Determining the content of the reform
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Expanding the use of collateral requires reforming the law of secured transactions and, as a critical part of that reform, replacing the traditional registry with an archive for filing notices of security interests.1 The reform must tackle a wide array of commercial and microeconomic problems, many examples of which are discussed in chapter 3. The law, through its detail, must address each of the commercial problems inexpensively and effectively. It must give clear instructions that address a daunting set of microeconomic problems. And through all this, the law must constantly guide economic agents toward actions that produce the greatest economic gain at the lowest cost.
Moreover, the detail must be integrated into the new law's architecture in a way that produces the best overall impact. And this architecture must fit within the framework of other laws in a way that permits the new law of secured transactions to operate in an economically effective way.
As chapter 3 shows, unreformed laws prevent important classes of property from serving as collateral, block the use of collateral in certain transactions, and prevent some agents from offering collateral and others from accepting it. A reformed law will need to cover many more situations than those discussed in that chapter. Indeed, a well-drafted law will cover all the detail of a modern textbook on secured transactions, which typically contains several hundred pages.2 In setting out that detail, the law must resolve some larger strategic issues that arise in drafting the law and transforming the registry into a filing archive. These issues are set out in the following sections.
The law, at its most detailed level, is like a computer program that must permit lenders and borrowers to process an enormous range of economic transactions.
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But that detail operates within an overall structure, the architecture of the law, that also affects its economic impact. The legal issues that must be addressed in shaping this architecture will arise again and again, so the project team and task manager should have a clearly developed and defensible position on the law's approach to solving problems in creation, priority, publicity, and enforcement and in the derogation (amendment or repeal) of conflicting laws.
Two fundamental issues that the reform must address: Will the law adopt a unified approach covering all transactions that function as security devices? And how will it apply to nonconsensual security interests?
Comprehensive functional approach
The secured transactions reform that is most economically effective, the North American model, adopts the comprehensive functional approach, with the reformed law covering all voluntary security devices that use property. These include mainly pledges, leases, trusts, conditional sales, consignments, warehouse finance, and mortgages against ships and airplanes.3
That means that if a transaction, no matter what it is called, takes property as collateral, the reformed law will determine priority and publicity. If in addition the transaction takes collateral on a voluntary basis, the reformed law will also determine creation and enforcement. It does not mean that the new law repeals all the old laws specifying security devices. Those voluntary security devices will continue to exist. But the reform will impose uniformity in key aspects over all these devices: priority will be determined by the time of filing in the filing archive, and repossession and sale will be governed by the new law. That will require minor modifications of the other laws. But as long as the filing archive is inexpensive (as it should be for many other reasons), the modifications relating to priority should not inconvenience those using the existing legal features. And the new provisions relating to enforcement will typically be an advantage.
An alternative strategy, the superpledge-supercharge approach, calls for strengthening the traditional legal instrument for the many types of security interests in movable property that may now exist. Depending on the regime, this would relate to the pledge, the charge, and the mortgage. This is the approach suggested in the European Bank for Reconstruction and Development's draft model law on...
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