Guiding principles for the development of a charges registry

The concept of a registration system (whether called notice filing, public recording, or whatever) dedicated to publicising security rights created over movable assets by debtors has slowly gained prominence. However the diversity that exists between the systems that have been developed in the region and the lack of reliable information about their efficacy has led EBRD to produce a set of principles on the basic requirements for such a system together with guidelines for their implementation. This has been done drawing on work already carried out in this field, on EBRD’s own experience advising on such development and more generally in assessing secured transactions regimes across the region. The work was supported by an assessment of the experience in the Balkans region carried out in 2003/2004.

The principles are proposed as a basis for designing or assessing a charges registry. They are ’guiding’ principles and do not seek to impose any particular solution on a country. The principles concentrate on the result that should be achieved. Ways of achieving the result (and there may be many) are discussed under ‘Implementing Guidelines and Recommendations’ in the complete document, where the relative advantages of different options are presented, with illustrative examples in the notes of how such questions have been decided in the region. An Annex on the technical requirements of a charge register presents the most important aspects of the computer system which will have to be developed.

By expressing in simple, impartial terms the qualities and features that a registration system should possess, EBRD hopes to trigger a debate involving all participants – policy-makers, users, technical assistance providers, etc – on what has been achieved to date and to provide a practical basis from which improvements can be developed for the future.

1. A regime for secured credit should provide for effective publicity of charges.

The development of a publicity system is essentially an economic exercise, not a legal one, where the ultimate objective is the reduction of risk.

• Charges are useful because they can reduce the risk attached to credit.
• Risk reduction is dependent upon certainty of the creditor’s right in charged assets.
• Publicity enables third parties to discover that the creditor has a prior right in the asset.
• Publicity also enables the creditor to ascertain existing charges affecting charged assets.

Without publicity a creditor is unlikely to have sufficient certainty in his rights in the charged assets. The situation is different where he takes them into his possession or control, for example in the case of security over shares or bonds.

A publicity system can only operate effectively in a market economy if:

• it is simple, fast and easy for all parties to use;
• it supports the needs of the whole of the credit sector and does not, for example, restrict access to only a few privileged users (e.g. large domestic banks);
• the market is willing to use the publicity system;
• the system actually enables the public to become aware that charges exist.

The willingness of the market to use the publicity system and the extent in practice to which the system actually enables the public to become aware that charges exist are key indicators of the effectiveness of the system.

2. As a result of publicity it should be possible to find out what charges are claimed over a person’s assets and their chronological order of ranking.

The need for publicity derives from the desire to avoid the problems that arise when one person who has, or wishes to acquire, rights in an asset is not able to ascertain what rights others may have in the same asset. If this is to be achieved, the publicity system must not only identify the person who is giving the charge, but also give the means to identify the assets which are encumbered by describing them specifically or generally.

The publicity system also provides a convenient method for determining the order of ranking between competing rights claimed in the same asset.

• The order of ranking is normally determined by the chronological order of publication.
• A person with an existing charge should not find that his priority has been harmed without his consent.
• A person acquiring a right in the asset should not acquire it subject to a charge of which he had no notice.

3. Publicity is best achieved by registration, most often against the person granting the charge.

The publicity system should:

• make it possible to give notice of a charge over any asset belonging to any person, and
• render the information in the notice easily and universally accessible to the public.

The only means of publicity which permits this is some form of centrally held, publicly accessible register. The register has to be designed in a way which enables it best to fulfil this function. In particular, it should be computer based - this will greatly increase the simplicity, speed and efficiency of recording and retrieving information as compared to a paper-based system.

There has to be a basis for primary classification (and thus later recovery) of the information:

• In theory the choice is to classify by person (as in a company or commercial register) or by asset (as in a land register).
• It is relatively easy to construct a simple and uniform method for uniquely classifying and indexing all chargors, i.e. the persons (physical and legal) who create charges (by reference to name, ID or commercial registration number, address, date of birth, etc.).
• It is much more difficult to do so for assets. Some assets may have a unique identification number (vehicles, machines) or other unique identity feature (works of art), but for many assets unique identification is impractical (for example, stock in trade, small equipment, grain, oil).
• If a charge over the universality of the debtor’s assets is to be possible, registration cannot be made against the assets.
• In practice classification by person is the only solution which can be of general application.

4. Failure to publicise a charge makes it ineffective against third parties.

In some legal systems publicity is a condition for the creation of a charge, or is even the act which creates the charge.

In others it is merely the means by which the chargeholder acquires prior ranking against other persons with a claim in the charged asset.

Whatever the approach adopted, the effect in practice of a failure to publicise should be the same: no charge in the register means no security right that can be effective against third parties.

This is essential for ensuring a sufficient level of certainty for assets to be freely bought and sold, or offered as collateral.

5. The system for giving publicity and for accessing the publicised information should be simple.

Simplicity is fundamental to any publicity method. Each element of unnecessary complexity for the user or the registrar (and its agents) reduces efficiency. Respect of the principle of simplicity should pervade every aspect of the design of the registry, for example:

• Rules governing registration should be defined in clear and simple terms, any instructions, guidelines, manuals should be fully consistent.
• Procedures for registration should be kept simple and easy to follow. Any temptation to supplement the procedures with unnecessary requirements (for example, production of documents to accompany registration) should be strongly resisted.
• The nature and amount of the information to be registered, and the form in which it is registered and retrieved, should remain simple (while being useful to the public).
• An entry in the register serves only to give notice that a security right may exist over certain assets of the chargor. There is no need for anyone other than the parties to check or confirm the validity of the security right or the accuracy of the information to be publicised. The fact that information appears in the register does not ‘authenticate’ it or validate the security right.
• The technical structure should be made simple for the registrar (within the constraints of cost effectiveness).
• The registration service should be widely available, to ensure easy access by all citizens and businesses.
• Immediately upon registration the person requesting registration should be able to obtain a print out of the information as entered into the register, confirming the entry that has been made.
• Procedures for searching should be kept simple, should be clearly explained and easy to follow. There should be no requirement for justification for search.

6. The system for giving publicity and for accessing the publicised information should be fast and inexpensive.

Any person should be able to make a registration or a search without unnecessary delay or cost.

Using modern technology it should be possible for a new entry to be available in the register within a few minutes of the registration request being made. Searches should be quasi instantaneous.

The costs of registering and searching should be kept to the minimum level that is feasible. Unless the registry is subsidised the fee will have to cover the capital and operating costs of providing the registration service but it should not include any element of taxation or excessive profit for the registrar.

The capital and maintenance costs of the computer system should be carefully assessed with a cost/benefit analysis for each feature.

It is desirable that the fees for the registration service are determined on a transparent basis and that the income and expenditure accounts of the registry are open to the public. This provides a means of control and also strengthens public confidence.

Ultimately the fees for registration should not deter the public from using the system, especially for smaller transactions where the role of collateral as a facilitator of credit is often at its greatest.

7. The register should be accessible for all persons and all registered information should be public.

There should be no restriction as to who can search the register. The purpose of registration is to provide information to the public, so neither the registrar nor any other person should be entitled to limit the right of access to any registered information.

The search procedures should be designed to facilitate retrieval of information. Current information in the register should be available immediately on screen and with the facility for any member of the public to obtain an immediate print-out.

Searching points should be organised so that any person, wherever situated in the jurisdiction, can have easy access. The internet is likely to provide the most efficient and accessible search medium.

8. The method of recording, storing and accessing information should protect against error, abuse and fraud.

The computer system should be designed to avoid registration of incomplete, irrelevant or incompatible information and to minimise the possibility for human error (for example by using drop drown menus, compulsory fields, clear guidelines).

Search procedures should facilitate information retrieval (for example by showing names with similar spellings, permitting the use of wild cards, etc.). The reliance placed on negative search results makes this especially important.

The computer system and its operating procedures should include adequate protection against loss or corruption of data in the registry database, whether through technical fault, unauthorised access or tampering, or occurrence of disaster. It should not be possible to register a charge over a person’s assets without authorisation, which may come from the person himself or from a judicial or administrative decision. The registration procedure may require that evidence of such authorisation be produced to the registrar or his agent. If a charge is registered without authorisation, the person against whom it is registered should be able to obtain deletion through a fast and simple procedure and to obtain compensation.

Procedures for registration of amendments and cancellation (termination) should incorporate similar protection against error, abuse and fraud. It should not be possible to cancel a charge without the chargeholder’s authorisation, or other appropriate safeguards.

Correction of factual errors directly by the registrar should be limitatively defined and duly documented.

9. The registry should be operated and managed transparently as a public service.

Operation may be delegated in whole or in part to persons in the public or private sector but the responsible government department should ensure that there is an effective system of supervision and that the registration system operates in the manner intended by the law and relevant regulations.

The ownership and licencing of the software, hardware and data must be clearly defined.

The general public should be made aware of the existence of the registry, the way it operates and the consequences of registration.

The registry should be reliable, available and operational during its defined service hours. Uncertainty as to the availability of the service, either for registering charges or searching, will quickly discourage potential users.

Standards of performance should be established, actual performance measured, and the results made publicly available.

The registrar should be required to report regularly to provide information to the supervising authority on all aspects of operation of the registry and to demonstrate that the registry is performing as required by law. The registry should be subject to a regular independent audit.

The duties of the registrar should be clearly defined. The rights of government to terminate the appointment of the registrar in the case of default and to take over the operation of the registry or appoint a new registrar should also be defined.

The registry should be established in a way which ensures the sustainability of the registration system and the finance required for its continued operation and periodic upgrade.