Law on FIs to provide framework for ensuring secured transactions

24 Dec, 2021

ISLAMABAD: The Financial Institutions (Secured Transactions) (Amendment) Act, 2021, approved and promulgated by the federal government will provide a legal framework for creation, perfection, and enforcement of security interest on movable assets to enhance SMEs’ access to finance through use of their movable assets. Sources told Business Recorder that the said Act, related to the SECP, had introduced the legal framework of secured transactions in line with the international best practices.

The act introduced amendments to the Financial Institutions (Secured Transactions) Act, 2016 (STA), promulgated on July 1, 2016, to provide a legal framework for creation, perfection, and enforcement of security interest on movable assets with a view to enhance the SMEs access to finance through use of their movable assets (e.g. receivables, intellectual property, inventory, negotiable instruments, agricultural produce, petroleum or minerals, motor vehicles, etc) as security for loans. It also provided for establishment of a STR for registration of charges created by unincorporated entities (individuals, sole proprietorships, partnerships etc) on their movable assets.

The STR was launched by the SECP on April 30, 2020, relevant rules and regulations have also been notified. The scope of the law extended to allow extension of security interests to future assets, products and replacements of original assets and absolute assignment of receivable.

It will allow general description of debts and obligations in collateral agreements and permit that all types of debts and obligations (i.e. present, future, conditional, unconditional etc) can be secured between parties.

It will allow absolute priority to secured creditors over government and labour claims, in case of default in insolvency or outside insolvency. To ensure efficient administration of the STR by the SECP, some powers of the federal government e.g. appointment of the registrar, operationalisation of the registry and ancillary matters have been assigned to the SECP. This structure of the registry will help to move towards unification of registries and their legal framework in line with doing business methodology and international best practices leading to further improvement in ease of doing business ranking in the future.

Moreover, to comply with international best practices on secured transactions laws and the EODB requirements, the security interests will be regulated on the basis of their function, not their form, traditional terminology for security interests (like pledge, hypothecation) is used only in the definition of “security interest” in section 2(xlviii), while the term “security interest” is used in all other provisions. Under the new law, the filing of a security agreement is not required and advance registration of security interest based on authorisation by the entity is allowed.

A charge/security interest may be registered for a period of up to five years, which is extendable, if required.

Perfection of security interests may be achieved by registration in all types of security interests on movable property. However, in some cases, eg, possession of tangible movable property or right on funds credited in deposit account perfection may also be achieved through possession or control respectively.

Earlier, perfection by registration was not available for all types of security interests. The new law would also allow super-priority to acquire security rights i.e. security right of financier of an asset, if registered under the Act, shall have priority over another secured creditor.

Copyright Business Recorder, 2021

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