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Part 2 -Taking Security in Cross-Border Lending: (How Do You Know) the Steps to Take or Whose Law Is It Anyway?
December 2, 2024
By David W. Morse, Esq.
Part 1 of this article appeared in the September/October issue of The Secured Lender.
Taking Security: Security Rights in Intangible Assets
In the case of tangible personal property, the general principle to look to the laws of the location of the property captured in the phrase lex rei sitae provides some useful guidance for the secured lender on how to determine the steps that it will need to take in order to establish its security rights to such property. But what happens in the case of intangible property, where there is no such location? If the assets are the receivables owing to a company, whether arising from the sale of goods or services, or from other extensions of credit, or if the assets are a bank account or intellectual property, how does the secured lender determine the steps it should take to get rights to its security?
The Key Relevant Rights of the Secured Lender and “ThirdParty Effectiveness”
In the case of an intangible asset like a receivable, such matters become quite complex, because it is not just a matter of the rights of the secured lender relative to the owner of the asset (and other creditors of the owner), but another key party: the obligor on the receivable (referred to as an “account debtor” in the UCC and simply a “debtor” in most jurisdictions outside of the United States).
As with tangible assets, the secured lender will want to comply with the law of the location of the grantor of the security right (whether in the form of a security interest, security assignment, pledge, charge or other form of security right) since the laws of such jurisdiction will likely be where most of its creditors are located and where most likely the company will be subject to an insolvency proceeding. This means for a company organized under the laws of a State in the United States, the secured lender will look to the UCC. For a company organized under the laws of England and Wales, or the Netherlands, or Germany, the secured lender will look to the steps needed to establish its rights to the receivables under the laws of England and Wales, the Netherlands or Germany, wherever the company is organized.
But whereas with tangible assets the secured lender needs to consider the laws of the location of the inventory or other tangible assets, with intangible assets like receivables, the secured lender will need to consider the laws where the obligor on those receivables is located.
The secured lender will need to identify the law that will establish the effectiveness of its rights as against other creditors and in the event of an insolvency (which under the UCC is through “perfection” of its security interest), but in addition must also identify the laws that will establish its rights relative to the obligor on the receivable. Addressing the rights of the secured lender as to both categories of parties is commonly referred to as a matter of “third-party effectiveness” of the secured lender’s position.
Click here to continue reading the article (starting at column 2 on page 1)
Taking Security: Security Rights in Intangible Assets
In the case of tangible personal property, the general principle to look to the laws of the location of the property captured in the phrase lex rei sitae provides some useful guidance for the secured lender on how to determine the steps that it will need to take in order to establish its security rights to such property. But what happens in the case of intangible property, where there is no such location? If the assets are the receivables owing to a company, whether arising from the sale of goods or services, or from other extensions of credit, or if the assets are a bank account or intellectual property, how does the secured lender determine the steps it should take to get rights to its security?
The Key Relevant Rights of the Secured Lender and “ThirdParty Effectiveness”
In the case of an intangible asset like a receivable, such matters become quite complex, because it is not just a matter of the rights of the secured lender relative to the owner of the asset (and other creditors of the owner), but another key party: the obligor on the receivable (referred to as an “account debtor” in the UCC and simply a “debtor” in most jurisdictions outside of the United States).
As with tangible assets, the secured lender will want to comply with the law of the location of the grantor of the security right (whether in the form of a security interest, security assignment, pledge, charge or other form of security right) since the laws of such jurisdiction will likely be where most of its creditors are located and where most likely the company will be subject to an insolvency proceeding. This means for a company organized under the laws of a State in the United States, the secured lender will look to the UCC. For a company organized under the laws of England and Wales, or the Netherlands, or Germany, the secured lender will look to the steps needed to establish its rights to the receivables under the laws of England and Wales, the Netherlands or Germany, wherever the company is organized.
But whereas with tangible assets the secured lender needs to consider the laws of the location of the inventory or other tangible assets, with intangible assets like receivables, the secured lender will need to consider the laws where the obligor on those receivables is located.
The secured lender will need to identify the law that will establish the effectiveness of its rights as against other creditors and in the event of an insolvency (which under the UCC is through “perfection” of its security interest), but in addition must also identify the laws that will establish its rights relative to the obligor on the receivable. Addressing the rights of the secured lender as to both categories of parties is commonly referred to as a matter of “third-party effectiveness” of the secured lender’s position.
Click here to continue reading the article (starting at column 2 on page 1)
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