chapter  4
38 Pages

Creation of security rights

A simple and effi cient manner of creation of security rights is critical in lowering the cost of credit and is known to be one of the key principles of international instruments. Predictable rules on the effectiveness of a security right between the debtor and secured creditor, arguably, will be instrumental to achieve facilitation of credit. As part of this, it is also crucial to recognise the effectiveness of nonpossessory security rights in all types of assets.1 In essence, creation is the process where the security right becomes effective by an agreement between the secured creditor and debtor (grantor) who grants to the former the right to enforce this interest over the assets of the latter in the latter’s default.2 The economic power that the creation of security rights grants over the assets of the debtor is clear: simply, the secured creditor lends, and takes security over the existing or future assets of the borrower by concluding an agreement stipulating post-default rights according to which, in case of default in payments or insolvency of the debtor, the secured creditor will have the right to enforce the security interest to satisfy the claim, thus, in a way, controlling the business decisions of the borrower. Facilitation of credit requires clear, effi cient, simple and functional rules for the creation of security rights. Minimal formalities, a single method for creating security rights and an ability to create security rights over future assets without the need for additional documents are instrumental in the facilitation of credit. The grantor should be able to use the same asset to grant multiple security rights.3 Unnecessary formalities have adverse effects on the cost of credit. Specifi cation of the time of creation is critical. An effi cient creation procedure of security rights must address a number of issues, including who may grant and be the benefi ciary of a security right, and what types of assets and obligations may be encumbered and secured by a security right. Unreformed secured transactions regimes exclude certain goods, obligations and transactions. There are restrictions as to who can be a party to a secured transaction. This chapter will explore the issues

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3 To operate this objective effectively, a registration system notifying third parties is necessary. See Chapter 5.