CLIR: Secured Transactions Law
Secured Transactions Law
Secured Transactions Law is intended to facilitate commerce by reducing the cost of lending by reducing risk through a standardized system of secured lending. Through the act of pledging property to the creditor a secured loan or transaction provides creditors with security in the event that a borrower defaults on debt. The creditor can, under certain circumstances, sell or take possession of the pledged property if the borrower defaults on a loan. A more standardized and predictable system for creating a security interst/pledge should stimulate greater lending activity. Secured Transactions Law also provides for certain rules governing relationships between a debtor and a creditor. This preserves the rights of some creditors (i.e., secured creditors) against the rights of others in the event of a debtor’s bankruptcy. The process of “registering” a pledge or security interest protects the rights of a creditor in the event that the borrower’s property is pledged several times.
The Secured Transactions section of the CLIR diagnostic methodology focuses on the legal system as it relates to pledges and security interests in different asset classes. The term “secured transactions” as used in the diagnostic includes “the [l]aws procedures, and institutions designed to facilitate commerce by promoting transparency, predictability and simplicity in creating, identifying and extinguishing security interests in assets.”[1] The ability to use security interests in moveable property is essential to a vibrant market economy. Commerce needs inexpensive capital in order to thrive and lending that is secured by a pledge of property is one of the most economical means of securing financing. Secured lending, in theory, reduces a creditor’s risk since it provides the creditor with a source of payment if the debtor defaults.
[1] The Model Law on Secured Transactions, EBRD, 1994, located at http://www.ebrd.com/english/st.htm
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