquisition secured creditor perfected its security right by possession. The
relevant provision states if “the holder of the acquisition security right notifies
a secured creditor that has registered a notice against the collateral of the same
kind that it has or intends to obtain an acquisition security right.”640 Since the
purpose of this provision is to protect inventory financiers that provide credit
periodically, the logical reading of the provision should be that the debtor has
the duty to notify, (a) if it intended to take acquisition security right (b) if it
has already taken acquisition security right and intended to register it or has
registered it and (c) if it has taken acquisition security right and intends to take
possession of the collateral or has already taken possession of the collateral.
None of this information is less valuable to the supplier of inventory financing.
639
Official Comment 4 to UCC § 9-324.
640
220
9.5.2. Competing Acquisition Security Rights
The MPSRP states that “the priority between competing acquisition security
rights is determined according to Article 46 (the principle of priority by order
of registration).”641 Accordingly, the priority of competing acquisition security
rights is determined on the basis of their order of registration at the CRO.
Nonetheless, the principle of priority by order of registration does not apply to
an acquisition security right of a seller, lessor, or licensor that competes with
another acquisition security right. In this regard, the MPSRP stipulates that
“an acquisition security right of a seller, lessor, and licensor has priority over a
competing acquisition security right of a secured creditor.”642
The rule indicated above deserves a further explanation. A grants a loan

to B for the purchase of a tractor and takes a security interest in the tractor and
registers it at point 1. C grants a loan to B for the purchase of the same tractor
and takes a security interest in the tractor and registers it at point 2. In this
scenario, for the sake of simplicity, let us assume that B had identified a vendor
of the tractor and the tractor has been identified by a serial number. Both A and B
extended loans for the purchase of that tractor in which both have security rights.
In case of conflict, the security interest of A prevails because it is perfected by
filing registration earlier. However, this rule suffers from an exception if one of
the acquisition secured creditors is a seller, a lessor, and a licensor.
In our example, C instead of providing a loan for the purchase of the

tractor; is a vendor of the tractor. Instead of paying full price for the said tractor,
B makes a partial payment of the purchase price. In this arrangement, the
contract between A and B states that A has security right in the tractor to secure
repayment of the money loaned to acquire it. The Contract between B and C
states that C has a security right in the tractor to secure payment of the unpaid
purchase price of the tractor. If both A and C wish to enforce their claims,
there would a conflict between one acquisition security right (of the lender of
acquisition money) and another acquisition security right (of the seller of the
641
642
221
good who is paid the partial price). In this case, provided that both security
rights are perfected, the security right of the seller prevails over the security
right of the lender even though both are acquisition security rights.
The seller, the lessor, or the licensor should naturally perfect the security
right using one of the methods permitted (registration of notice or possession).
Even though the seller, lessor, or licensor has registered the notice later than the
holder of the competing acquisition security right, the former still wins in the
battle for priority. The policy rationale is simple. The one who has supplied the
asset that became collateral and has been paid a partial price for it shall have
its claim satisfied first from the collateral. Although the one that has supplied
money for the purchase of the same collateral has provided acquisition money,
since the debtor did not actually use the money to purchase the collateral, its
security right is subordinate to the security right of the seller. The same rule
applies in the case of the security right of the lessor and licensor of intellectual
property right.
The rule on the priority in case of competing acquisition rights is the same
under UCC Article 9. “If more than one security interests qualify for priority
in the same collateral in goods, inventory, and livestock, the security interest
securing an obligation incurred as all or part of the price of the collateral has a
priority over a security interest securing an obligation incurred for value given
to enable the debtor to acquire rights in or the use of collateral.”643 This rule
says that the security right securing the repayment of the price(full or partial) of
the collateral supplied by the creditor(lessor, consignor, a seller with retention
of title, etc..) has priority over the security right securing the repayment of loan
used to purchase the collateral.
9.6. Priority Right in Proceeds
The rule that security rights automatically extend to proceeds dictates the
analysis of the priority of proceeds because the conflict of security rights in
proceeds arise similarly to the conflict of security rights in the main collateral.
643
UCC § 9-324.
222
To analyze the rules on the priority of security rights in proceeds conveniently, it

should be helpful to start with a hypothetical scenario because the provisions on
the priority of security rights in proceeds under the MPSRP are complex, filled
with cross-references and vague rules.
Jinka Bank extends a loan to Omo Farms, a business that produces and
distributes crops, specifically for the purchase of two tractors identified by serial
numbers. Arbaminch bank extends loan for the purchase of the same tractors.
Both Banks obtain security right in the tractors to secure their respective loan.
Both banks register notice regarding their security right but Jinka Bank registers
its security right later than Arbaminch Bank. Omo Farms sells both tractors and
acquires four transportation vehicles and defaults to pay the loan to Jinka Bank
and Arbaminch Bank. In this scenario, the tractors(collaterals) are disposed
of and four vehicles are bought, representing proceeds of the collateral. The
question is who has priority in the proceeds? To respond to this question,
we need to look at the provision of the MPSRP which governs the priority
of security right in proceeds of collateral (corporeal proceed) or any general
principle that can aid us.
The starting point is Article 51 of the MPSRP which states that subject
to Article 58, a security right in proceeds that is effective against third parties
under Article 14 has the same priority over a competing security right as the
security right in the collateral from which the proceeds arose.644 Under Article
51, other than in the case of acquisition security rights, security in proceeds
that is perfected per Article 14 has priority over competing security rights as
the original security right. Stated differently, provided that it is perfected under
Article 14, the priority of security right in the collateral extends to proceeds.
However, the question is what does Article 14 cover? Is it about

corporeal proceeds or money proceeds or both? Article 14(1) covers proceeds
that are money, negotiable instruments, or the right to payment of fund in the
deposit account. In our example, the proceeds are vehicles (corporeal assets).
644
MPSRP Article 51.
223
Article 14(2) covers proceeds other than those covered by paragraph 1 of

the same article, meaning it covers proceeds that are corporeal assets. Under
this provision, if a security right in an asset is effective against third parties,
a security right in any type of proceeds originating from that security right is
effective against third parties:
i. for ten working days after the proceeds arise and

ii. thereafter, only if the security right in the proceeds is made effective
against third parties by one of the methods applicable to the relevant
type of collateral before the expiry of ten working days.
Thus, the security right in vehicles(proceeds) is effective for ten days

after the proceeds arise and thereafter only if the security rights in the proceeds
are perfected before the expiry of ten days. In other words, the security rights
of Jinka Bank and Arbaminch Bank are effective in the vehicles for ten days
without them doing anything and later if they perfect it. But this does not settle
the question of priority. Regarding priority, since Arbaminch Bank’s security
is perfected first, its security right is effective against the third party. Hence,
its security right extends to the vehicles. It means that for ten working days
counted from the acquisition of the vehicles, Arbaminch Bank’s security right in
proceeds is effective without the need for further steps. Upon the expiry of the
ten working days, Arbaminch Bank must register a notice within ten working
days after the expiry of ten working days expired and maintain its priority in the
proceeds. What if Arbaminch bank did not register notice in those ten working
days while Jinka Bank did? In this case, by the virtue of perfecting its security
right in the proceeds per Article 14(2)(b), Jinka bank would maintain its security
right in the proceeds and maintain priority per Article 51 of the MPSRP.
This is a very complex system of determining priority in proceeds. The

above analysis is to determine only the priority of security rights in proceeds
when the proceed is a corporeal asset and the original security rights are perfected
by registration of notice. The rule could have been written easily without this
much technicality.
224
Admittedly, the US has an equally complex system of priority of security

interests in proceeds. With respect to the priority of security right in proceeds,
UCC § 9-322 provides a unified set of rules. Of course, there are exceptions
and limitations, but they are relatively easily discernible. Thus, security right in
proceed which is a corporeal asset, where the original security right is perfected
through filing registration is determined either based on the date of filing of
the security right in the original collateral or the date of filing the security right
in the proceeds.
UCC § 9-322 (c) states that except as otherwise provided in subsection

(f), a security interest in collateral which qualifies for priority over a conflicting
security interest under Section 9-327(security interests in a deposit account),
9-328(security interest in investment property), 9-329(security interest in letter-
of-credit), 9-330(purchase of chattel paper or instrument), or 9-331(purchases
of instruments, documents, and securities under other articles) also has priority
over a conflicting security interest in proceeds of the collateral if: (A) the
security interest in proceeds is perfected; (B) the proceeds are cash proceeds
or of the same type as the collateral; and (C) in the case of proceeds that are
proceeds of proceeds, all intervening proceeds are cash proceeds, proceeds of
the same type as the collateral, or an account relating to the collateral.
Under UCC Article 9, security right in proceeds of a collateral (corporeal

proceeds) have priority if the security right in the original collateral is perfected
or the security rights in the proceeds are perfected (for instance the perfection of
the original collateral has expired in which case the security right in the proceed
must be perfected).645
In our example, instead of acquiring vehicles, what if Omo Farms has

acquired corporate bonds that pay interest rates? How would the priority rights
of Jinka Bank and Arbaminch Bank be determined? In this case, the proceed is
account receivable (regular interest rate payment from the bonds and ultimately
the capital). Again, the basic rule is in Article 51 of the MPSRP which states
645
UCC § 9-315 (c) & (d).
225
that a security right in proceeds that is effective against third parties under
Article 14 has the same priority over a competing security right as the security
right in the collateral from which the proceeds arose.646 Under Article 14(2) if a
security right in an asset is effective against third parties, a security right in any
proceeds of that asset is effective against third parties without any further act
by the grantor or the secured creditor, if the proceeds are in the form of money,
receivables, negotiable instruments, or rights to payment of funds credited to
a deposit account. In our example, Arbaminch Bank has perfected its security
right and its security right in the tractors has priority over the security right of
Jinka bank. That priority extends to the proceed, which is receivable, without
further steps being necessary. The rule is similar under UCC Article 9.647
The MPSRP provides special rules of priority of security rights in proceeds

of acquisition security rights. “In the case of an acquisition security right in
equipment, a security right in proceeds has the same priority as the acquisition
security right.”648 If a security right is created on an inventory or intellectual
property, “a security right in proceeds has the same priority as the acquisition
security right, except where the proceeds take the form of receivables, negotiable
instruments, or rights to payment of funds credited to a deposit account.”649
However, for such a priority right to be given effect, the MPSRP requires the
acquisition secured creditor to notify non-acquisition secured creditors on the
same collateral that it has registered a notice at the CRO.650
The general principle is that the priority in acquisition security rights

in equipment carries over to the proceeds [MPSRP, Article 58(1)]. Priority of
acquisition security right in inventory and in intellectual property carries over
to the proceeds unless, the proceeds are in a form of receivables, negotiable
instruments, and payment of fund in a deposit account [MPSRP, Article 58(2)].
For the priority in acquisition security right in inventory and intellectual
646
MPSRP Article. 51.
647
UCC § 9-322(d) & (e).
648
649
650
226
property to extend to the proceeds, the acquisition secured creditor must notify
non-acquisition secured creditors on the same collateral that it has registered a
notice at the CRO [Article 58(3)].
Article 58(2) of MPSRP does not extend priority of acquisition

security right in inventory and intellectual property to proceeds in a form of
receivables, negotiable instruments, and payment of fund in a deposit account
because inventories are goods sold or leased in the debtor’s normal course of
business and extending priority in proceeds that are not cash might lead to the
over-extension of the acquisition secured creditor’s priority right which may
undermine subsequent financiers. To illustrate this, ABC finances computers
that are sold during the normal course of the debtor’s business and has security
right which is perfected in the inventories. This means that ABC’s security right
applies to the computers and the proceeds (other computers that are bought
with the cash from the sale of the computers financed by ABC). Its priority
does not extend to negotiable instruments as this might potentially extend to
assets financed by other creditors.651 This rule takes into account the typical
inventory financing where the financier extends funds for incoming inventories.
It is sufficient to protect the financier through extending priority in proceeds in
a form of cash or incoming inventories(computers).
The second requirement under Article 58(3) is that the acquisition

secured creditor must send a notification to the holder of conflicting security
rights in the inventory (non-acquisition security right) before the proceeds
arose, or the acquisition secured creditor registers a notice in the Collateral
Registry. This requirement is meant to protect non-acquisition secured creditors
from financing the debtor without being aware that the debtor’s inventories are
financed by the acquisition secured creditor. Here is another example. A provides
a loan to B, a motor vehicle vendor, and has security interests in its future
inventories perfected by registering notice. B used that loan for paying annual
rent, restructuring office, salaries, and supplies. C, a second creditor provides
651
See DC Library, Code of the District of Columbia: § 28:9-324. Priority of purchase-money
security interests, https://code.dccouncil.us/dc/council/code/sections/28:9-324.html.
227
a loan to B for the purchase of several motor vehicles by taking security right
in the inventories and perfects it by registering notice. In this case, A is a non-
acquisition secured creditor while C is an acquisition secured creditor.
A’s security right extends to any inventory received by B (as it has

security right in all future inventories). Since security rights can be created to
secure future advance, it is also possible that the arrangement between A and
B involves A advancing loan every time there is incoming inventory without
necessarily financing a particular item. C’s security right extends to the specific
motor vehicles that it has financed (specific inventories). If B defaults on its
payment to C, C’s security right extends to cash received from the sale of the
motor vehicles it has financed or a motor vehicle that B has purchased by using
the cash proceed as long as that is identifiable and traceable. Nevertheless, C
must notify A of its acquisition security right in order to have priority in the
proceeds. This notification would help A not to provide additional funds to B.
In the absence of such notification, it is possible for A to extend a further loan
to B without knowledge of the acquisition security right. Where no notification
was made and A has extended an additional loan, C will not have priority in the
proceeds.652 These rules are similar under UCC Article 9 with some exceptions
and deviations. It would be of no help to discuss those exceptions other than
complicating the already complex topic in this field.653
9.7. Third Party Acquirer of Interest in a Collateral
A last major issue in relation to the priority of security rights is the right of third-
party acquirers. A third-party acquirer may be a purchaser or a transferee of the
collateral through the sale and other transactions.
The starting point to determine the right of the secured creditor vis-à-vis
a third party acquire of collateral is Article 54(1) of the MPSRP which contains
a rule that “[i]f the collateral is sold or otherwise transferred, leased or licensed
while the security right in that asset is effective against third parties, the buyer
652
Ibid.
653
UCC § 9-324(a)- (c).
228
or other transferee, lessee or licensee acquires its right subject to the security
right except as provided in this Article.”654 The provision sets the principle that
a secured creditor that has perfected its security right has the right to pursue the
collateral in the hands of a third party acquirer. The rule is based on the premise
that third parties acquiring an asset in which there is security right can determine
the status of the asset by making an inquiry at the CRO or at the appropriate
entity if the security right is perfected through non-filing method (e.g., a bank in
case of security right, in right to payment of fund in a deposit account perfected
through control agreement).
Nevertheless, is it feasible to verify the status of an asset in all

circumstances? Should a purchaser of computers displayed at the seller’s shop
inquire at the CRO whether the computers are encumbered by a security right of
a consignor or a lender with an acquisition security right? Should a transferee of
money verify whether there is a security right in the money? It is impracticable
to require transferees of an asset in which there is a security right to make
inquiries about possible security right in the asset across all types of assets as it
would make conducting trade and commerce nearly impossible. Thus, the rule
suffers from exceptions.
One of the exceptions is authorization by the secured creditor which

allows the debtor to transfer the collateral free of the security right. While
authorization by the secured creditor is important, it is self-explanatory and is
not subject to a detailed discussion here. Under the MPSRP, a “buyer or other
transferee of the collateral acquires its right free of the security right, if the
secured creditor authorizes the sale or other transfer of the asset free of the
security right.”655 Moreover, it states that “[t]he right of a lessee or licensee of
the collateral is not affected by a security right if the secured creditor authorizes
the grantor to lease or license the asset unaffected by the security right.”656
Under these provisions, the authorization of a secured creditor to the transfer
654
655
656
229
of collateral to a third party entitles the third party to acquire rights over the
collateral that is free of encumbrance.
9.7.1. Good Faith Acquirer
Many of the exceptions where a third-party transferee can take the property free
of security right fall under good faith acquisition(transfer). Although the rule
regarding good faith acquirer is slightly different with respect to different assets
acquired by a third party, the general requirements remain the same. There are
three requirements for the acquirer to take a collateral free of security interest —
ordinary course of business, lack of knowledge, and acquisition for value (each
of these requirements is discussed below).
9.7.1.1 Corporeal Assets
Article 54(4) of the MPSRP provides that a “buyer of corporeal collateral sold in
the ordinary course of the seller’s business acquires its rights free of the security
right, provided that, at the time of the conclusion of the sale agreement, the
buyer does not have knowledge that the sale violates the rights of the secured
creditor under the security agreement.”657
Under this provision, the buyer should not have the knowledge that the
sale violates the rights of the secured creditor under the security agreement at
the time of the conclusion of the sales agreement. It is to be noted that the
provision requires, not only knowledge of the existence of security right in the
collateral but also the fact that the sale violates the security agreement. If this
line of understanding is adopted, the knowledge of the existence of a security
agreement by itself does not imply that the transfer to the buyer is vitiated. This
is so because, in many instances, corporeal assets that are subjected to security
agreements are subject to sales. A retailer of cars who has received supplies
from a dealer under a consignment agreement sells the goods on behalf of the
consignor. The consignor has a title to the goods. The MPSRP considers this kind
of transaction as a secured transaction. In this case, the buyer may know that
the goods are being sold by the consignee who has no title. The buyer may even
657
230
be made aware that the consignor has security right in the goods(inventories).
Notwithstanding that, buyers would still buy the cars as they are for sale during
the ordinary course of the retailer’s business. This fact alone is not sufficient to
make the sale tainted.
Buyers need to have actual knowledge of the fact that the retailer is
selling the cars in violation of the security agreement with the consignor. If
knowledge of the existence of security right alone were to be sufficient, it would
be difficult to conduct daily sales transactions as buyers need to inquire from the
secured creditor whether the seller, they are dealing with is violating a security
agreement by conducting the sale. The knowledge of the violation of a security
agreement should be based on clear evidence such as the generally known
information that the debtor is undergoing bankruptcy or that it has defaulted on
its obligations to its financiers.
The requirement of providing value for the acquisition of the asset is

implied in the sales contract. While the MPSRP is not explicit about this, UCC
Article 9 explicitly requires that the buyer provides value for the collateral.658
The third requirement is that the sale is in the ordinary course of the seller’s
business; an ordinary course of business is not a requirement under UCC Article
9.659 From practical perspectives, the difference between UCC Article 9 and the
MPSRP is likely to be immaterial as the sale of collateral outside the ordinary
course of the debtor’s business will be taken into account in the determination
of the knowledge of the transferee as to the fact that the sale violates a security
right in the asset. Thus, if the debtor’s ordinary course of business is selling
computers, if it sells a car, the buyer should be alerted to make an inquiry as to
whether the sale violates a security agreement.
The MPSRP also prescribes similar conditions for the transfer of a

corporeal asset to a third party free of security right through leasing. It states
that “[t]he rights of a lessee of corporeal collateral leased in the ordinary course
of the lessor’s business are not affected by the security right, provided that,
658
UCC § 9-317(b).
659
UCC § 9-317(b).
231
at the time of the conclusion of the lease agreement, the lessee does not have
knowledge that the lease violates the right of the secured creditor under the
security agreement.”660 The requirements of the ordinary course of business, lack
of knowledge that the transfer violates an existing security right, and transfer for
value apply in the same way as in the case of transfer by sale.661
The MPSRP defines a corporeal asset as all types of goods including

money, negotiable instruments, negotiable documents, and certificated
securities.662 However, does Article 54(4) principle of good faith acquisition
apply to all corporeal assets including negotiable instruments, money, shares,
and bonds (certificated securities)? The response is negative because there are
special rules regarding some of these assets.
9.7.1.2. Negotiable Instruments and Documents
Although negotiable instruments are a type of corporeal assets based on the

statutory definition provided by the MPSRP, the general rule applicable to
the sale of corporeal assets under Article 54(4) does not apply to negotiable
instruments. The MPSRP prescribes that a “buyer or other consensual
transferees of an encumbered negotiable instrument acquires its right free of
a security right that is made effective against third parties by registration of a
notice in the Collateral Registry if the buyer or other consensual transferee: (a)
qualifies as a holder in due course under the Commercial Code; or (b) takes
possession of the negotiable instrument and gives value without knowledge that
the sale or other transfer is in violation of the right of the secured creditor under
the security agreement.”663 It also states that a “transferee of an encumbered
negotiable document that obtains possession of the document and gives value
without knowledge that the sale or other transfer is in violation of the rights of
the secured creditor under the security agreement, acquires its right free of a
security right in the document and the corporeal assets covered thereby that is
made effective against third parties under this Proclamation.”664
With respect to negotiable instruments, there are two alternative

requirements. The first requirement is that the buyer or transferee qualifies as a
232
holder in due course under the ECOMC. The ECOMC defines a holder in due
course as “a person who has acquired a negotiable instrument in due course, in
accordance with the rules applying to negotiation.”665 The rules of negotiation
differ depending on whether the negotiable instrument is to the bearer, to
specified person to order.666 While an instrument to bearer is transferred by mere
delivery, to a specified person is transferred by the entry of the name of the
person in the instrument and in the register of the issuer of the instrument.667
Finally “Instruments to order may be transferred by endorsement, followed by
delivery of the instrument to the beneficiary under the transfer.”668 A party that
acquires negotiable instruments according to the correct mode of transfer(holder
in due course) takes it free of the security right.
Alternatively, the acquirer takes the negotiable instrument free of

security right if it takes possession of the negotiable instrument and gives value
without knowledge that the sale or other transfer is in violation of the right of the
secured creditor under the security agreement. In this case, the requirement of
lack of knowledge and giving value must be fulfilled while the requirement for
an ordinary course of business is not imposed. Since the transfer of negotiable
instruments do not necessarily presuppose an organized market or a regular
business channel, the law does not require the transfer to be made during
the ordinary course of the transferor’s businesses as there may not be such a
business. This alternative method of acquiring negotiable instrument free of
security right is equally applicable to negotiable documents (e.g., bill of lading,
consignment note, warehouse receipt).669
It is worth observing that UCC Article 9 has a comparable rule for good
faith acquisition of negotiables instruments. Section 9-330(d) states “except as
otherwise provided in Section 9-331(a), a purchaser of an instrument has priority
over a security interest in the instrument perfected by a method other than
665
ECOMC Article 718.
666
ECOMC Article 719.
667
ECOMC Article 721 & 723.
668
ECOMC Article 723.
669
233
possession if the purchaser gives value and takes possession of the instrument
in good faith and without knowledge that the purchase violates the rights of the
secured party.”670 A holder in due course also takes a negotiable instrument free
of security right.671
9.7.1.3. Intellectual Property Rights
The rules regarding good faith licensing agreement protects a third party who
entered into a licensing agreement to produce a patented product for instance.
The requirements are similar to the ones that apply to corporeal assets: ordinary
course of business, providing value (licensing fee), and lack of knowledge that
the licensing agreement violates security right.
Under the MPSRP “the rights of a non-exclusive licensee of intellectual

property licensed in the ordinary course of the licensor’s business are not affected
by the security right, provided that, at the time of the conclusion of the license
agreement, the licensee does not have knowledge that the license violates the
right of the secured creditor under the security agreement.”672
UCC Article 9 takes a slightly different approach. Section § 9-321(d)

states that “a licensee in the ordinary course of business takes its rights under a
nonexclusive license free of a security interest in the general intangible created
by the licensor, even if the security interest is perfected and the licensee knows
of its existence.”673 The provision makes it clear that knowledge of the existence
of perfected security interests is irrelevant. The wording is unlikely to make
any difference. Even under the MPSRP, the requirement is a lack of knowledge
that the licensing violates security agreement, not the mere presence of security
agreement.
9.7.1.4. Money and Funds Paid in Deposit Account
Money presents a slightly different issue as it circulates at high speed in the
670
UCC § 9-330(d).
671
UCC § 331(a) & § 3-302. Regarding negotiable documents, see UCC § 9-331.
672
673
UCC § 9-321(d).
234
economy. Thus, the rule of good faith acquisition of money should be slightly
different from those governing good faith acquisition of other corporeal assets.
The MPSRP stipulates that a “transferee that obtains possession of money that
is subject to a security right acquires its rights free of the security right unless
that person has knowledge that the transfer violates the right of the secured
creditor under the security agreement.”674 This provision has three key features
that require attention. First, the provision does not envision the transfer of value
in exchange for the money that is acquired by the transferee. Thus, whether
the transfer is gratuitous or for monetary consideration is irrelevant. Second,
the acquirer needs to take possession. Third, the transferee should not have the
knowledge that the transfer violates an existing security right.
Under UCC Article 9, the requirements are slightly different. “A

transferee of money takes the money free of a security interest unless the
transferee acts in collusion with the debtor in violating the rights of the secured
party.”675 UCC Article 9 does not expect the transferee of money to take into
account whether the transfer violates an existing security right. It is sufficient
that the transferee does not collude with the debtor in violating the secured
party’s right.
The rule in UCC Article 9 regarding the transfer of money is more

appropriate. First, a security interest in money is made effective against third
parties by taking possession of the money. Consequently, a third party cannot
acquire the money in which there is a security interest effective against third
parties, for the money stays in the hands of the secured party. The only exception
would be if the debtor illegally takes possession of the money over which there
is security interest and transfers it to a third party. Even in this case, the third
party will take the money free of the security interest unless the third party
colludes with the debtor, i.e., knowingly aids and abets the debtor to transfer
the money in violating the security right to the creditor. It is in this context that
UCC Article 9 has the requirement of collusion.
674
MPSRP Article 63.
675
UCC § 9-332(a).
235
The rule under the MPSRP regarding good faith acquisition of money
is based on the misguided rule of perfection. While in the US, security right
in money can only be perfected by taking possession, in Ethiopia, it can be
perfected by notice filing. The latter is absurd as no transferee of money
inquires at the CRO about the existence of security right in the money before
taking possession of money. The secured party should perfect its security right
in money by possession. If possession is the method of perfection which it is
under UCC Article 9, the assumption is that third parties will always acquire
the money in good faith, and the room for acquiring money in which there is
security interest without good faith is limited. The law in Ethiopia should be
amended both regarding the perfection of security right in money (see supra
section 8.4.1.3) and acquisition in good faith.
Finally, regarding payment of fund in a deposit account, the MPSRP

states that “a transferee of funds from a deposit account pursuant to a transfer
initiated or authorized by the grantor acquires its rights free of a security
right in the right to payment of funds credited to the deposit account unless
the transferee has knowledge that the transfer violates the right of the secured
creditor under the security agreement.”676 Once again, this rule makes little
logical and practical sense. Security right in right to payment of fund in a
deposit account is perfected either by control agreement where the financial
institution agrees not to authorize transfer/withdrawal without the authorization
of the secured party or by the secured party becoming the account holder. If the
secured party is the bank itself, no further step is required under the MPSRP
other than concluding a valid security agreement. Although the MPSRP does
not explicitly exclude perfection of security right in right to payment of fund
in a deposit account through registering notice, it has been observed earlier
that perfection by control gives the creditor super-priority right, thus effectively
making perfection through notice filing impotent.
Thus, it is improbable that experienced lenders would perfect a security

right in the right to payment of fund in a deposit account through notice filing.
676
236
This means that they are likely to perfect it through control. If that happens, third
parties can acquire fund deposited in a bank account only if (a) the financial
institution breaches the control agreement with the secured party and decides
to transfer the fund without an instruction from the secured creditor (b) the
secured party authorizes the transfer (c) the grantor and the transferor defraud
the financial institution by impersonating the secured creditor and giving
instruction of transfer on behalf of the secured creditor and (d) the bank makes
a mistake and authorizes the transfer despite the control agreement requiring it
to have instruction from the secured party. The instances in which the transferee
can acquire the fund honestly are (a) when the secured party authorizes in which
case there would be no question and (b) if the bank makes a mistake. In the latter
case, the third party can possibly acquire the fund knowing that the transfer
violates the security agreement. However, this is a rare occasion that the rule has
almost no practical application to it. Exceptionally, the transferee can acquire a
fund deposited in a bank account by colluding with the grantor/debtor.
Due to the foregoing reason, UCC Article 9 has a different requirement

for good faith acquisition of funds paid in an account. “A transferee of funds
from a deposit account takes the funds free of a security interest in the deposit
account unless the transferee acts in collusion with the debtor in violating the
rights of the secured party.”677 UCC Article 9 rule is in line with the rule that
security right in the right to payment of fund is perfected by control.678
9.8. Conclusion
This chapter analyzed the rules pertaining to determining conflicting proprietary

interests in collateral. The analysis which also utilized examples is useful for
practitioners, judges, and students. Nevertheless, the rules governing priority
also deserve the attention of policymakers and professionals interested in
simplifying the rules through reform. In this regard, there are three key areas
that require rethinking.
677
UCC § 9-332(b).
678
UCC § 9-312(b).
237
First, the MPSRP should clarify the conditions under which a proceed
of collateral which is a corporeal asset has priority. The current rules make
complex internal cross-references that require interpretive exercises. Second,
the requirements for good faith acquisition of money and payments made in
a deposit account (lack of knowledge that the transfer violates security right)
should be removed and be replaced by the requirement that the third party does
not collude with the debtor.
238
Chapter Ten: Private Enforcement of Security Rights
10. 1. Introduction
Any secured transactions system, no matter how rudimentary it is, has
enforcement mechanisms. Nevertheless, the way enforcement is dealt with
and the ease with which enforcement can take place differs from one system
to another. Modern secured transactions law encourages private enforcement
of security rights as an efficient alternative to judicial enforcement. Private
enforcement of security rights refers to an enforcement process without the
involvement of the court.
An efficient and fair procedure of enforcement of security rights serves

the interests of both the debtor and the creditor. While the creditors could enforce
its claim at a lower cost, the debtor would in turn benefit from increased access
to credit that results from the creditor’s willingness to extend collateralized loan.
As traditional court administered enforcement of security rights is generally
lengthy and inefficient, private enforcement mechanisms remove the judiciary
from the enforcement process and thereby reduces the cost of enforcement.679
This chapter analyses the provisions of the MPSRP that allow private
enforcement of security rights —self-help repossession, strict foreclosure,
and private disposition of collateral. Judicial enforcement of security rights is
outside the scope of this chapter as judicial enforcement heavily relies on civil
procedure rules that readers should study separately.
679 See Catalin-Gabriel Stanescu, Self-Help, Private Debt Collection, and the Concomitant
Risks, 1 & UCC § 9-609.
240
10.2. Self-Help Repossession

Self-Help repossession refers to the secured creditor’s right to take possession of
the collateral upon the debtor’s default without the assistance of a state official
(court, bailiff, or any other state authority).680 With its origin in US Common
Law codified under UCC Article 9, it is one of the contentious institutions in
the secured transactions law, especially in civil law countries. Addressing how
continental European lawyers perceive self-help repossession, Warren and Walt
wrote “the Europeans tend to see it as another example of American Barbarism:
You mean the creditor can just go and steal the property back?”681 Although
the concept of self-help repossession is born in the US, it has gradually been
adopted in other countries in some form.
10.2.1. Self-Help Repossession in Ethiopia

As part of providing wider room for private enforcement of security rights, the
MPSRP allows the secured creditor to take possession of the collateral upon the
debtor’s default without applying to a court, if the grantor has consented to it
in the security agreement or at the time the secured creditor attempts to obtain
possession of the collateral, the grantor or any other person in possession of
the collateral does not object to the repossession.682 The MPSRP states that “if
the grantor or any other person in possession of the collateral objects to giving
possession of the collateral to the secured creditor, the collateral registry office
shall have the power and duties to order the police force.”683 With regards
to goods that can be rendered unusable, the MPSRP States that “The secured
creditor may, without removal, render the collateral unusable and dispose of it on
the grantor’s premises.”684 These provisions introduced self-help repossession
as a remedy to secured creditors in all types of collaterals. Before discussing the
pre-conditions for the execution of self-help repossession, it is useful to have a
680
See Catalin-Gabriel Stanescu, Self-Help, Private Debt Collection, and the Concomitant
Risks, 1.
681
William D. Warren & Steven D. Walt, Secured Transactions in Personal Property, 269.
682
683
684
MPSRP Article. 83(3).
241
cursory review of the Pre-2019 legal rules on self-help repossession in Ethiopia.
In principle, self-help repossession was not allowed as a remedy to a

secured creditor under Pre-2019 Ethiopian secured transactions law, whether
under the ECC or any other statute. There were two exceptions to that —(a) the
lessor’s right to repossess a leased good under the financial leasing law685 and (b)
the right of the creditor to repossess aircraft and aircraft engines under the CTC
and the Aircraft Protocol (Ethiopia being a party to both legal instruments).686
The leasing industry has been an infant in Ethiopia which requires

encouraging investors in the sector, inter alia, by creating a conducive legal
regime for the enforcement of the lessor’s right. The idea of efficient enforcement
of security rights is equally important in the airline industry, perhaps more
pronounced as international financiers often seek a legal framework for efficient
enforcement of security rights in aircraft and aircraft engines, aircraft objects,
and helicopters. Regarding requirements for executing repossession, the leasing
law and the CTC follow different standards.
Under the leasing law, the lessor can take possession of the collateral
upon giving 30 days’ notice to the debtor to remedy the default or the breach of
contract.687 What happens if the lessee does not surrender the good peacefully?
What if the lessee has paid 90% of the price (in case of hire-purchase)? Doesn’t
the lessee have a stronger claim in the good than the lessor? If the latter is true,
doesn’t the law need to strike a balance between efficient enforcement of the
lessor’s right and protection of the debtor by prohibiting self-help repossession
in those circumstances? The financial leasing law was not designed with these
conflicting policy ideals equally being given consideration. However, this law
is now inapplicable to hire-purchase as the MPSRP has brought hire-purchase
under the umbrella of secured transactions law and subjects it to the enforcement
rules of the MPSRP.
685
The Capital Goods leasing Proclamation No. 103/1998 Article 5.
686
The Cape Town Convention, Article 8(1) and the Aircraft Protocol Article XI (2) Altenative A.
Signed on 16.11.2001 ratified on21.11.2003 and the convention came into force on 01.03.2006.
687
The Capital Goods Leasing Proclamation Article 6.
242
Under the CTC, which is the applicable legal regime on international

security rights in aircraft and aircraft engines, aircraft objects, and helicopters,
the secured creditor can take possession of the collateral upon the debtor’s
default if the debtor has agreed to it at any time (in the security agreement or
in a separate agreement drawn up later).688 Therefore, one difference between
the leasing law and the CTC is that in the latter, the debtor’s agreement to
the repossession is a pre-requisite. If an agreement has not been reached in
the security agreement or subsequently, self-help repossession is excluded as a
method of enforcement. The CTC makes an exception with respect to financial
lease and sale with retention of title. Financial lessors and sellers with reservation
of title have an even stronger right with respect to self-help repossession. Article
10 of Convention states that “In the event of default under a title reservation
agreement or under a leasing agreement as provided in Article 11, the conditional
seller or the lessor, as the case may be, may: (a) subject to any declaration that
may be made by a Contracting State under Article 54, terminates the agreement
and take possession or control of any object to which the agreement relates;
or (b) apply for a court order authorizing or directing either of these acts.”689
Ethiopia has not made a declaration that deprives the secured creditor the of
right to take possession of the collateral without court involvement.690 The
CTC “While promoting its foundational policy, i.e., efficient enforcement of
security rights, strikes a balance between the right of the creditor on the one
and the debtor on other hand, by subjecting repossession to prior agreement.”691
The Ethiopian leasing law not only ignores circumstances where the debtor
might have a better stake in the leased good relative to the lessor but also the
undesirable and unfortunate results that might occur during the repossession
688
The Cape Town Convention Article 8(1) (a).
689
690
Declaration Lodged by the Federal Democratic Republic of Ethiopia under the Cape Town
Convention at the Time of the Deposit of its Instrument of Ratification, https://www.unidroit.
org/status-2001capetown?id=467.
691
Asress Adimi Gikay and Cătălin Gabriel Stănescu (2018), ‘The Reluctance of Civil Law
Systems in Adopting the UCC Article 9 “Without Breach of Peace” Standard — Evidence from
National and International Legal Instruments Governing Secured Transactions” Journal of Civil
Law Studies 10, no.1 (2017): 38.
243
for instance resistance from the lessee and an ensuing exchange of potential
physical violence. How does the MPSRP address self-help repossession?
10.2.1.1. Requirements for Self-Help Repossession under the

MPSRP
There are two conditions for pursuing self-help repossession under the MPSRP
— (1) default and (2) prior agreement of the debtor or absent such an agreement,
lack of objection by the debtor during the repossession.692 There are a plethora of
issues that could arise under the self-help repossession provision of the MPSRP.
First, considering that this is a relatively new legal procedure in Ethiopia,

it takes time for consumer debtors to be familiarized with the procedure. Hence,
with the current level of literacy in Ethiopia, creditors could impose standard
self-help repossession clauses on debtors that could be hidden in a long security
agreement that may not necessarily be brought to the consumer debtors’
attention. This means that the consumer could be taken by surprise when the
secured creditor shows up to take possession of the collateral, with no court order
and no prior notice. Second, in cases where there is no prior agreement for the
repossession, the MPSRP merely states that the creditor can take possession of
the collateral if the debtor does not object to it. What form should the objection
take? Does the silence of the debtor when the creditor takes possession of the
collateral constitute lack of objection? Does the mere statement by the debtor
for instance as “it is my car, do not take it?” not accompanied by any other act
constitute an objection capable of stopping the creditor from repossessing the
collateral? What if the repossession agent shows up with an armed police officer
who just happened to be a few meters away while the repossession is taking
place? Does the failure of the debtor to oppose the repossession due to fear of
police violence constitute a lack of objection?
It certainly is intimidating for certain persons to see an armed police

officer accompanying the repossessor, even if the police officer does not actually
assist the repossessor. It could prevent the debtor from making a reasonable
692
244
objection to the repossession. In the US, a court has found that since “an officer’s
mere presence has the ability to intimidate the debtor into compliance with the
repossession, the officer’s involvement constituted a breach of the peace as a
matter of law.”693
The MPSRP does not state under what conditions the creditor can execute
the repossession even in the instance where the debtor has consented to it in a
prior agreement. If the creditor has security right in a car (a leased car), parked
in a locked premise, can the creditor break into the premise? May the creditor
take possession of the car from a parking lot without the debtor’s knowledge and
inform the debtor on the telephone of the repossession? Shouldn’t the debtor be
given a notice of the creditor’s intention to repossess the collateral and thereby
be given the opportunity to rectify the default?
The MPSRP also foresees that “if the grantor or any other person in
possession of the collateral objects to giving possession of the collateral to the
secured creditor, the collateral registry office shall have the power and duties
to order the police force.”694 Supposedly, this provision applies where there has
been a prior agreement for repossession and the debtor refuses to surrender the
collateral. Formalistically speaking, this turns the procedure to state- sanctioned
enforcement and thus it could be argued that it is no more self-help repossession.
Nevertheless, the rule is the extension of self-help repossession right. Either
way, the provision does not clarify what the CRO orders the police to carry out.
Is it to carry out the repossession on behalf of the creditor? If so, can the police
use force to that effect? What if the debtor protests the repossession on the
ground that it did not default on its obligation? Aren’t the creditor and the CRO
acting as ultimate umpires in their own cases at the expense of the debtor’s
right to present his/her case before an independent judge? These are legitimate
questions to ask.
693
Stone Mach, 463 P.2d at 652. See also Aaron Lowenstein, “Law-Enforcement Officers,
and Self-Help Repossession: A State-Action Approach,” Michigan Law Review 111, Issue
7(2013):1367.
694
245
To the author’s best knowledge, the MPSRP has the most aggressive
private enforcement clause in modern secured transactions law, not just because
it fails to safeguard consumer debtors from abuses but because it goes further
to empowering the Collateral Registry Office to order the police to effect
repossession without a court proceeding.
10.2.1.2. Requirements for Self-Help Repossession in the US and

other Civilian Systems
As self-help repossession is a new enforcement mechanism in Ethiopia;
practitioners, judges, and policymakers need to identify its core features and
contours. The implementation of the procedure involves striking a careful
balance between various competing interests — the secured creditor, the
debtor, and the public at large, as experience has shown in the US. To have
a clear idea about the self-help repossession procedure, the overview of self-
help repossession under UCC Article 9 and how the balance between efficient
enforcement of security rights on the one hand and protection of consumer
rights, on the other hand, is struck should be valuable. An insight into self-help
repossession in other civil law jurisdictions is also provided to demonstrate that
the solutions to the challenges posed by self-help repossession differ across
legal families, with civilian systems being more averse to the procedure.
Under UCC Article 9, the secured creditor has the option of repossessing
the collateral under section 9-609 through either judicial or non-judicial
means.695 Non-judicial repossession should be conducted without breach of the
peace.696 The “without breach of the peace” standard being undefined by UCC
Article 9 is left to the determination of courts, on an ex post facto basis.697 The
decision as to whether there is a breach of peace in a given case is easier in
instances involving physical assault by the repossessor, whereas it is difficult in
cases involving emotional harms or when it is conducted through tactics whose
effect on the debtor are psychological than physical as in the case of the mere
695
See William D. Warren & Steven D. Walt, Secured Transactions in Personal Property, 277.
696
UCC § 9-609.
697
Ryan McRobert “Defining Breach of the Peace in Self-Help Repossession,” 569, 569.
246
presence of law enforcement officer during at the time of the repossession.698

The objective of subjecting self-help repossession to the without breach of the
peace standard is to protect consumer debtors from abuses that can occur during
self-help repossession.
Although discussing every possible scenario involving breach of

the peace standard is not plausible, it is enlightening to discuss some of the
situations in which US courts found the violation or otherwise of the standard.
McRoberts provides comprehensive, yet simple and policy-based analysis of the
“without breach of the peace” standard under UCC Article 9.699 He emphasizes
the inconsistency of court decisions on the breach of the peace standard across
states and federal courts in the US.700 While there are cases where the courts tend
to agree on, for example in cases involving physical assault or violence during
the repossession,701 there are borderline cases such as trespass, involving a law
enforcement officer as a mere observer during the repossession, emotional harm
on third parties, and the effect of debtor’s verbal objection during repossession
where courts do not have a uniform view on.702
McRoberts argues that since the inconsistency in court decisions on

breach of the peace in the US means unpredictability to creditors involved in
interstate trade, the fact that UCC Article 9 left breach of the peace standard
undefined defeats the very purpose of the UCC.703 He recommends the
amendment of UCC Article 9.704 Regardless of the inconsistency, under UCC
Article 9, violation of the breach of peace standard could entail criminal liability
in cases of grave breach such physical assault, compensatory damages, statutory
and punitive damages as well as the secured creditor’s loss of the right to
698
Ibid., 570-571.
699
Ibid., 117.
700
Ibid., 578-594.
701
See Ford Motor Credit Co. V. Herring, 589 S.W.2d 584, 586 (Ark. 1979) & McCall v. Owens,
820 S.W.2d 748, 751 (Tenn. Ct. App. 1991). 120.
702
Ryan McRobert “Defining Breach of the Peace in Self-Help Repossession,” 582-591. See
also Chapa v. Traciers & Assocs., 267 S.W.3d 386 (Tex. Ct. App. 2008).
703
Ryan McRobert “Defining Breach of the Peace in Self-Help Repossession,” 587.
704
Ibid., 594.
247
deficiency claim.705 Despite all the legal tools regulating self-help repossession
and limiting its boundaries in the US, the occurrence of confrontation between
repossession agents and debtors ending in tragic deaths of repossession agents
or debtors is common.706
Most civil law countries are skeptical about self-help repossession. If

they do embrace the procedure in their legal systems, they provide tools for
protecting consumers from abusive enforcement practices. In Romania, prior to
2011, self-help repossession was subjected to the express consent of the debtor
where the repossession clause should be inserted in the security agreement in
a specifically prescribed format — in bold capital letters.707 This requirement
was introduced to ensure that the repossession clause is brought to the attention
of consumers in the proper form. In the United States, the civil law state of
Louisiana refused to adopt self-help repossession in its UCC Article 9 form by
prohibiting it as a general principle.708 Hence, in Louisiana, the creditor has no
right to repossess the collateral without court involvement except for one type of
collateral — an automobile.709 Under Louisiana’s Revised Additional Remedies
Act, a secured creditor can repossess automobile collateral (1) by sending a
notice to the debtor upon default,710 (2) by clearly stating in the notice that
“Louisiana law permits repossession of motor vehicles upon default without
further notice or judicial process and (3) without breaching the peace.”711
Besides limiting self-help repossession to automobiles and subjecting it

to strict standards, the Louisiana Revised Additional Remedies Act illustratively
lists the conditions under which breach of the peace occurs. For instance, there is
705
See generally UCC Sections 9-625 et seq.
706
Associated Press via NBC, Violence between Repo Men, Car Owners Rising (NBC News,
2/27/2009). See also Rick Lessard, Tow truck driver murdered repossessing vehicle ‘never saw
it coming, (Fox61, Jan. 18, 2018).
707
Catalin-Gabriel Stanescu, Self-Help, Private Debt Collection, and the Concomitant Risks,
105.
708
LA Rev Stat § 10 :9-609
709
La. R.S. § 6 :966 (2015).
710
Ibid., § 6 :966(2).
711
LA Rev Stat § 6 :965.
248
a breach of peace in case of unauthorized entry into the debtor’s premise (locked
or unlocked) by the creditor/repossessor to conduct the repossession or when
the repossession takes place despite the debtor’s verbal objection.712 Louisiana
is averse to self-help repossession due to the incompatibility of the procedure
with keeping peace713 as confirmed by courts on multiple occasions.714 The
ultimate result of Louisiana’s stance on self-help repossession is the protection
of consumer debtors from abusive security rights enforcement practices.
In Ethiopia, a country that has a much less literacy level, low respect
for rule of law and, a high tendency for abuse of power and police violence, the
MPSRP’s failure to provide safeguards for consumer rights during enforcement
of security rights by conferring on the creditor and the CRO the power to order
the police to assist in the process is deeply troubling. There is no legal provision
under which consumer debtors can challenge the wrongful conducts that could
occur during private enforcement of security rights and ask for redress.
10.3. Judicial Repossession

The MPSRP permits the secured creditor to take possession of the collateral or
render it unusable, upon the debtor’s default provided that the debtor has agreed
to the repossession or does not object to it (see supra section 10.2.2.2). If the
debtor resists self-help repossession, the secured creditor has the right to request
the CRO to order the police, presumably to assist the secured creditor to take
possession of the collateral. Earlier it has been argued that the MPSRP provides
room for abusive credit recovery practice where the CRO might exercise its
power without reasonable restraint. Moreover, this turns the secured creditor
and the CRO into an independent judiciary. There could be various reasons the
debtor might resist self-help repossession including the lack of prior agreement
712
La. R.S. § 6 :966 (2015), § 6 :965. C.
713
Paul Joseph Ory, “Non-Judicial Disposition under Louisiana Commercial Law Chapter
Nine,” Louisiana Law Review 51, no. 6(1991): 1254.
714
In Liner v. Louisiana Land and Exploration Company, Justice Tate stated “…this is done
interest of preservation of peace in society and as a deterrent against self-help.’ 319 So. 2d 766
(La. 1975). See also Guidry v. Rubin, 425 So. 2d 366, 371 (La. App. 3d Cir. 1982) & Grandeson
v. International Harvester Credit Corp., 223 La. 504, 66 So. 2d 317.
249
or an allegation that the debtor did not default on its payment. These issues
should be subject to judicial scrutiny, not an administrative decision by the CRO.
Nevertheless, secured creditors also need to have a fast and efficient

enforcement method, even if self-help repossession fails. To strike a fair balance
between the interests of the debtor and the creditor, other jurisdictions recognize
a faster procedure than regular court procedure — judicial repossession.
10.3.1. Judicial Repossession as a Middle Ground

Judicial repossession is a middle ground between self-help repossession and
regular judicial enforcement of security rights. The MPSRP does not have a
provision dedicated to judicial repossession.
In the US, when the secured party could not or does not want to pursue
self-help repossession, as an alternative, it can resort to repossession by judicial
action.715 Generally, UCC Article 9 gives the secured creditor the right to take
possession immediately upon default. Since the law protects the secured status
of the creditor, it is entitled to take possession of the collateral without the
involvement of state or court agents, provided that there is no breach of peace.
This would generally save the secured creditor time, effort, and money. However,
in case the debtor resists self-help repossession or the creditor does not want to
pursue it716 UCC Article 9 provides the option to the secured creditor to conduct
judicial repossession.717 In this case, the secured creditor must resort to judicial
measures and obtain a court order for the possession. The sheriff then enforces
the order. Most states authorize the sheriff to use force to take possession,718 a
715
James J. White & Robert S. Summers, Principle of Secured Transactions (Thomson West,
2007), 221.
716
The creditor might be reluctant in resorting to self-help repossession in order to avoid the
risks of being held liable for potential violations of the without breach of peace standard.
717
UCC § 9-609 states that after default, the secured creditor (1) may take possession of the
collateral; and (2) without removal, may render equipment unusable and dispose of collateral
on a debtor’s premises under Section 9-610. (b) [Judicial and non-judicial process.] A secured
party may proceed under subsection (a): (1) pursuant to judicial process; or (2) without
judicial process, if it proceeds without breach of the peace.
718
Lynn M. LoPuckci, Secured Credit: A System Approach, Elisabeth Warren and Lynn M.
LoPucki, ed. 7th ed. (Austin: Wolters Kluwer, 2012), 42.
250
right the secured creditor making use of its self-help remedy does not have. The
most common way of obtaining an order is by filing an action for replevin.719
The mechanism might be familiar to civilian systems as well. The secured

creditor files a civil action against the debtor and, immediately upon filing, it
then moves for an order granting immediate temporary possession pending the
outcome of the case. Typically, this does not take more than ten to twenty days.
In some US states, the procedure is ex parte which means the debtor may not
even be informed and the case is solved in a matter of hours.720 In order to
obtain the writ of replevin, all the creditor needs is to establish at the hearing the
likelihood that it will prevail in the action on the merits.721 Usually, the writ is
conditioned by the posting of a bond, in order to protect the debtor in case the
creditor’s case will be rejected. In theory, the debtor can regain possession of
the collateral by posting a similar bond in favor of the creditor, but where the
default is due to the debtor’s inability to pay the likelihood that the debtor will
be able to post such a bond is low.
The distinguishing feature of this procedure is its swiftness. Once the

writ is issued and the collateral is in the creditor’s possession, the debtor has
no reason to defend the action of replevin, and judgment is entered by default.
722
As a result, a secured creditor obtains possession of collateral (provided it
is a tangible good) through judicial procedure within two or three weeks, after
which the creditor can foreclose the collateral by selling it in a commercially
reasonable manner as per UCC Article 9. Over-cautious secured creditors can
719
Ibid., 41. “By far the most common users of replevin today are secured creditors entitled to
possession of collateral pursuant to UCC Section 9-609.
720
See Del’s Big Saver Foods, Inc v. Carpenter Cook, Inc., 603 F Supp. 1071 (W.D. Wis. 1985)
where the secured creditor successfully filed an action for replevin without notice to the debtor
and obtained the writ on the same day. Later that day, the secured creditor presented the writ to
the debtor and demanded possession of the collateral, under threat that it will return with the
sheriff for enforcement. The debtor complied and surrendered possession of the collateral. The
federal case brought by the debtor alleging violation of the constitutional right to due process
was dismissed. Nevertheless, states, where no notice is required, are the exception, not the rule,
which means that generally, the procedure will not be as fast as the one described here.
721
Lynn M. LoPuckci, Secured Credit: A System Approach, 41.
722
Ibid., 41.
251
choose to resort directly to judicial repossession, for the procedure is not much
lengthier than the self-help remedy and, provided the debtor’s default is real, it
poses fewer risks.723 It might explain for instance why self-help repossession
maintains a limited attraction in Louisiana (being mostly used for repossession
of vehicles): judicial repossessions are just as fast.
In Louisiana, the secured creditor can judicially repossess the collateral.

In other states in the US, judicial repossession is exercised mostly through
an action for replevin while in Louisiana it is exercised through an executory
process under the Code of Civil Procedure. “Executory process begins with
the filing of a special kind of lawsuit where there is no citation and no service
of process on the debtor.”724 Similarly to replevin, after hearing of the petition
for executory process, the court can order the seizure and sale by the sheriff of
the collateral.725
Executory process is faster compared to ordinary process because,
under the former, the collateral after being repossessed by the sheriff can be
sold without judicial appraisal provided that waiver of judicial appraisal has
been agreed upon in the security agreement726 and the secured creditor loses
723
Courts generally hold that the duty to refrain from breach of peace during repossession
is nondelegable, which means that secured creditors who resort to professional repossessors
cannot escape liability in case the latter engage in abusive practices. In other words, secured
creditors cannot insulate themselves from the consequences of unlawful repossession by simply
externalizing the service to a third party. Ibid., 43.
724
Louisiana Civil Procedure Code, Article 2631 states that executory proceedings are “those
which are used to affect the seizure and sale of property, without previous citation and judgment,
to enforce a mortgage or privilege thereon evidenced by an authentic act importing a confession
of judgment, and in other cases allowed by law.”
725
Louisiana Civil Procedure code, Article 2638 states that “If the plaintiff is entitled thereto,
the court shall order the issuance of a writ of seizure and sale commanding the sheriff to seize
and sell the property affected by the mortgage or privilege, as prayed for and according to law.”
726
Louisiana Code of Civil Procedure, Article. 2723 states “Prior to the sale, the property
seized must be appraised in accordance with the law unless appraisal has been waived in the
act evidencing the mortgage, the security agreement, or the document creating the privilege
and plaintiff has prayed that the property be sold without an appraisal, and the order directing
the issuance of the writ of seizure and sale has directed that the property be sold as prayed for.
There is no requirement that seized property subject to a security interest under Chapter 9 of
the Louisiana Commercial Laws (R.S. 10:9-101, et seq.), be appraised prior to the judicial sale
thereof.”
252
its right to a deficiency judgement.727 In order to prove its right to executory

process, the creditor must submit the petition along with statutorily required
documents including, authentic evidence of the security agreement,728 and a
judgement confession.729 Because the virtue of executory process lies in the fact
that it is fast and less expensive, the Civil Procedure Code of Louisiana gives the
debtor limited defenses,730 giving the secured creditor the benefit of enforcing
its claim without delay: “three days, exclusive of holidays, after having served
the notice of seizure, the sheriff may proceed to have the property appraised and
advertisements of the sale published.”731
The MPSRP could have introduced a fairer and generally acceptable
method of repossession which relies on the judiciary than attempting to
empower a CRO to order the police to assist in the repossession of collateral.
The experience from the US including Louisiana would have been valuable to
craft a unique and workable alternative for Ethiopia.
727
Michael H. Rubin & Jamie D. Seymour, “Deficiency judgments: a Louisiana overview,”
Lousiana Law Review 69, no. 4 (2009): 796-797.
728
See Louisiana Civil Procedure Code Article 2635 which states “In order for a plaintiff to
prove his right to use an executory process to enforce the mortgage, security agreement, or
privilege, it is necessary only for the plaintiff to submit with his petition authentic evidence
of (1) The note, bond, or other instrument evidencing the obligation secured by the mortgage,
security agreement, or privilege. (2) The authentic act of mortgage or privilege on immovable
property importing a confession of judgment. (3) The act of mortgage or privilege on movable
property importing a confession of judgment whether by authentic act or by private signature
duly acknowledged”
729
John Pierre & M. R. Franks, “The Consequence of Default to the Debtor under Part 5, Chapter
9 of the Louisiana Commercial Laws: a Primer on Debtor’s Rights,” Southern University Review
18(1991)(Electronic Version), http://www.franks.org/fr01185.htm. See also Louisiana Civil
Procedure Code Article 2632 “an act evidencing a mortgage or privilege imports a confession
of judgment when the obligor therein acknowledges the obligation secured thereby, whether
then existing or to arise thereafter, and confesses judgment thereon if the obligation is not paid
at maturity.”
730
Louisiana Civil Procedure Code Article 2642 limits the defenses available to the debtor to
(1) injunction of seizure and sale, and (2) a suspensive appeal of the order of seizure and sale.
Code of Civil Procedure Article 2751 further limits the grounds for granting an injunction to
claims that (1) the debt is extinguished, (2) the privilege is unenforceable, or (3) the incorrect
procedure was followed.”
731
George C. Herget, “Execution Sales,” Lousiana Law Review 21, n. 1(1960): 235.
253
10.4. Private Disposition of Collateral

In any secured transactions system, the creditor must have a mechanism to
satisfy its claims through the sale of the collateral although this is not the only
way to do so. While in some systems, especially in most civil law countries, the
sale of collateral takes place in a court-administered auction, under UCC Article
9, a private sale is favored as efficient and faster.732
10.4.1. Private Disposition of Collateral Pre-2019

In Ethiopia, the private sale of collateral has been impossible under the ECC.
While the ECC prohibits the transfer of mortgaged property by the mortgagee to
a third party,733 the property mortgaged or pledged with banks Proclamation (“the
PMPBP”) which is now repealed by the MPSRP provided otherwise.734 Under
the PMPBP notwithstanding the provisions of the ECC governing pledge735 and
mortgage,736 an agreement authorizing a creditor bank with which a property
has been mortgaged or pledged and whose claim is not paid within the time
stipulated in the contract, to sell the said property by auction upon giving a
prior notice of at least 30 days to the debtor and to transfer the ownership of the
732
Laurence M. Smith, “Secured Party Sales under U.C.C. Article 9: A Commonsense Solution
to Maximize a Recovery,” Pratt’s Journal of Bankruptcy Law (2010): 42. Smith state “A secured
party sale under Article 9 of the U.C.C. is a means by which a secured lender can realize on
the debtor’s collateral, without the need to institute litigation or bankruptcy proceedings. It
is expeditious, cost-effective, and free of the adverse publicity that frequently accompanies a
bankruptcy filing.”
733
ECC Article 3060(prohibited provisions) states that (1) any provision whereby the creditor
may after the debt has become due, appropriate, or sell the immovable without due regard for
the conditions prescribed by law shall be of no effect, notwithstanding that such provision was
made after the creation of the mortgage. (2) Provisions may however be made to the effect that
the mortgagor shall after the debt has become due, transfer the ownership of the immovable to
the mortgagee.
734
The Federal Democratic Republic of Ethiopia, property mortgaged or pledged with banks
proclamation no. 97/1998, federal negarit gazette, legal notice no. 16(Addis Ababa, 1998).
735
ECC Article 2851(Commissoria lex) states that “(1) any agreement, even subsequent to the
furnishing of the pledge, Authorizing the creditor, in the event of non-payment on the due date,
to take possession of the pledge or to sell it without complying with the formalities required by
law shall be of no effect. (2) it may however be agreed after the debt has become due, that the
debtor shall make over the pledge to the creditor in settlement of the debt.”
736
See ECC Article 3060.
254
property to the buyer, was valid.737 This proclamation allowed sale by auction
by the bank without the involvement of the debtor and the sale is considered to be
executed on behalf of the debtor as long as the relevant provisions of the Ethiopian
civil procedure Code(ECPC) on public auction are complied with.738 The law was
implemented to provide banks (exclusively) with efficient tool enforcement.739
But looking at this provision, it can be argued that while attempting

to introduce a speedy and efficient enforcement method by departing from the
ECC, the PMPBP self-defeats its purpose by referring to the ECPC provisions
on public auction, as ECPC public auction is a long process. The only advantage
of this law was that a bank did not need to get a judgment from the court to
execute the sale by auction. It means that the sale could be conducted under the
ECPC provisions where the court appoints an officer for the auction and issues
a proclamation of sale by auction which contains the detail of the sale including
time and price of the sale and the amount of debt recoverable from the proceed.740
Under the ECPC, “Where no bidder presents himself at the second

auction, the court may, notwithstanding any provision to the contrary, authorize
the decree-holder to take possession of the property ordered to be sold at its
estimated value in full or partial satisfaction of the decree, as the case may
be.”741 When the price of the property as stated in the PMPBP for public auction
is not offered by a purchaser, the ECPC requires a second auction to be issued
737
See PMPBP Article 3.
738
PMPBP Articles 5 cum 6.
739
See PMPBP preamble which states “WHEREAS, it takes rather too long a time to obtain
a judgment, from courts of law, for sale of property mortgaged or pledged with banks and to
subsequently have it executed; WHEREAS, consequently, banking business thriving on interest
payments on loans it provides from public money received by way of saving deposits or acquired
from other sources, has been adversely affected; WHEREAS, in order to create a conducive
environment to economic development by enabling banks to collect their debts from debtors
efficiently and thereby promoting a good business culture, it is necessary to amend the Civil
Code concerning the sale of property mortgaged or pledged with banks; NOW, THEREFORE,
in accordance with Article 55(1) of the Constitution of the Federal Democratic Republic of
Ethiopia, it is hereby proclaimed as follows:”
740
See ECPC Articles 422- 427.
741
ECPC Article 423(2).
255
by the court.742 As can be observed from the brief description of the ECPC
provisions governing sale by auction, the process is lengthy and involves a cost
of administration as the court is involved almost until the last moment. The
ECPC gives the creditor the possibility to apply to the court for sale by private
contract that the court grants after hearing the creditor (“decree holder “as the
code uses this term).743
Overall, although the PMPBP tried to introduce efficient and quick

enforcement procedures for banks, the reference to the traditional civil procedure
code auction rules diminished the purpose of the law. Moreover, the law applied
only to banks. Non-bank Creditors were not entitled to use this procedure.
Besides being inefficient by its reliance on the lengthy and bureaucratic judicial
process, Pre-2019 law permitted only banks to conduct private disposition of
collateral. Both Property Mortgaged and Pledged with Banks Proclamation are
now repealed by the MPSRP and the new regime of enforcement is applicable
with regard to the security right of banks in movable assets.744
10.4.2. Private Disposition of Collateral under the MPSRP

The MPSRP introduced a unified set of rules for the private disposition of
collateral for all secured parties in all assets enshrined in Articles 82 to 84.
There are three mandatory rules that must be observed by the secured creditor
in conducting the private disposition of collateral. These are default, notification
of private disposition, and commercially reasonable standards.
Article 82(1) of the MPSRP states that “After default, the secured
creditor is entitled to sell or otherwise dispose of, lease, or license the collateral
in its present condition or following any commercially reasonable preparation
or processing.”745 This provision is a verbatim copy of UCC § 9-610 (a) of
UCC Article 9.746 The provision enshrines the rule that whether the collateral
742
743
744
745
746
UCC § 9-610 (a). § 9-610.
256
is repossessed by the creditor upon the debtor’s default or is surrendered

voluntarily by the debtor, the secured creditor has the right to dispose of(sell) it.
10.4.2.1 Default
Default is the triggering point for the right to dispose of the collateral both under
the MPSRP and UCC Article 9. Neither the MPSRP nor UCC Article 9 defines
default. The definition of default under UCC Article 9 is left to the parties’
agreement.747 Therefore, under UCC Article 9, “default is whatever the security
agreement says it is”.748 When the parties have the freedom to agree upon default,
there is a possibility that the creditor might consider minor events as default.
Therefore, the ordinary limitations on the contract such as unconscionability and
good faith apply to defining default.749 Contracts involving regular installment
payment could present a unique challenge as the debtor might make a minor
deviation in complying with payment deadlines. One of the “mechanisms of
avoiding series of suits in instalment payment is providing acceleration clause
that entitles the creditor to accelerate the maturity of the debt, therefore, all
payments become due immediately.”750
If the debtor owes 1 Million ETB paid in 5000 ETB monthly installment,
the parties could agree that missing the payment deadline by 10 days three times
in a row would accelerate payment. This means that instead of suing the debtor
everything for defaulting on the 5000 ETB installment, the creditor can sue for
the entire unpaid loan. The purpose of the acceleration clause is to ensure that
the creditor does not have to sue the debtor after default on each instalment
and acceleration clauses are enforceable by courts in the US.751 Therefore, an
acceleration clause is one way of defining default. However, since an acceleration
clause can be used to unfairly collect a debt by the creditor, the law imposes a
restriction on the creditor by requiring that the acceleration clause be triggered
when the creditor in good faith believes that the debtor’s prospect of payment is
747
James J. White & Robert S. Summers, Principle of Secured Transactions, 207.
748
Grant Gilmore, “Security Interests in Personal Property,” 1193.
749
750
Ibid., 209.
751
Ibid., 209.
257
impaired.752 If the parties did not agree upon default, the definition of default is
failure to pay as the debt matures.753
Since the MPSRP does not define a default, the courts should resort
to the provisions of general contract law establishing default. Under Ethiopian
contract law, the creditor is entitled to enforce its claim upon putting the debtor
in default through default notice.754 Although giving default notice is the general
rule, the ECC lists conditions under which default notice is not necessary.755 One
of the grounds rendering default notice unnecessary is when the parties have
fixed the exact time of performance after which default is assumed.756 Therefore,
it can be concluded that under the ECC, the parties can define default in their
contract.
10.4.2.2. Notification of Disposition of the Collateral
The mere fact that the secured creditor has taken possession of the collateral or
has rendered it unusable after default does not necessarily mean that the debtor
automatically assumes that the creditor will sell the collateral. The decision
to dispose of the collateral immediately may not necessarily be in the interest
of the secured creditor who may for instance receive late payment from the
debtor. Moreover, there might be other secured creditors or third parties with the
proprietary claim that have interest in the asset being subject to disposition. Thus,
the law requires notification of the intention to dispose of the collateral. rticle
83 of MPSRP which is substantially similar to its UCC Article 9 counterpart §
9-611 has four key components of the duty to notify.
First, the notification must be in writing.757 The MPSRP does not
752
U.C.C. 1-208.
753
754
ECC Article 1772.
755
ECC Article 1775.
756
ECC Article 1775(d).
757
The MPSRP does not explicitly require the writing and signature of the notice although the
information that needs to be in the notification cannot be practically given in a verbal form.
UCC § 9-611(a) has similar requirements except it requires the notification to be authenticated,
meaning signed by the debtor. The Signature of the debtor is not a requirement under the MPSRP
although the secured creditor should find it in its best interest to provide a signed notification.
258
explicitly require the writing and signature of the notice although the information
that needs to be in the notification cannot be practically given in a verbal form.758
One might ask whether an audio-video record or a sound record is a sufficient
form of notification. In the age of digital technology where recording devices
are readily available with the ability to transfer messages at a flick of a wrist,
it might be argued that sound and audio video records should be a valid form
of notification. It can also be added that the digital traces of these forms of
notification are easily maintained as long as both parties have access to the same
method of communication (e.g., WhatsApp). Unfortunately, the MPSRP is
unclear on this. UCC § 9-611(a) also requires notification except it requires the
notification to be authenticated, meaning signed by the debtor.759 Regarding the
timing of notification, the MPSRP establishes ten working days760 while UCC
Article 9 required only reasonable notification, it was revised as ten days due to
the difficulty around determining what reasonable time of notification is.761
Second, the notification must be given to the grantor and the debtor;
any person with rights in the collateral that notifies in writing the secured
creditor of those rights; any other secured creditor that registered a security
right notification with respect to the collateral; and any other secured creditor
that was in possession of the collateral at the time when the enforcing secured
creditor took its possession.762 This provision is similar to UCC Article 9 with
a minor qualification that in non-consumer good collaterals, notification is
provided to a secured party that has held security right perfected ten days before
the notification date.763 The latter means that secured parties whose security
rights are registered less than ten days before notification are not entitled to
get a notification. The rules seem to be designed to spare the secured creditor
758
See MPSRP Article. 84(1).
759
Under UCC § 9-102(7) “Authenticate” means “(A) to sign; or (B) with present intent to
adopt or accept a record, to attach to or logically associate with the record an electronic sound,
symbol, or process”
760
761
UCC § 9-612. See also Scott J. Burnham, The Glannon Guide to Secured Transactions, 111.
762
MPSRP Article 83(1)(a) -(d).
763
MPSRP Article 83(2) & UCC § 9-611(a) – (e).
259
from conducting a search of potential security rights immediately before the

notification time.
Third, the notice must identify the grantor and the secured creditor;
contain a description of the collateral; state the amount required to satisfy the
secured obligation including interest and a reasonable estimate of the cost of
enforcement; identify the manner of the intended disposition and state the date
after which the collateral will be sold or otherwise disposed of, leased or licensed,
or provide the time and place of a public disposition.764 Fourth, the notification
does not apply if the good may perish before the end of ten working days after
the secured creditor obtained possession of such collateral may decline in value
speedily; is of a kind sold on a recognized market, or the cost of care and storage
of the collateral is disproportionately large relative to its value.765
One could also add that notification of disposition of collateral does not
apply if the parties have waived it. In this regard, the MPSRP state that “The
grantor and any other person that owes payment or other performance of the
secured obligation may not waive unilaterally or vary by agreement any of its
rights under the provisions of this Part prior to default.766 The rule is similar
under UCC Article 9.767 Although the parties may waive the right to notification
before default unilaterally, a unilateral waiver is not valid post-default. This
essentially means that the secured creditor cannot rely on a declaration made by
the debtor or the obligor that they do not wish to be notified of the disposition of
the collateral unless that is negotiated and signed by both parties post-default.
Nevertheless, secured parties might want to send a notification rather than
negotiating a waiver agreement, unless the collateral is so diverse and quite
large that complying with the notification is more cumbersome than entering a
non-notification deal.
764
UCC § 9-611(c).
765
766
767
Read UCC § 9-611(1)(b) and § 9-624 together.
260
10.4.2.3. Commercially Reasonable Standard

The third key element of disposition of collateral is the commercial
reasonableness of the disposition. The requirement is imposed to ensure
that the secured creditor acts responsibly in its attempt to recover its claim.
Failure by the secured creditor to observe this requirement might entail serious
repercussions in the US while it is unclear whether it entails any consequence
under the MPSRP (see infra § 10.7).
The MPSRP states in Article 76(3) that “the secured creditor shall
exercise its remedies under this part in good faith and in a commercially
reasonable manner.”768 There is a slight difference in the approach taken by
the MPSRP and UCC Article 9. First, the MPSRP imposes the requirement of
good faith in addition to the commercially reasonable standard. Second MPSRP
imposes the requirements with respect to every aspect of enforcement (e.g.,
repossession) while UCC Article 9 imposes it with respect to the disposition of
the collateral. UCC Section 9-610(b) states that “every aspect of the disposition
of collateral, including the method, manner, time, place, and other terms,
must be commercially reasonable.”769 The MPSRP gives the secured debtor
the discretion to choose “the method, manner, time, place and other aspects
of the sale or other disposition, lease or license, including whether to sell or
otherwise dispose of, lease or license collaterals individually, in groups or as
a whole.”770 These choices are to be made by assessing whether they make the
most commercial sense in terms of reducing transaction costs and bringing a
higher value for the collateral.
The disposition (sale) can be private or public if the commercially

reasonable deposition requirement is complied with. Moreover, the
commercially reasonable standard applies not only to price, or the time and
place of the disposition. It also applies to other aspects of the disposition such
as the manner of disposition including negotiation. Warren and Walt comment
768
769
UCC § 9-610 (b).
770
261
that one of the goals of section 9-610 is to increase return on the disposition
of collateral by getting away from old court-administered sale to business-like
sale.771 Nevertheless, the vagueness of the commercially reasonable standard
resulted in litigations between creditors and debtors.772 Revised UCC Article
9 considers the disposition commercially reasonable if it is in conformity with
the reasonable commercial practices among dealers in the type of property that
was the subject of disposition.773 What is of importance is that the commercial
reasonableness standard, no matter how vague it is, is aimed at avoiding the
inefficient judicial auction and shifting towards a cheaper and quicker method
of disposition without compromising the value of the collateral.774
As the commercially reasonable standard along with private disposition

is a recent development under Ethiopian secured transactions law, litigations are
likely to ensure from the provisions of the MPSRP.
10.5. Strict Foreclosure

Strict Foreclosure is a private enforcement mechanism by which the secured
creditor takes the collateral in full or partial satisfaction of the debt.
10.5.1. Pre-2019 Strict Foreclosure Law in Ethiopia

Under the ECC, the debtor and the creditor may agree after the due date of the
claim that the pledgee takes the pledge as a settlement of the debt.775 With respect
to mortgage the same rule applies, that is, after default, the mortgagor may agree
to transfer the ownership of the collateral to the mortgagee.776 Nevertheless,
the law of strict foreclosure Pre-2019 was rudimentary on multiple levels. To
mention some of the defects, the rules were scattered across different codes
(parts in a code), applied to individual security rights with no general underlying
policy applicable to security rights in different assets. The available rules made
771
772
Ibid.
773
See UCC Revised Article 9-627(b) (3) (2010).
774
See for instance, William E. Hogan, “The Secured Party and Default Proceedings under the
Uniform Commercial Code,” Minnesota Law Review 47(1962): 219-220.
775
776
ECC Article 3060(1)-(2).
262
no distinction between partial, full strict foreclosure and provided no protection

to consumer debtors.
10.5.2. Strict Foreclosure under the MPSRP

The MPSRP has a comprehensive set of rules on strict foreclosure that close the
legal gap that existed prior. Article 85(1) of the MPSRP states that “the secured
creditor may propose in writing, before or during disposition, to acquire one
or more of the assets subject to a security right in total or partial satisfaction
of the secured obligation.”777 In the following sub-sections, four important
components of strict foreclosure are discussed. These are the timing of the
proposal for strict foreclosure, full strict foreclosure, partial strict foreclosure,
and strict foreclosure in collateral where the debtor is a consumer.
10.5.2.1. When May Strict Foreclosure Agreement be Concluded?
The MPSRP in contrast with previous rules does not require that an agreement
of strict foreclosure be reached after default as a written proposal can be made
before or during the disposition of the collateral. The phrase “before disposition”
in Article 85(1) does not suggest that an agreement for strict foreclosure should
be reached before default. Nevertheless, it also does not exclude proposals
made before default. The drafter(s) seemed to have intentionally avoided using
the word default as it could have raised questions regarding the appropriateness
of allowing a strict foreclosure agreement from being concluded before
default. UCC Article 9 does not allow a strict foreclosure agreement to be
concluded before the debtor defaults as proposals are to be sent to the debtor
post-default in all cases.778
The reason for allowing strict foreclosure agreements to be made post-
default is that a secured party could take advantage of the debtor by including
a strict foreclosure clause in the security agreement whenever the value of
the collateral is higher than the debt.779 Imposing such a clause is easy at the
time of negotiating a loan agreement as the lender may have the upper hand
in the negotiation vis-à-vis a desperate borrower. It may also change security
777
778
UCC § 9-620 UCC (c).
779
263
agreements to potential sales agreements if pre-default strict foreclosure

agreements were to be the norm. In this regard, the MPSRP favours the creditor
over the debtor and might be seen to be unfair.
10.5.2.2. Full Strict Foreclosure

In the case of full strict foreclosure, meaning when the collateral is accepted in
full satisfaction of the debt, the requirements are more lenient than in the case for
partial satisfaction. First, the MPSRP states that in case the collateral is provided
by a party different from the debtor(grantor), the debtor has no right to receive
notification of the proposal of full strict foreclosure. It is only the provider of the
collateral that has the right to be notified.780 The underlying logic is that if the
debtor will be considered to have paid the debt in full, there is no reason to give
the debtor a notice about the collateral that the debtor does not own, being taken
for full satisfaction of the debt. The debtor’s only liability is to pay the debt to
the grantor rather than to the secured party, by way of subrogation. UCC Article
9 has a different rule as it requires the debtor to be notified even if the grantor
of the security right (the owner of the collateral) may be a different party.781 In
practice, this difference is likely to be insignificant as the grantor who is notified
of strict foreclosure is likely to consult with the debtor before accepting it.
Second, under the MPSRP, “the secured creditor acquires the collateral
in the case of a proposal for the acquisition of the collateral in full satisfaction
of the secured obligation unless the secured creditor receives an objection in
writing from any person entitled to receive such a notice within fifteen working
days after the notice is sent to that person.”782 Under this rule, failure to submit
a written objection is considered as implied acceptance of the proposal for full
strict foreclosure not only by the debtor but also by other interested parties.
Under UCC Article 9, the rule is similar except that the debtor has twenty days
to submit a signed objection.783
780
MPSRP Article 85(2)(b), contrary reading.
781
UCC § 9-620 does not have any exception regarding sending a proposal to the debtor.
782
783
UCC § 9-620 (a)(c)(1)(C).
264
In both jurisdictions, an offer of full strict foreclosure can be accepted

impliedly. Nevertheless, it is questionable whether the fifteen days’ time within
which an objection should be submitted is sufficient in Ethiopia compared to
the twenty days under UCC Article 9. On a related note, although the legal
rules in both jurisdictions use the phrase “after the proposal is sent”, the time
period starts running after the proposal is received by the debtor as that is the
only logical way to hold the debtor or other parties accountable for inaction.
Certainly, in some cases, the decision to accept or reject the offer could be
easy as well as the means of communicating the objection. In others, it may be
difficult. Again, the MPSRP here seems to favor the secured party by giving a
shorter time period to send an objection.
10.5.2.3. Partial Strict Foreclosure

In case of partial strict foreclosure, meaning when the creditor accepts the
collateral in partial satisfaction of the debt, strict foreclosure is ineffective
unless the debtor and other interested parties expressly consent to it both under
the MPSRP and UCC Article 9, with the difference that UCC Article 9 requires
only the debtor’s express consent whereas the MPSRP requires the consent of
all addressees of the proposal.784 Thus, for partial strict foreclosure, implied
consent is not valid. The reason for this is that the debtor should not be assumed
to accept a proposal where the collateral is valued less than the amount of the
debt, subjecting them to pay the difference.
Should other interested parties, for instance, secured creditors with
subordinate priority right be allowed to expressly consent to the partial strict
foreclosure? The MPSRP requires their express consent, presumably to prevent
the foreclosing secured party from potentially undervaluing the property and
claiming the difference from the assets of the debtor which certainly will
diminish their chance of satisfying their claims from the debtor.
10.5.2.4. Strict Foreclosure of Consumer Good

The MPSRP does not have a special rule on strict foreclosure applying to consumer
transactions in contrast with UCC Article 9 which treats strict foreclosure in case
784
See MPSRP Article 85(3)(b) & UCC § 9-620 (c).
265
of consumer contracts differently. Accordingly, “In a consumer transaction, a

secured party may not accept collateral in partial satisfaction of the obligation it
secures.”785 A consumer transaction is “a transaction in which (i) an individual
incurs an obligation primarily for personal, family, or household purposes, (ii) a
security interest secures the obligation, and (iii) the collateral is held or acquired
primarily for personal, family, or household purposes.”786 The explanation for
the prohibition of partial strict foreclosure in consumer transactions is the
consumer’s general inability to judge the value of collateral, initially related
to automobiles(although the rule applies to all consumer transactions now). 787
While the rule might be perceived as paternalistic, consumer advocacy
groups would see it as an appropriate safeguard for consumer interests from
being undermined by lenders. The MPSRP does not have such a rule. This
may have an adverse effect on consumer rights as they have weaker bargaining
power as well as limited know-how to determine if they should accept the offer
of partial strict foreclosure. In the process, consumers are likely to make an
erroneous decision.
10.5.3. Suing the Secured Creditor After Agreeing to Full Strict

Foreclosure
The virtue of strict foreclosure relative to private disposition is that it absolves
the debtor from paying for deficiency if the value of the collateral does not cover
the amount the debtor owes (in case of full strict foreclosure), while the creditor
can avoid the commercial reasonableness standard of the disposition and filing
suit for a deficiency judgment.788 However, in certain circumstances, the secured
creditor might be forced to account for surplus. Although one would imagine
that once the secured creditor has complied with the requirements of notice for
full strict foreclosure, the secured creditor can sell the collateral and retain the
785
UCC § 9-620 (g).
786
UCC § 9-102(a)(26).
787
Marion W. Benfield Jr., “Consumer Provisions in Revised Article 9,” Chicago-Kent Law
Review 74, Issue 3 (1999): 1286.
788
135.
266
surplus amount, that is not the case all the time, at least in the US.
In Reeves v. Foutz and Tanner, the supreme court of Mexico City held
that even if the secured creditor complied with the thirty days’ notice, the fact
that the creditor anticipated the sale of the collateral instead of retaining the
collateral entails the creditor’s obligation to account for surplus.789 The court
by referring to ““the Draftsmen’s Statement of Reasons for 1972 Changes in
Official Text” reasoned that waiver of deficiency and surplus is appropriate only
when the prompt sale of the collateral has not been anticipated.”790 In other
words, if the secured creditor utilized a full strict foreclosure with the view to
selling the collateral immediately and make additional money if the collateral
is valued higher than the value of the debt, the court concluded that the creditor
should account for surplus to the debtor.791
The MPSRP does not have a similar provision as this emerged from the
interpretation of UCC Article 9. Nevertheless, to consumer advocacy groups,
this could be important as lenders might use the system to snatch property out of
the consumers’ hands under the guise of strict foreclosure only to end up selling
it for an additional buck. In such cases, it would obviously make more sense
for the consumer to have rejected the full strict foreclosure and go for private
disposition of the asset. Ethiopian law should be revisited to prevent abuse of
the rules by secured creditors by putting in place consumer protection regimes.
The rule from Reeves v. Foutz and Tanner should be used to design a more
contextualized legal rule in Ethiopia.
10.6. Enforcement of Security Rights in Intangible Assets

Security interests in intangibles including claims against third parties pose
relatively different issues compared to security interests in tangible goods. For
instance, in case of a security interest in tangible goods as motor vehicles, when
the debtor defaults, the secured creditor can resort to self-help repossession
and sell the motor vehicle. The same procedure is certainly not suitable for
789
Reeves v. Foutz and Tanner, Inc., 617 P.2d 149 (New Mexico Supreme Court, 1980).
790
Ibid.
791
Ibid.
267
enforcement of security rights in accounts receivables or in right to payment

of deposit account. In these cases, either there is nothing to be repossessed or
to be sold in a strict sense. Therefore, different rules are available for enforcing
security right in intangibles, particularly debts owed to the debtor. The rules on
enforcement of security rights in intangibles and negotiable instruments under
the MPSRP Articles 87 and 88 are clear and comprehensive.
With respect to receivables, the rules are more detailed and could be
tricky. This section, therefore, dedicates some space to highlight the rules
regarding the enforcement of security rights in receivables. Under the MPSRP,
after default, a secured creditor with a security right in a receivable is entitled
to collect payment from the debtor of the receivable subject to Articles 70-74.792
The secured creditor must send a notification to the debtor of the receivable to
be able to collect payment upon the debtor’s default. The MPSRP states that
“notification of a security right in a receivable is effective when received by the
debtor of the receivable if it reasonably identifies the encumbered receivable
and the secured creditor.”793 If the debtor of the receivable is not so informed
by the secured creditor, it has the right to discharge its obligation pursuant to its
original contract with the grantor.794 On the basis of the MPSRP’s rules on the
identification of the collateral and the secured creditor,795 it is believed that the
type and date of the underlying contract, as well as the nature and amount of
obligations it entails and the name and address of the secured creditor, should
be clearly included in the notification provided to the debtor. If the debtor of the
receivable has received notification of more than one security right in the same
receivable by the same grantor, the debtor can be discharged by paying as per
the first notification received.796 It is worth noting that a debtor in receivables can
raise all defenses and rights that could have been raised against the grantor,797
792
MPSRP Article 87(1) & (4).
793
794
795
MPSRP Article 6.
796
797
268
such as period of limitation, aside from the right of set-off that is available to it
at the time of notification of the security right.798
The rules on enforcement of security rights in accounts receivables under

the MPSRP are essentially similar to UCC Article 9 rules where the account
debtor has an obligation to pay the secured creditor (the assignee) upon receiving
a notification from the assignee authenticated by the assignee or the assignor.799
This is consistent with the rule, which authorizes the secured creditor to collect
payment directly from the account debtor in case of default.800 UCC Article 9
lays out requirements of the notification that must be met by the creditor and
obliges the account debtor to pay, as long as those requirements are met, even if
the account debtor has already paid to the assignor provided that it effected the
payment after notification by the secured party.801 Since the secured creditor is
an assignee, it has the same right an assignee has under general contract law.802
Therefore, the account debtor can raise defenses available against the assignor
including set-off, as long as the latter is possible due to a claim the account
debtor has against the assignor that arose before the secured creditor notifies
the account debtor.803
One difference between the provisions of the MPSRP and UCC Article 9
pertains to the notification requirements. Under UCC Article 9, a notification of
the security right to the account debtor is ineffective, if the notification notifies
the account debtor to make less than the full amount of any installment or other
periodic payment to the assignee, even if, (a) only a portion of the account,
chattel paper, or payment intangible has been assigned to that assignee; (b) a
portion has been assigned to another assignee, or (c) the account debtor knows
that the assignment to that assignee is limited.804 This rule protects the account
798
MPSRP Article 72(1)(b).
799
UCC § 9-406(a).
800
UCC § 9-607(a).
801
UCC § 9-406.
802
803
See UCC § 9-404.
804
UCC (2010) § 9-406(b)(3).
269
debtor from being subjected to payment demands from several creditors. Thus,
a debtor that wishes to use its account receivable as collateral should ensure that
it does not split the accounts receivable between more than one creditor. The
MPSRP does not have a similar rule. While the approach under the MPSRP is
flexible and gives parties leeway to structure receivables financing according to
their needs, it may also cause an inconvenience to an account debtor in terms
of dealing with multiple creditors. A possible compromise would be to give
the anti-assignment clause effectiveness if it prevents assignment by way of
security of accounts receivable for several creditors.
The provisions of the MPSRP regarding enforcement of security rights

in accounts receivables are comparable to the rules under UCC Article 9. There
is no major gap or potential interpretive issue that can undermine the efficient
functioning of the law. Noted earlier, one area where a complaint may emerge in
the future is the rule which might allow a debtor to use its account receivable as
collateral with respect to the debts owed to multiple creditors. In this instance,
the MPSRP allows the debtor to notify the account debtor. It does not place
any limit on how many creditors it can use to access loans by using its account
receivables. Can the debtor use its account receivable to borrow money from five
creditors and notify the debtor of the receivable to fulfil its obligation toward
five different creditors? Businesses may find it administratively cumbersome
to have to pay to five creditors instead of one. UCC Article 9 says in this case
that the notification is ineffective, and the debtor of the receivable will make
payment according to the original contract.
10.7. Remedies for Violation of the Secured Party’s Duties

The secured party could be in violation of its duties towards the debtor in
different ways. The secured creditor might repossess the collateral before
default or in breach of the peace (US) or may fail to give notice before selling
the collateral (US) or may sell the collateral in violation of the commercially
reasonable standard of disposition.805 There are a number of ways in which the
secured party could cross the boundaries of the law in an attempt to enforce its
805
270
security right. The law needs to provide remedies for that.
Why is the discussion of remedies for violation of the secured creditor’s

duty important? The law should provide the efficient means of enforcement of
security rights to secured creditors and this is important to ensure that there is
access to the credit. However, the law must strike a balance between the rights
of the secured creditors to efficient and quicker enforcement on the one hand
and protection of debtors from abuses in various forms on the other.
10.7.1. Remedies in Pre-2019 Laws

Pre-2019 Ethiopian secured transactions law lacked specific rules providing
remedies for secured creditor’s violation of the rules of enforcement of security
rights. Thus, an aggrieved debtor should resort to general tort law remedies for
wrongful conduct. The general principle under Ethiopian law of extra-contractual
liability is that whoever causes damage by intentional or negligent conduct must
compensate for the damage.806 An Injunction can also be obtained to stop the
defendant from engaging in an act prejudicial to the plaintiff when there is good
reason to believe that the injury may not be fixed by damages(compensation).807
Given that creditor-debtor relationship vis-à-vis the collateral does not give rise
to an injury that cannot be fixed by damages, it is very unlikely that this the ECC
provision on injunction is useful to stop the creditor from violating its duties
regarding the collateral unless the wrongful disposal of collateral(for instance)
is considered to be irreparable damage.
Since Ethiopian secured transactions law Pre-2019 did not experience

comprehensive reform, the lack of tailored law on creditor’s liability in the
context of wrongful enforcement of security rights is not surprising.
10.7.2. Remedies Under the MPSRP

Despite being implemented largely based on UCC Article 9, the MPSRP
conveniently ignored many of the provisions of UCC Article 9 that provide a
remedy for breach by a secured creditor of the rules governing the enforcement
806
807
271
of security rights. There is only one instance under the MPSRP where the
secured creditor could be held liable —for any damage, it causes to the debtor
in the process of selling by auction in violation of the relevant provisions of the
Civil Procedure Code specified under Article 82 (4) of the MPSRP.808
Selling by auction is not the only case in which the secured party can
breach its obligation. The secured party may try to repossess the collateral before
default, may try to repossess without the debtor’s agreement or by using physical
and psychological violence, may dispose of the collateral without the necessary
agreement being obtained from the debtor, or in breach of the commercial
reasonableness standard. It is perplexing as to why the drafter thought adding
a special provision on liability for potential failure to observe civil procedure
rules on public auction is more important than for the aforementioned instances.
The MPSRP is crafted to strengthen the creditor’s position, by avoiding

legal rules that are important in terms of protecting debtors from abusive creditors.
This becomes apparent when the provisions of UCC Article 9 are examined.
Under Article 9, “if it is established that a secured party is not proceeding in
accordance with the law, a court may order or restrain collection, enforcement,
or disposition of collateral on appropriate terms and conditions.”809 These are
the first remedies UCC Article 9 gives in case of violation of the creditor’s duty.
However, if the collateral has already been disposed of or the above remedies
are not sufficient, Article 9 provides for different types of damages. First, any
loss incurred by the debtor due to the creditor’s failure to comply with UCC
Article 9 is compensable.810 This provision allows a claim of actual loss and
“it is unclear whether a consequential loss is also covered by it.”811 Second, in
the case of consumer goods, the law permits the claim of statutory damages.812
Failure to comply with certain identified provisions of UCC Article 9 entails
808 MPSRP Article 77(2).

809
UCC § 9-625 (a).
810
UCC § 9-625 (b).
811
812
UCC § 9-625 (c).
272
statutory damages that can be claimed by the obligor or the debtor.813 Thirdly,
the violation of the breach of peace standard can lead to punitive damages.814
Punitive damages are compensation paid to an aggrieved party with the view to
penalizing the defendant and dissuading the defendant from engaging in similar
acts in the future.815 Finally, the secured party may lose its right to deficiency
judgment or payment for failure to comply with the rules of collection,
enforcement, disposition, or acceptance.816
10.8. Conclusion
Overall, the MPSRP has brought about significant changes in the arena
of enforcement of security rights. It has introduced what is rare in many
civil law jurisdictions but trending in contemporary secured transactions
law reform — self-help repossession. It has also modernized the method of
disposition of collateral after default by allowing secured creditors to conduct
private disposition by observing the commercially reasonable standard. Strict
foreclosure is also reasonably regulated.
Nevertheless, the law still has gaps, special faired with UCC Article 9.
The lack of adequate debtor protection in relation to self-help repossession, the
conferral of power on the CRO to order the police to assist the secured creditor
in taking possession of the collateral, the failure to create legal rules on judicial
repossession, lack of rules protecting consumer debtors in strict foreclosure,
and the lack of remedies for debtors aggrieved by the secured creditor during
the enforcement of its security can be mentioned as the most important defects.
Policymakers should put these issues on their agenda of reform for the near future.
813
UCC § 9-625(e).
814
815
See Dan Markel, “How Should Punitive Damages Work?” University of Pennsylvania Law
Review 15(2009):1391.
816
See UCC § 9-625.
273
274
Chapter Eleven: Security Rights in Bankruptcy
11.1. Introduction
Bankruptcy being an ultimate business misfortune for a debtor, triggers
collective and court-monitored settlement of debts owed by the debtor to its
creditors. Under the so-called, acid test of security rights, “security right survive
in the wake of bankruptcy.”817 This means that the priority position of secured
creditors remains the same in bankruptcy. Nonetheless, in some circumstances,
the rights of secured creditors might be compromised in a bankruptcy situation.818
Therefore, a conscious effort must be made to create a harmony between the law
of security rights and bankruptcy law in designing comprehensive law of security
rights. An informed policy choice in shaping the rights of secured creditors in
bankruptcy ultimately increases greater certainty, efficiency, and fairness.
The MPSRP incorporates the acid test of security rights in Article 45

which states that unless otherwise provided in the insolvency law, the priority
of security rights shall continue during insolvency or liquidation.819 The key
question is, to what extent does bankruptcy law modify the priority position of
secured creditors (if at all), and on what policy grounds can this be justified?
This chapter analyses the relationship between the MPSRP and the Ethiopian
Bankruptcy law. While the provisions of the ECOMC governing bankruptcy
817
Gerard McCormack, Secured Credit Under English and American Law (Cambridge
University Press, 2004), 148-149.
818
Richard F. Duncan, et al, the law and practice of secured transactions: working with Article
9, 7- 50 et seq.
819
MPSRP Article 45(1) & (2).
276
are analyzed, the Draft Commercial Code (DCC) is also referenced whenever
appropriate.
11.2. The Bankruptcy and Security Rights Nexus

This section focuses on two important aspects of the enforcement of security
rights in bankruptcy. These are the automatic stay procedure and the role of the
bankruptcy administrator in the enforcement of security rights.
Where a rule for an automatic stay of individual proceedings in bankruptcy

exists, a secured creditor cannot enforce its right against the collateral without
obtaining a relief order from the bankruptcy court. This obviously contradicts
at least a couple of fundamental assumptions behind secured credit — quick
and efficient enforcement of the secured claims and priority over unsecured
claims. Nevertheless, an automatic stay is aimed at preserving the integrity of
the bankrupt estate, ensuring effective re-organization, and preventing rushes
to the courthouse.820 Designing comprehensive law of security rights in itself
is not sufficient if the bankruptcy law undermines security rights or inflexibly
gives monopoly to the secured creditors on the debtor’s asset.
Similarly, whether a bankruptcy system should grant a strong or a weaker

position to the secured creditors in granting the bankruptcy administrator tools
to avoid various transactions is an issue that should be adequately addressed
during secured transactions/bankruptcy law reform.
11.2.1. Automatic Stay

“The automatic stay is a statutory, ex parte, temporary restraining order against
the world that automatically goes into effect the moment a debtor files for a
820
See Jeffry H. Gallet & Robert Z. Dobrish, “The Bankruptcy Automatic Stay: It’s Not the End
of the World— or of the Case,” Journal of the American Academy of Matrimonial Lawyers,
16(1999): 150 The authors state “[p]purpose of the automatic stay is to give the debtor a
breathing spell from his creditors, in which he may attempt a repayment or reorganization plan.
The automatic stay also protects creditors by averting a scramble for assets and promoting
instead an orderly liquidation procedure.” Farley v. Henson, 2 F.3d 273 (8th Cir. 1993); Koolik
v. Markowitz, 40 F.2d 567 (2nd Cir. 1994) & In re Atlas, 222 B.R. 656 (S.D. Fla. 1998).
277
bankruptcy case.”821 The effect of automatic stay on a secured creditor is that

it stops all enforcement proceedings including self-help or court-assisted
repossession as well as private or judicial disposition of the collateral.822
Automatic stay is justified based on the idea that “the importance of bankruptcy
law lies in part in making the resolution of multiple creditors’ conflicting claims
more orderly and increasing the amount of their joint recovery.”823 However,
secured creditors in acquiring security rights in the debtor’s property hedge
against default and establish stronger rights through individual bargaining.
What US, as well as leading models, suggests is that although automatic stay
enhances orderly and collective recovery, it should not modify the secured
creditors’ rights without a compelling reason.
The first reason that justifies automatic stay is the exceptional nature of
bankruptcy itself, in the life of the business, requiring exceptional assessment
of rights and obligations that existed before bankruptcy.824 Rights of secured
creditors acquired prior to the bankruptcy should be assessed in the context of
bankruptcy with a potential effect on the secured creditor’s priority position.
Therefore, bankruptcy, as a rare event in the firms’ life leads to tolerable
modification in the rights of the creditors. This partly justifies automatic stay.
The second reason, which lies in bankruptcy as an institution, is the need to
ensure successful reorganization. Corporate reorganization is aimed at the
preservation of the firm’s going-concern value as opposed to liquidation that is
aimed at selling the assets of the firm and paying out the creditors, leading to
the liquidation of the firm.825 The individual action of creditors contradicts this
821
Jeffry H. Gallet & Robert Z. Dobrish, “The Bankruptcy Automatic Stay: It’s Not the End of
the World— or of the Case,” 150.
822
823
Kenneth W. Dam, the Law-Growth Nexus – The Rule of Law and Economic Development
(Washington D.C., Brookings Institution Press, 2006), 195.
824
Ibid., 197.
825
Patrick Bolton, “Towards a Statutory Approach to Sovereign Debt Restructuring: Lessons
from Corporate Bankruptcy Practice around the World,” IMF Working paper 03/13(2003), 4-5.
278
purpose by removing assets from the reorganizing debtor.826
11.2.1.1. Automatic Stay under Ethiopian Law

Ethiopian bankruptcy law does not recognize automatic stay of secured
creditors’ enforcement rights. The ECOMC governing bankruptcy requires
unsecured creditors to form a legal entity called universality of creditors.827
Individual suits of unsecured creditors are suspended by the judgment in
a bankruptcy proceeding.828 That means secured creditors are not stopped
from enforcing the claims on the collateral individually. There is simply no
provision under the Ethiopian bankruptcy law subjecting secured creditors to
a suspension of individual enforcement. This is true for liquidation as well as
rehabilitative proceedings.
For instance, in the case of a scheme of arrangement, approval by

the majority of unsecured creditors is necessary for the court to confirm the
arrangement.829 If secured creditors wish to participate in voting, they are required
to surrender the collateral(security right).830 This approach is one-sided in the
sense that secured creditors should either stick to their collateral or participate
in voting by losing their right to the collateral fully or partially. The approach
certainly harms the debtor’s possibility to make successful reorganization. The
DCC changes the status quo.
I. Scope of Automatic Stay under the DCC

The DCC states that “During the observation period, all individual enforcement
actions by all creditors, including secured in rem by pledges, mortgages or
otherwise, preferred and creditors benefiting from a sale contract with ownership
reserved, shall, as a matter of law, be automatically stayed, without any need
for the debtor or the supervisor in reorganization to request a stay of individual
826
University of Pennsylvania Law Review, “Adequate Protection and the Automatic Stay
under the Bankruptcy Code: Easing Restraints,” University of Pennsylvania Law Review, Vol.
131
, no. 2 (1982): 224-225.
827
828
ECOMC Article 1026.
829
830
279
enforcement actions.”831 An observation period is a time period in which the

debtor in possession prepares a reorganization plan which is a period of four
months(initially) that can be extended up to a maximum of twelve months.832
Under the DCC Article 655, for the duration of the observation period,
(a) the due date of pre-insolvency claims may not be accelerated (b) creditors
may not start any legal proceedings with respect to the payment of pre-insolvency
claims (e) creditors may not receive any payment of pre-insolvency claims.
While these provisions seem to suspend individual suits covering a broad range
of security rights, the provisions can raise interpretive challenges.
First, the language of the provisions is not in line with the MPSRP.
Under the MPSRP, security rights in movable assets including what is formerly
known as pledge as well as security rights in incorporeal assets fall under an
umbrella of the concept of security right. Article 654(1) of the DCC states that
enforcement by all creditors including secured in rem by pledges, mortgages or
otherwise, preferred and creditors benefiting from a sale contract with ownership
reserved are automatically stayed. While pledges are no more valid security
devices (at least formally/doctrinally speaking), the fact that the provision lists
specific types of security rights (pledge and mortgage) creates confusion that
enforcement of security rights in a broader range of assets including negotiable
instruments, intellectual property, accounts receivables, equipment are not
automatically stayed. The DCC might have been prepared before the enactment
of the MPSRP. Nevertheless, it should be revised to be in line with the MPSRP
to ensure that automatic suspension of enforcement of security rights applies to
all security rights governed by the MPSRP (unless exceptions are consciously
and cautiously recognized).
Second, the DCC’s provision of the automatic stay of individual

suits applies only during the period of observation (while a reorganization
plan is being prepared by the debtor). In other words, once a bankruptcy
proceeding(liquidation) commences, secured creditors may pursue individual
831
DCC Article 654(1).
832
DCC Article 650(1) – (4).
280
enforcement action with respect to their secured claims. Thus, a secured creditor
may repossess an automobile in which it has security interest as long as the
repossession complies with the requirements set under the MPSRP. This renders
automatic stay largely ineffective in terms of achieving its objective. Automatic
stay aims to maximize collective recovery of the debt and reduce the cost of
litigation so that all creditors are better off. Thus, it should apply even where
a liquidation proceeding has commenced subject to lifting it upon application
under certain conditions (see infra § II).
Under US bankruptcy law, the filing of a bankruptcy petition automatically

stops secured creditors from taking enforcement actions.833 First, unlike the
approach in Ethiopia, US bankruptcy law applies to virtually all security
rights. It suspends not only enforcement but also the creation and perfection of
security rights in the debtor’s property.834 In this regard, the US Bankruptcy
codes’ use of the term lien835 should not be confused with the concept of lien in
Ethiopia because, in the US, the lien is equivalent to security right. Second, the
automatic stay applies in all proceedings, voluntary or involuntary proceeding,
reorganization, or liquidation.836 Thus, if an automatic stay of individual claims
is regarded as a useful tool to preserve the assets of the debtor and to ensure
maximum collective recovery, Ethiopian law should create a harmony between
the bankruptcy law provisions and the provisions of the MPSRP, clarify the
scope of application of automatic stay, and expand its scope to cover also
liquidation. The US Bankruptcy law can provide rich insights into working out
the details of the procedure in Ethiopia.
II. Lifting Automatic Stay

Automatic stay of creation, perfection, and enforcement of security rights
833
Larry Peitzman and Margaret S. Smith, “The Secured Creditor’s Complaint: Relief from the
Automatic Stays in Bankruptcy Proceedings,” California Law Review, 65, no. 6 (1977):1217.
Bankruptcy procedure in the US is governed by the United States Code, Chapter 11(“11 U.S.C.
5 1-1255 (1970)”).
834
See U.S. C Title 11 § 362.
835
See U.S. C Title 11 § 362.
836
Ibid.
281
undermines security rights, especially when a duly created and perfected

security right may not be enforced quickly. To ensure that secured creditors are
not unduly and unfairly impeded from enforcing their claims, the law provides
a mechanism for lifting the automatic stay.
Under the DCC, the creditor may apply for relief from the automatic
suspension where (a) the debtor is not in possession of encumbered assets or
(b) individual enforcement actions are not likely to jeopardize the restructuring
of the business or (c) one or more creditors would be unfairly prejudiced by
a general stay of individual enforcement actions.837 The DCC’s provisions
governing the lifting of automatic stay are fairly comprehensive.
The grounds for lifting automatic stay under the DCC are general
enough to cover a wide array of circumstances in which it is justified to lift
the automatic stay. Nevertheless, additional guidelines or an illustrative list
of circumstances under which each of the three grounds operates would be
necessary. This is particularly so because Ethiopia is a civil law country where
courts interpret the law with limited room to adapt the law to new situations
unless they have an interpretive guide that can allow them to apply the law by
analogy to similar circumstances.
In the US, secured creditors can seek lifting of the automatic stay on
the grounds specified by the law.838 There are generally two grounds on which
relief from automatic stay can be granted — (1) cause and (2) lack of adequate
protection839 ‘The first requirement —cause is a broad term whose boundary has
not been defined by a statute.”840
On the application for a motion for relief from automatic stay for
cause, the second circuit court has developed twelve factors test in Schneider
man vs. Bogdanovich including “whether relief would result in a partial or
837
DCC Article 654(5).
838
See 11 U.S.C. § 362 (d).
839
Robert Michael Lloyd, George W. Kuney, Secured Transactions: UCC Article 9 Bankruptcy
(Tennessee: University of Tennessee College of Law, 2009), 404.
840
Ibid.
282
complete resolution of the issues; lack of any connection with or interference

with the bankruptcy case; whether the other proceeding involves the debtor as
a fiduciary.”841 Discussing each aspect of stay on the ground of “cause” would
not be necessary here. What needs to be recognized is that courts in the US can
develop new tests and adapt the law to novel cases. Such a system does not exist
in Ethiopia which makes it necessary to revisit the DCC to provide illustrative
lists of circumstances in which automatic stay can be lifted. For instance, one of
the instances is where the individual claim has nothing to do with the bankruptcy
procedure as in the case of security right in a corporeal chattel in which no other
proprietary claim of a third party exists. In this case, depending on the value of
the debt and the collateral, courts might find it easy to grant the stay. In other
cases where given collateral is encumbered by different proprietary claims with
different priorities, the court might need to deny the lifting of the automatic stay
until the rights of various claimants are clearly established.
The second ground for lifting an automatic stay in the US is the doctrine
of adequate protection where the request for lifting the automatic stay may be
denied if the secured creditor is given adequate protection.842 US bankruptcy
law recognizes three methods of adequate protection.843 These are periodic
cash payment, replacement lien, and indubitable equivalence.844 The periodic
cash payment method is criticized for being incompatible with the purpose of
reorganization because it requires the debtor who is in financial trouble to make
payments that should otherwise be used to contribute to the reorganization
plan.845 The second method is also criticized because the likelihood that the
insolvent debtor has unencumbered assets to be given as replacement collateral
841
See In re Bogdanovich, 292 F, 3d 104(2nd Cir. 2002) para 19.
842
11 U.S. Code § 361.
843
11 U.S.C § 361.
844
11 U.S. Code § 361.
845
University of Pennsylvania Law Review, “Adequate Protection and the Automatic Stay under
the Bankruptcy Code: Easing Restraints,” 428.
283
to the secured creditor is low.846 The third method- indubitable equivalence847

— is considered the only realistic alternative for the debtor and flexible for the
bankruptcy court. The indubitable equivalence has been interpreted by courts
to mean complete compensation of the creditor, while authorities strongly
and compellingly argue that in the context of a reorganization, the debtor’s
reasonable opportunity to reorganize should be taken into account.848 This line
of argument calls for interpreting the doctrine of adequate protection to mean,
“Merely the interim protection of the present value of the secured creditor’s
collateral.”849 Moreover, it requires not only a focus on the immediate parties’
interest but also the interest of the debtor’s employees, the government treasury,
the debtor’s suppliers, and unsecured creditors.850 Therefore, while the rule
is that the initiation of bankruptcy automatically stays individual suit of the
secured creditor, the debtor has to provide adequate protection in the order to
have the automatic stay in place.
Lifting the automatic stay is designed primarily to preserve the right

of the secured creditor. The secured creditor can file for relief from automatic
stay through adversary procedure.851 To grant relief from automatic stay,
the court takes into account certain criteria. The criteria differ depending on
whether the specific bankruptcy procedure is liquidation or any of the forms
of rehabilitative procedure including corporate reorganization because of the
prevailing different policies in liquidation and rehabilitation proceedings.852 In
reorganization proceedings, the court generally considers four conditions to be
846
Ibid.
847
This is a term coined by judge learned hand in re Murel Holding Corp (the U.S. Court of
Appeals for the Second Circuit75 F.2d 941 (2nd Cir. 1935).
848
University of Pennsylvania Law Review, “Adequate Protection and the Automatic Stay under
the Bankruptcy Code: Easing Restraints,” 454.
849
Ibid.
850
Ibid.
851
Bankruptcy Rules 10-601(c), 11-44(d), and 12-43(d). States, “In extraordinary circumstances,
temporary ex parte relief is available under Rules 10-601(d), 11-44(e) and 12- 43(e).
852
Larry Peitzman and Margaret S. Smith, “The Secured Creditor’s Complaint: Relief from the
Automatic Stays in Bankruptcy Proceedings,” 1219-1220.
284
met to grant relief from automatic stay.853 These are the debtor’s equity in the
collateral, the likelihood of material harm to the secured creditor, the likelihood
of rehabilitation, and the property’s importance to the debtor’s operations.854
In concrete cases, the court weighs one factor against the other, as well as
balances the interest of the creditor with the debtor to allow or grant relief from
automatic stay; therefore, not a single factor determines the outcome of the
secured creditor’s request.855
The reason automatic stay of individual enforcement right under

bankruptcy law is important is that it shows the conflict of rights of secured
creditors with that of debtors and other creditors to a certain extent. Despite such
conflict, the automatic stay does not nullify the priority position of the secured
creditor rather may modify it. The provisions on setting aside automatic stay
protect the rights of the secured creditor and ensure that the priority position
of the secured creditor is maintained. However, in the interest of successful
rehabilitation, the secured creditor may be forced to accept delayed enforcement.
11.2.2. The Bankruptcy Trustee and Security Rights

Once the bankruptcy of the debtor is declared, its asset is administered by court-
appointed authority. This authority is referred to as ‘the trustee” under the US
bankruptcy law856 as well as under the Ethiopian Bankruptcy law.857
The bankruptcy trustee as an institution is another point where security

rights and bankruptcy law encounter. The trustee has certain powers during the
course of administering the bankruptcy estate and the bankruptcy proceeding.
The specifics of these powers differ from jurisdiction to jurisdiction. From
these powers, of particular significance are the avoidance powers of the trustee
entitling it to invalidate, among others, security rights. This section addresses
853
Ibid., 1226.
854
Ibid.
855
Ibid., 1226-1233.
856
See 11 U.S.C, 1302 (a).
857
ECOMC Article 994.
285
the power of bankruptcy to invalidate preferential and fraudulent transactions.858
11.2.2.1. The Bankruptcy Trustee and Voidable Preference
Sometimes, transactions could be conducted on the verge of bankruptcy to

favor certain creditors. These transactions will have appreciable benefits if they
involve the granting of security rights in the debtor’s asset(s). Bankruptcy law
must make a choice as to whether and under what conditions such transactions
can be avoided. Generally, the bankruptcy administrator has the power to avoid
the so-called “voidable preference.” Preference refers to the fact of the insolvent
debtor preferring some creditors to others by paying the former or granting to
them security right in its asset.859
Under the applicable Ethiopian bankruptcy law, there are provisions

governing invalid acts and rights that can be avoided by the bankruptcy trustee.860
The ECOMC lists acts carried out prior to the adjudication of bankruptcy that are
invalid and these include securities set up on the property of the debtor in respect
of debts contracted before the setting up of such securities, between fifteen days
before the date of suspension of payment and the date of adjudication.861
One major issue that arises from the ECOMC provision regarding
preference is its striking vagueness. The crucial question is, what is the
objective of the law? Is it to invalidate transactions that are aimed at benefiting
a creditor(s) at the expense of the bankrupt estate or is it to invalidate all
transactions that are conducted within the suspect period regardless of the
motive? Should all creditors be affected in the same way by the invalidation, or
should there be distinctions between different creditors for instance depending
858
Thomas H. Jackson, “The Avoiding Powers in Bankruptcy,” Stanford Law Review, 36, no.
3(1984): 732-733.
859
860
ECOMC Articles 1029-1033.
861
As per the ECOMC Article, 1029 invalid acts are “Gratuitous assignments, payments of debts
not due, whether in cash or by assignment, sale, set-off or otherwise, payments of debts due
otherwise than in cash, by negotiable instrument or by transfer to a bank; securities set up on
the property of the debtor in respect of debts contracted before the setting up of such securities,
between fifteen days before the date of suspension of payments and the date of adjudication.”
286
on their relationship with the debtor?
Under US bankruptcy law, the trustee can avoid transfers that are
made by the debtor to certain creditors in preference to others.862 Transactions
made while the debtor was insolvent, or within ninety days before the filing for
bankruptcy or between ninety days to one year before the filing, if the creditor is
an insider are all preferred transactions.863 Five conditions must be met in order
for the transfer to be the voidable preference.864 There are transfers: (1) for
the benefit of a creditor, (2) for an account of an antecedent debt owed by the
debtor before such transfer was made, 3) made while the debtor was insolvent,
(4) 90 days before the filing of a petition or 90 days to a year in case of insider
transactions, and (5) that enables the creditor to receive more than what it would
receive if the case where under liquidation and the transfer has not been made
and creditor received payment of such debt to the extent provided by the law.865
While the five elements of voidable transfer law are not always easy
to apply and involve intricacies,866 the bottom line regarding secured creditors
is simple. A secured creditor who acquires or perfects a security interest in the
debtor’s property within three months before filing for bankruptcy is subject to
the avoidance power of the trustee depending on whether “the transfer” occurred
within that time framework.867 The fifth criterion applies to receiving payment
as opposed to acquiring a security right or perfecting it. Here, for instance,
strict foreclosure could be regarded as receiving payment. Hence, if the transfer
occurred within the suspect period, whether the transfer takes place at the time
of execution of the security agreement or perfection or any other legal act, the
acquiring of security right would be a voidable transfer.868
862
See 11 U.S.C § 547(b).
863
Ibid.
864
James J. White, Bankruptcy and Creditor’s Rights Cases and Materials (West Publishing Co.,
1985) 233.
865
Ibid., 233 -234.
866
Ibid., 233.
867
Ibid., 235.
868
Ibid., 235.
287
US bankruptcy law provides for exceptions to voidable preferences.869

“These exceptions protect transfers that involve an equivalent return to the debtor
and, therefore, do not prejudice other creditors or transfers occurring within
the ordinary course of the debtor’s business. Generally, such transfers involve
short-term trade credit and other “like cash” transactions, purchase money loans
(acquisition loans) and credit advances”870 Hence, these exceptions protect
creditors to the extent that the bankruptcy estate receives an equivalent value.871
The applicable ECOMC does not have such a nuanced approach.

Nevertheless, the DCC has brought significant changes in this area. The DCC
divides voidable transactions into two categories —those to be invalidated
mandatorily and those to be invalidated optionally, the court being give
discretion in this regard.
Article 671(5) of the DCC authorizes the court to invalidate the creation
of mortgages, pledges, or other in rem security interest, over the assets of the
debtor, in respect of debts contracted before the creation of such rights in rem,
at the request of the reorganization supervisor. This provision covers mandatory
invalidation. Notwithstanding this provision’s risky approach to listing security
rights instead of using the generic term “security right” in line with the MPSRP,
this provision does intend to cover all security rights that are created to secure
debts contracted before the creation of security rights. Under the optional
voidable transactions, at the request of the supervisor in a reorganization, the
court may invalidate all other acts performed by the debtor during the suspect
period provided that: (a) the creditor knew or should have known that the debtor
was already in a situation of cessation of payments and (b) the act was detrimental
to the estate or the payment was made in preference to other creditors.872 These
provisions equally apply to reorganization and liquidation.
869
See 11 U.S.C § 547(C)
870
Michael A. Bloom, Richard D. Gorelick, and Heather A. MacKenzie, Exceptions to
Bankruptcy Preferences: Countryman Updated The Business Lawyer 47, no. 2 (1992): 530.
871
See H.R. Rep. No. 595, 95th Cong., 1st Sess. 373 (1977), reprinted in 1978 U.S.C.C.A.N.
5787, 6329.
872
DCC 673(1) & (2).
288
Article 674 of the DCC which enshrines these exceptions states that
the following acts and payments made by the debtor during the suspect period
may not be subject to invalidation, except in the case of fraud: new financing,
the creation of security interests, the sale of assets, the payment of debts, as
well as any other legal acts and payments made by the debtor pursuant to the
restructuring plan, which has been confirmed by the Court.
The provisions of the DCC, although significantly improved are still

confusingly vague on preferences. First, the distinction between mandatory
and optional invalidation is not based on sensible policy rationale. Under the
mandatory invalidation (Article 671), the court shall invalidate security rights
created within the suspect period for debts contracted before the creation of
security right. This means that a security right in the debtor’s intellectual property
created after granting the loan should be invalidated if the loan was provided
two working days prior to the creation of the security right and the creation of
security right happens to coincide with the cessation of payment. Even if the
cessation of payment occurred a day before the creation of security right, the
latter occurred in the suspect period and therefore it falls under the mandatory
invalidation. It is irrelevant whether the secured creditor and the debtor had any
malice. It is irrelevant whether this transaction was a preference. Here, an honest
transaction can be invalidated under the mandatory invalidation provision.
Under the optional invalidation provision (Article 672), the court may
invalidate transactions if the creditor knew or should have known that the debtor
was already in a situation of cessation of payments and the act was detrimental
to the estate or the payment was made in preference to other creditors. In our
earlier example, a security right created on the same date when the loan was
extended may fall under the optional invalidation provision and may not be
invalidated unless it can be proven that the creditor knew of the cessation of
payment and it was detrimental to the estate. An illustration might be good to
explain this absurdity.
289
A. Security Right Created Within Suspect Period
December December
December
21, 2020 22, 2020
20, 2020 Mandatory
Invalidation
Paymant Security
Loan (Art. 671)
Cessation Right in IP
Extended
Date Created
B. Security Right Created within Suspect Period
December December
December
20, 2020 22, 2020
22, 2020 Optional
Invalidation
Payment Security
Loan (Art. 672)
Cessation Right in IP
Extended
Date Created
The difference between scenarios A and B is the following. In A, the

security right was granted in respect of debt contracted prior to the granting
of the security right and the difference between the two dates is one day. This
transaction falls under mandatory invalidation. In scenario B, the granting of
the loan and the security right are made on the same date although they both
happened within the suspect period. Nevertheless, because the two transactions
occur at the same time, it falls outside the ambit of the mandatory invalidation.
This means that under Article 672 of the DCC, the reorganization supervisor
must show that in scenario B, the transaction involves preference and detriment
to the bankruptcy estate while in scenario A, no such proof is required. The
difference between the two is artificial and could lead to absurd results. As such,
it should be revisited to make sure that it does not lead to differential treatment
of substantively similar transactions based on a mere technicality.
The DCC should also differentiate between transactions involving

preference and those that are honest but happened to be within the suspect period.
Last, but not least, the suspect period should be fixed differently for preferred
transactions and honest transactions. In the US, a preference is invalidated
going as far back as one year if the party preferred is an insider (e.g., a company
290
director) an insider is assumed to use the information available about the debtor
only to them to strengthen their position for instance taking security right in the
debtor’s assets. Such a differentiation should be considered in revising the DCC.
The exceptions to the invalidation of transactions enshrined under Article

674 DCC are equally confusing. Under this provision, new financing, the creation
of security interests, the sale of assets, the payment of debts, as well as any other
legal acts and payments made by the debtor pursuant to the restructuring plan,
which has been confirmed by the Court are not invalidated unless they involve
fraud. Are these transactions excluded if all of them are executed pursuant to
the restructuring plan and confirmed by the court or are some of them excluded
regardless of court confirmation? If the answer is the latter, then this contradicts
the mandatory invalidation provision which requires security rights created
within the suspect period to be invalidated, if they relate to debts contracted
before the creation of the security right or at the very least with the optional
invalidation provision. Thus, the exclusion seems to apply to secured rights
created pursuant to the reorganization plan and confirmed by the court.
If the preceding analysis is valid, there is a gap in DCC. Often, there

are transactions such as acquisition security rights that are created to secure
payment of money directly supplied for the acquisition of a given asset
(acquisition security rights). Even if those transactions occurred within the
suspect period, they should be upheld as the secured creditor is a direct financier
of identifiable collateral.
US bankruptcy law clearly protects acquisition security rights holders.

Under the relevant provision, the trustee may not avoid a transfer that creates
a security interest in property acquired by the debtor— (A)to the extent such
security interest secures new value that was— (i) given at or after the signing of
a security agreement that contains a description of such property as collateral;
(ii) given by or on behalf of the secured party under such agreement; (iii) given
to enable the debtor to acquire such property; and (iv) in fact used by the debtor
to acquire such property, and (B) that is perfected on or before 30 days after the
291
debtor receives possession of such property.873
The DCC must be revisited to be clear about why transactions are exempt
and should remove judicial approval from some of the transactions as judicial
approval unnecessarily creates a burden on secured creditors whose rights do
not have a detrimental effect on the bankruptcy estate.
11.2.2.2. The Bankruptcy Trustee and Fraudulent Transfer

Another category of transaction that is subject to challenge by the bankruptcy
trustee is the fraudulent transaction (transfer). This is different from
preferences because it involves an intention to defraud parties involved in the
bankruptcy proceeding.
As shown earlier, the ECOMC simply lists the so-called invalid acts
that occurred prior to the adjudication of bankruptcy including setting up of
securities in the property of the debtor in respect of debts contracted before the
setting up of such securities, between fifteen days before the date of suspension
of payments and the date of adjudication.874 Under the Ethiopian bankruptcy law,
although security rights in rem created before the adjudication of bankruptcy or
suspension of payment may be registered (perfected), registration made within
one month before the suspension of payment may be invalidated by the trustee
if one month has elapsed between creation and registration.875 The rationale
behind this is that if the secured creditor has failed to register the security rights
for one month, a subsequent attempt to register it at the verge of bankruptcy
makes the creditor guilty of in-action and thus the property becomes part of
the bankrupt estate. The suspect period under the ECOMC is fifteen days. This
applies to all transactions including perfection of security interests.
In Ethiopia, there is no distinction between preferences and fraudulent

transactions. In practice, it is possible to apply the same provision of the ECOMC
to deal with both. However, since preference and fraudulent transactions have
873
11 U.S. Code § 547(c)(1)(c).
874
ECOMC Article 1029.
875
ECOMC Article 1029(d).
292
different objectives, the application of similar provisions of the ECOMC to

address both issues seems problematic. In other words, it is not fair to treat a
debtor and creditor involved in preferential transfer on the one and a debtor and
creditor involved in fraudulent transfers on the other hand in the same manner.
A Fraudulent transfer is aimed at intentionally defrauding creditors. Preferential
transfer can be an honest business practice that could be interpreted as a
preference. A transaction can qualify as preferential simply because it happened
at the wrong time or the circumstances make it seem suspiciously preference.
The DCC followed a similar pattern of not regulating preferences

and fraudulent transactions differently although it has more comprehensive
provisions governing so-called mandatory and optional invalidation. The
general rules on voidable transfers apply to fraudulent transactions. Thus, the
creation of security interest in the suspect period for a debt contracted before
the creation of the security will be invalidated mandatorily upon the request of
the reorganization supervisor. If the transaction does not fall within mandatory
invalidation provisions, it falls in optional invalidation provisions. None of the
provisions mention transactions that are invalidated due to the involvement of
fraudulent intentions.
Under the DCC Article 674 exception, certain transactions including

the creation of security interests, the sale of assets, the payment of debts, as
well as any other legal acts and payments made by the debtor pursuant to the
restructuring plan, which has been confirmed by the Court are not invalidated
unless they involve fraud.876 If the creation of security right is found to have
involved fraud, it means that it will fall either under the mandatory invalidation
or optional invalidation for there is no other procedure to invalidate transactions
during a suspect period.
Bankruptcy laws in other countries almost invariably contain specific

provisions governing fraudulent transactions. Under what is considered as a
“willful disadvantage,” under the German Insolvency Act(2012), transactions
876
DCC 674(1).
293
executed by the debtor in ten years prior to the commencement of the bankruptcy
proceeding, with intent to disadvantage the general creditors provided that the
other party was aware of the debtor’s intent to disadvantage the creditors at the
time of the transaction can be contested by the insolvency administrator.877 “The
awareness of the other party is presumed if the other party knew of the debtor’s
imminent insolvency, and that the transaction constituted a disadvantage for the
creditors.”878 Similarly, under the Hungarian Insolvency Act(1991), a fraudulent
transaction is a contract concluded to conceal the debtor’s asset or to defraud
creditors.879 Under this provision, the awareness of the other party involved in
the contract is a pre-requisite and the suspect period is five years.880
In the US, there are two sets of laws governing the fraudulent transfer,
namely the Uniform Fraudulent Transfer Act of 1984 (UFTA) and the bankruptcy
code.881 The UFTA has been adopted by 25 states.882 The significance of the
existence of these different laws is that bankruptcy law is federal law, and it is
enforced uniformly across states. A conflict between state law and bankruptcy
law is settled in favor of bankruptcy law. Under the US bankruptcy law, the
trustee can “set aside transfer in interest made on or within one year before the
bankruptcy, if the debtor voluntarily or involuntarily made such transfer with
the actual intent to hinder, delay or defraud the creditor.”883 There has not been
a case law showing the application of this section to secured creditors in the
personal property although it has been invoked in real-estate security. In Durrett
vs Washington Insurance Co where section 548 fraudulent conveyance is
877
German Insolvency act (2012) section 133(1).
878
Ibid.
879
The Hungarian Involves Law Act XLIX (1991) section 40(1)(a).
880
Ibid.
881
See Gary A. Foster, Eric C. Boughman, “The Uniform Voidable Transactions Act: An Overview
of Refinements to the Uniform Fraudulent Transfer Act,” Probate & Property Magazine 29
No. 04, http://www.americanbar.org/publications/probate_property_magazine_2012/2015/
july_august_2015/2015_aba_rpte_pp_v29_3_article_foster_boughman_uniform_voidable_
transactions_act.html
882
Lawrence P. King & Michael L. Cook, Creditor’s Rights, Debtor’s Protection and Bankruptcy,
3rd ed (Mathew Blender & Co. Inc, 1996), 326.
883
11 U.S.C § 548(a)(1).
294
invoked, the 5th circuit court set aside a pre-bankruptcy non-judicial foreclosure
that took place nine days before bankruptcy on the ground that the foreclosure
was for less than the fair consideration and therefore fraudulent.884
A few obvious conclusions can be drawn based on the short review

of fraudulent transactions laws in Ethiopia and other jurisdictions. First, it is
never justifiable not to have specific provisions dealing with fraudulent transfers
that occur on the verge or in the vicinity of insolvency. Second, at least for the
purpose of discouraging fraud, the claw back period should not be the same
as for honest transactions and fraudulent transactions. It should be longer for
the latter. For fraudulent transactions, it is ten years in Germany, five years in
Hungry, and one year in the US. The ECOMC as well as the DCC have gaps
in this regard. It would be a missed opportunity if the DCC is enacted in its
current form.
11. 3. Conclusion
While security rights survive in bankruptcy, bankruptcy law has various
provisions that curve security rights either through the temporary suspension
of enforcement or through invalidating security rights that undermine the
collective recovery of claims in bankruptcy. The provisions of the Ethiopian
bankruptcy law even in the DCC lack clear and sound policy behind many of
the rules addressing automatic suspension of an individual claim as well as the
avoidance of preferential and fraudulent transactions.
The most serious problems pertain to the technicality relating to the

treatment of honest transactions and preferential transactions. Due to the
rule’s excessive technicality and lack of sound underlying policy, sometimes
preferential transactions could survive in bankruptcy while honest transactions
could be invalidated. Moreover, the lack of distinction between fraudulent
transactions on the one hand and honest and preferential transactions on the
other hand casts a doubt on the fitness of the law to deal with modern commercial
realities.
Ibid. See Durrett v. Washington Nat’l Ins. Co., 460 F. Supp. 52, 53 (N.D. Tex. 1978), rev’d,
884
621 F.2d 201 (5th Cir. 1980).

Chapter Twelve: Security Rights and Consumer Debtor
Protection
12.1. Introduction
Today, access to consumer credit is an important aspect of economic
development.885 The consumer’s life may hinge on being granted credit.
Financing education, a home, purchase of a motor vehicle, and many other
important aspects of the consumer’s life in the modern world depend highly on
accessing credit.886 However, there is also a risk in access to consumer credit,
in particular over-spending and mass-scale consumer defaults that could have
severe economic and social consequences.887 An adequately regulated access to
consumer credit, the one that does not expose the consumer to over-indebtedness
is good for the economy.888 While the credit market itself should be regulated,
secured lending itself poses various consumer protection concerns.
Secured transactions law should have special provisions related to

consumer debtor protection. These provisions typically provide default-related
protections to consumers’ debtors. In the US and Europe, tailored laws are also
enacted to protect consumers’ debtors from abusive practices of lenders. This
chapter examines the potential challenge posed by the lack of consumer debtor
protection provisions under the MPSRP.
12.2. Special Provisions in Law of Security Rights

Prior to the enactment of the MPSRP, Ethiopia had no legal rules in its secured
transactions law designed to protect consumer debtors. In Ethiopia, modern
consumer protection law was enacted in 2003 and subsequently amended in
296
2010 and 2014.889 These laws do not cover consumer credit.
12.2.1. Security Right and Consumer Debtor under the MPSRP

The MPSRP was expected to incorporate rules prevailing in contemporary
secured transactions laws. As such, its provisions should balance between
access to credit and efficient enforcement of security rights on the one hand
and protection of vulnerable consumer debtors on the other hand. Nevertheless,
the MPSRP turned out to be missed opportunity in terms of consumer debtor
protection. Although the MPSRP applies to consumer goods,890 the unique
challenges faced by consumer debtors are not given due consideration.
UCC Article 9 applies to security rights in consumer goods.891

Commentators have underscored that “Article 9’s consumer protection
provisions do not fall into any coherent pattern.”892 When UCC Article 9 was
drafted, there were extensive consumer protection provisions that encountered
opposition from business interests and led to fear as to whether that may slow
down the adoption of Article 9 by states.893 In order to accommodate both
business and consumer interests, “the drafters decided to include in Article 9
minimal consumer protections and to encourage the states to enact separate
consumer protection statutes that might override contrary provisions of Article
9.”894 Revised Article 9 is considered a consumer compromise by introducing
more consumer favorable provisions as compared to its predecessor although
some criticize the compromise method as counter-productive due to weaknesses
in the revised substantive rules.895 Today, there are various provisions in UCC
Article 9 designed to protect consumer debtors, the most important ones relating
to consumer protection post-default (during the disposition of collateral).
First, under UCC Article 9, the secured creditor must dispose of the
collateral in 90 days after taking possession, if the consumer has paid 60 percent
of the value of the collateral.896 This requirement is meant to ensure that the
consumer debtor who has paid the significant amount of the debt secured (60
895
See Charles W. Mooney, “The Consumer Compromise in Revised U.C.C. Article 9: The
Shame of it All,” Ohio State Law Journal 68(2007):215-139.
896
UCC § 9-620(e) cum (f).
297
percent) and has established equity in the collateral is not stripped off their
property right unduly. The MPSRP does not have equivalent provisions.
Second, under UCC Article 9, unlike security rights in non-consumer

transactions, a secured party cannot accept the collateral in partial satisfaction
of the obligation it secures in the case of consumer debtor.897 This rule aims to
protect consumers who lack the necessary skill and experience to value their
asset from surrendering the collateral in partial satisfaction of the creditor’s
claim while the consumer would continue to pay the remainder of the debt.
Third, the failure of the secured party to comply with UCC Article 9 rules
entitles consumer debtors to higher damages (compensation) than non-consumer
debtors.898 The aim is to dissuade lenders from abusing their rights toward
consumer debtors. The MPSRP’s strict foreclosure rules make no distinction
between commercial and consumer debtors (see supra section 10.5.2.4). The
MPSRP lacks provisions on the civil liability of secured creditors for breach
of their obligations. Thus, consumer debtors do not benefit from a special
protective regime during enforcement of security rights under the proclamation.
Lastly, UCC Article 9 acknowledges the existence and supremacy of

special laws aimed at providing more protection to consumers.899 The justification
stems from the fact that UCC Article 9 provides minimal protection to consumers
and federal and state consumer protection laws governing consumer transactions
may provide stronger rules or better protection to consumers (see infra § 12.3).
In the light of the preceding analysis, it is fair to state that the MPSRP
is disproportionately creditor friendly. Such as system is doomed to have a
negative effect on secured financing and cause a socio-economic crisis. A
secured transaction law that ignores the competing needs of the consumer credit
industry and consumer debtors inevitably faces the challenge that consumers
may be discouraged from borrowing due to fear of abusive enforcement practice
897
UCC § 9-620((g).
898
See UCC § 9-625(a) to (g).
899
UCC § 9-201(b).
298
ultimately defeating the purpose of the law itself.
12.3. Abusive Debt Collection Practices

The increase in access to consumer credit and the pressure on financial institutions
to collect their debts lead to rampant abusive debt collection practices. The reform
of Ethiopian secured transactions law aims to enhance access to finance not only
for business but also for consumers. Today, enacting sui generis legal regime
dedicated to consumer protection in the collection of debts including secured
debts is not even remotely conceived in Ethiopia. This is slightly concerning
given that even countries where consumer financial protection is high, enact
laws to protect consumer debtors from abusive debt collection practices.
In the US, consumer credit laws have been evolving since 1968 when
the consumer credit protection act (CCPA) was enacted.900 The first purpose
of the CCPA was “to regulate garnishment of compensation due for personal
services and predatory extensions of credit that can divert money into excessive
credit payments and thereby hinder the production and flow of goods in
interstate commerce.901” The second purpose of the CCPA was “to regulate
the application of garnishment as a creditors’ remedy that frequently results in
loss of employment by the debtor, and the resulting disruption of employment,
production, and consumption.”902 Recently, there are more specific laws on
consumer credit; the Truth in Lending Act (TILA), the Fair Credit Reporting Act
(FCRA), the Equal Credit Opportunity Act (ECOA), and the Fair Debt Collection
Practice Act (FDCPA).903 The first three acts provide legal rules under which
consumers access credit. In addition to the consumer credit protection laws, the
US, enacted FDCPA aimed at tackling abusive debt collection practices by a
debt collector.904
900
See 15 U.S.C. 1671 et seq.
901
Ibid., § 30(a) (1)
902
Ibid., § 30(a) (2).
903
Fair Debt Collection Practice Act, 15 U.S.C. SS 1692-1692P (Last Amended 2010). § 806
of the FDCPA governs Harassment or abuse.
904
FDCPA, § 802 (e).
299
The FDCPA defines abusive debt collection practices to include “the

use of profane or obscene language; the natural consequence of which is to
abuse the reader or the hearer”905 These abusive debt collection practices can
be exploited by unsecured and secured creditors. Among others, the FDCPA
governs unfair collection practices including “taking or threatening to take any
non-judicial action to effect dispossession or disablement of property if there is
no present right to possession of the property claimed as collateral through an
enforceable security interest.”906
Because the FDCPA regulates abusive debt collection practices rather

than enforcement of security rights, debt collection agencies have often
argued that the FDCPA does not apply to cases involving the repossession of
collateral.907 This is meant that even if there has been a violation of certain rules
relating to the repossession of collateral from the consumer, the FDCPA would
not apply. However, in Vantu v. Echo Recovery (2014), the District Court of
Ohio rejected the defendant’s argument that since the principal activity of the
defendant is not the collection of debt rather enforcement of security rights, the
FDCPA does not apply to the dispute at hand, where the defendant was charged
with attempting to repossess a van at gun point and physically assaulted the
plaintiff.908 The court reasoned that the close reading of the relevant sections of
the FDCPA brings self-help repossession under the ambit of the FDCPA as long
as the repossession is attempted when there is no present right to repossess and
whether there is present right to repossess is assessed in the light of state law.909
The decision in Vantu vs Echo Recovery is sound from a policy point of

view. Since the FDCPA is aimed at tackling abusive debt collection practices,
differentiating between debt collection and enforcement of security interests
905
FDCPA § 806.
906
Ibid., § 808 6(A).
907
FDCPA 15 U.S.C. § 1692a (6). See Vantu v. Echo Recovery, L.L.C, The Northern District
Court of Ohio, Case No. 3:14CV958 (N.D. Ohio Feb 12, 2015).
908
See Vantu v. Echo Recovery, L.L.C, The Northern District Court of Ohio, Case No. 3:14CV958
(N.D. Ohio Feb 12, 2015).
909
Ibid.
300
is a mere technicality. When the collateral is repossessed, what follows is the

right of the creditor to satisfaction of its claim. Ergo, repossession is simply a
different form of collection.
The FDCPA provides for statutory penalties, civil damages and allows
the consumer to recover the cost of the action and attorney’s fees as determined
by the court (in case of success).910 It provides minimum rules for the protection
of consumers in debt collection. States have the power to enact laws providing
for stricter rules, going beyond the rules of the FDCPA.911 Among some of
the achievements of state FDCPA, includes extending the definition of “debt
collector” to the original creditor itself as it became necessary to address abusive
practices, whether perpetrated by the original creditor or a third-party collection
agency.912 Moreover, state FDCPA laws provide for licensing procedure for debt
collection agencies, a requirement that was not present in the federal FDCPA.913
12.4. Conclusion
It is unquestionable that the consumer credit industry is an important ingredient
of any economy. The survival of the credit industry as well as the sustained
contribution to provide money to the consumers requires enforcement of debts.
However, unregulated access to credit and debt enforcement systems puts the
consumer at the mercy of the credit industry and threatens consumer welfare,
and adversely affects the efficient functioning of the credit market. Thus, the law
must strike a balance between the interests and expectations of both creditors
and consumers.914
The US secured transactions law is designed to accommodate the above

conflicting interests. The same is true for special consumer debtor protection
laws. The Ethiopian secured transactions law lacks rules for the protection of
910
See FDCPA, § 813.
911
See FDCPA, § 816.
912
192.
913
Ibid., 213.
914
Sarah Brown, The Regulation of Consumer Credit. A Transatlantic Analysis, 78
301
consumer debtors. Thus, in addition to revising the MPSRP to include consumer

protection in various aspects of enforcement of security rights, Ethiopian
policymakers should implement a legal framework that protects consumer
debtors from abusive debt collection practices including during enforcement of
security rights. The experience of the US in this area would be unquestionably
beneficial for Ethiopia in its future effort to implement consumer debtor
protection in the consumer credit industry.
302
Short Glossary
As this book engages in comparative analysis of legal principles, concepts, and
rules, it is imperative to be familiar with some of the legal jargons that appear
in the book with the view to avoiding confusion because there are a few legal
jargons that may be used to mean different things in different contexts or are
totally unfamiliar to the Ethiopian legal system.
Attachment
Attachment is a legal term that refers to the security agreement being binding
between the debtor and the secured creditor. The term is uniquely used under
UCC Article 9 which provides that a security interest attaches to collateral when
it becomes enforceable against the debtor with respect to the collateral, except
when an agreement postpones the time of attachment.915 Although this term is
not employed in the MPSRP, the term is occasionally used in the book. The
term attachment is also used to refer to a court order seizing specific asset during
enforcement procedure.
Chattel Mortgage
Chattel mortgage refers to a non-possessory pledge in the US where the debtor
grants security rights in its movable asset without surrendering possession of
the asset to the creditor. In some jurisdictions, it is called a registered pledge.
Lien
The term lien is used to mean different things in different contexts. Generally,
under UCC Article 9, lien simply means security interest or security right
although it is used frequently with respect to a specific type of security right
as in agricultural lien, judgment lien, floating lien, consensual lien, and non-
consensual lien. In all these cases, the term lien refers to security right although
in most cases, it is used to refer to security right created by the operation of the
law or judicial decision. The MPSRP also uses this term (e.g., lien and non-
consensual security rights under Article 3). This book uses the terms security
interest and security right interchangeably.
915
U.C.C § 9 -203(a) (amended 2010)
303
Perfection
Perfection is UCC Article 9 term for the process by which security right is made
effective against third parties916 through notifying the public of the secured
creditors’ interest in the debtor’s asset to determine conflicting proprietary rights
in the asset.917 There are various methods of perfecting security that is discussed
in this book (see chapter 9). This term is not used by the MPSRP. Nevertheless,
for the sake of convenience, the book uses the term to describe when security
right is effective against third parties. Thus, sometimes, the book might say “the
security right is perfected” to mean that it has been effective against third parties
(e.g., by registration).
304
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313
The author
Asress Adimi Gikay is a Lecturer at Brunel University London with

his research focusing on Artificial Intelligence, Law, Policy, and Governance.
He has published several articles in peer-reviewed journals on topics ranging
from secured transaction law reform to the regulation of digital technologies.
He has also authored multiples monographs for the International Encyclopedia
of Laws published by Kluwer Law International. He is a co-editor of a book
titled “Discrimination, Vulnerable Consumers and Financial Inclusion: Fair
Access to Financial Services and the Law (Routledge, 2021).
In 2020, Asress Adimi Gikay obtained his PhD (with Honor) in
Individual Person and Legal Protections from Sant’Anna School of Advanced
Studies (Pisa, Italy) specializing in the Regulation of Algorithmic Consumer
Credit Risk Assessment in the European Union and the United States. He also
holds Doctorate Degree in Juridical Sciences (Summa Cum Laude) from Central
European University (CEU) Department of Legal Studies (2016) specializing in
comparative law of security rights. He has LLM in International Business Law
(CEU) and LLM in Comparative Law, Economics, and Finance (IUC-Torino). He
obtained his LLB degree from Addis Ababa University Faculty of Law in 2008.
314
This book is priced differently in Ethiopia and on Amazon. One of the reasons I
have decided to self-publish the book, as opposed to publishing with traditional
publishers is to make the book accessible and affordable to readers in Ethiopia.
International publishers price their books in foreign currencies in such a way
that the books are inaccessible and/or unaffordable to Ethiopian readers. Local
publishers do not seem to appreciate the significance of this area of law to
various stakeholders. It is due to this reason that the author took the challenge
journey of self-publishing the book — to provide a timely and unimpeded access
knowledge to Ethiopian readers. Hence, the price that appears on the cover
page is meant only for Ethiopian readers.
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Ethiopian Law of Security Rights in Movable Property

Book · April 2021

Asress Adimi Gikay

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Asress Adimi Gikay

First published © 2021 by Asress Adimi Gikay

The reform effort in Ethiopia is commendable as the country abandoned

The book utilizes comparative analysis to explain policy and interpretive

I hope this work, which comes early during the implementation of

Asress Adimi Gikay

Chapter One: Modernization of Law of Security Rights in Ethiopia

Chapter Two: The Conceptual Foundations of the MPSRP

Chapter Three: Security Rights to which the MPSRP is Inapplicable

Chapter Four: Possessory Security Right and Security Right in Commercial

5.1. Introduction 115

Chapter Six: Security Rights in Intangibles Assets

6.1. Introduction 147

Chapter Seven: Security Rights in Proceeds

7.1. Introduction 161

Chapter Eight: Perfection — Effectiveness of Security Rights Against Third Parties

8.1. Introduction 179

Chapter Nine: Priority and Security Rights

9.1. Introduction 207

Chapter Ten: Private Enforcement of Security Rights

10.1. Introduction 239

Chapter Eleven: Security Rights in Bankruptcy

11.1. Introduction 275

Short Glossary 301

This chapter provides an overview of the reasons for Ethiopia’s choice

1.2. The Credit Economy — The Driving Force

favored economic sector. In the 21st Century, a government centered private

Credit is important for economic development both in the developed

the assumption that credit is an important engine for economic development, a

Access to credit is critical for the growth of small and medium-sized

1.3. The Role of Law of the Security Rights in Enhancing Access

repayment or reducing the risk of default.22 Second, it reduces interest rate as

Understandably, having a law governing secured lending is not in itself

1.4. Modern Law of Security Rights

An obsolete law that governs secured transactions makes it difficult

One of the major shortcomings of an obsolete law of security rights

The second major defect of an outdated law of security rights is a flaw

The task of identifying key principles of a modern law of security

Having inspired reforms in different countries, UCC Article 9 could be

1.5. The Causes for Reform in Ethiopia

1.5.1. Private Sector Development and the Law of Security Rights

as in Ethiopia, leading today to a stronger private sector economy and financial

The continuous privatization process led to a shift from state to private

1.5.2. The Obsolescence of the Pre-2019 Law and Piecemeal

1.5.3. The Ratification of the Cape Town Convention and the

and Construction Equipment(MAC) Protocol.54 The purpose of the CTC

pre-2019 domestic Ethiopian law of secured financing for several reasons. As an

First, the convention follows a functional approach to security right,

1.6. The Defects in Pre-2019 Ethiopian Law of Security Rights

First, entering into a security agreement required negotiating and

secret transactions overriding subsequent transactions or the risk of costly

Ostensible ownership “arises when a debtor retains possession of

Second, under the Pre-2019 Ethiopian law, the indiscernible statutory

The absence of a unified system of registration of security rights made

Third, the Warehouse Receipt law represented another source of

The ensuing challenge was that a creditor with a security right in a

subsequent secured creditors was impracticable.