Chattel mortgage

In Korea, since June 11, 2012, small businesses may take advantage of a new type of chattel mortgage (동산담보/動産擔保). The Act on Security Interests in Movable Properties, Receivables, etc. (동산·채권 등의 담보에 관한 법률/動産·債權等擔保法) will allow small-and-medium sized enterprises (SMEs, 중소기업/中小企業) or venture businesses to use movable properties, account receivables, and intellectual property rights (IPRs) as collateral to raise funds more easily on good terms. By means of the newly-introduced security registration of relevant movable properties, the owner may borrow funds from the banks. Until now SMEs could only use the fiduciary transfer of title (Yangdodambo, 양도담보/讓渡擔保) of such propertiesfor the borrowing from banks.

Key words
chattel mortgage, non-possessory security interests, movable property, receivable, small-and-medium sized enterprises (SMEs), debtor-based electronic register

Main points of the new Act
The main points of the new Act are as follows: * Security interests in movable properties and receivables (Articles 3 and 34):
 * Movable properties, including a number of movables or those to be acquired in the future, or receivables with designated creditors who are entitled to claim cash or its equivalents, including a number of receivables or those to be acquired in the future, may be provided as collateral subject to appropriate security registration.

* Eligibility for security interest providers (Articles 3, 4, 34 and 37):
 * Only a corporate body or person, who has registered his/her company name under the Commercial Registration Act, may create security interests in movable properties or receivables. When the company name registration is deleted, the already created security interest shall be kept intact.

* Keun (continuing) security interests (Articles5 and 37):
 * In case the maximum amount of secured credit is set and the confirmation thereof is reserved in the future, the security interests in movable properties or receivables may be created. In this case, any discharge or transfer of such secured credit prior to the confirmation thereof shall not affect the already created security interests.

* Security interest provider's duty of declaration of any encumbrance on movable properties or receivables (Articles 6 and 37):
 * In order to protect secured creditors who have difficulty in finding any encumbrance on the collateral, a person who intends to create security interests in movable properties or receivables is required to declare in the security agreement the ownership thereof or any encumbrance on the collateral.

* Effects of security registry (Articles 7 and 35):
 * 1) Security interests in movable properties shall be effective subject to the registration in the Security Registry. The priority of competing security interests in the same movable properties shall depend on the order of registration. In case the registration in the Security Registry and delivery of the same movable properties take place, the priority of competing rights thereof shall depend on the order of the registration and delivery thereof unless otherwise provided for by law.
 * 2) When security interests in receivables are registered with the Security Registry, they may be set up against third parties except the obligor of the receivables which were provided as collateral. In case the registration with the Security Registry, and the notice or consent in accordance with Articles 349 or 450(2) of the Civil Code take place for the same receivables, the priority among them shall be asserted against third parties except a third obligor by the order of registration, arrival of notice or consent thereof.

* Effects of security interests (Articles 8 through 11, 13, 14, 17, 19, 20 and 37):
 * 1) A secured creditor is entitled to be satisfied by the collateral preferably against other creditors, and may exercise the security interests in the whole collateral until when the whole secured credit has been satisfied. A secured creditor may exercise security interests in the goods adhered to, and accessory of, the collateral, and the fruits of the collateral which such secured creditor has acquired or may acquire upon attachment against, or demand of delivery of such collateral. And the security interests may be transferred together with the secured claims.
 * 2) A secured creditor may exercise the right to surrogate the proceeds in cases of not only destruction, damage or expropriation but also sale or lease of collateral. When the value of such collateral decreases remarkably owing to reasons imputable to the security interest creator, the secured creditor may demand the restitution or provision of equivalent collateral from such security interest creator. In case of infringement upon the collateral by a third party, the secured creditor may demand return of the lost collateral, removal or prevention of such infringement.

* Enforcement of security interests (Articles 21, 23, 27 and 29):
 * 1) In case of movable property security interests, a secured creditor is entitled to enforce such security interests by auction or liquidation through acquisition or disposal. In case of liquidation by means of acquisition or disposal, such secured creditor shall enforce security interests one month after the notification of how to enforce such security interests to the interested parties including the obligor subsequent to the due date so as to protect such interested parties. Then such secured creditor shall pay excessive proceeds to the obligor. If the proceeds of such collateral are attached or provisionally attached, or a third party asserts rights against the proceeds, the secured creditor may discharge obligations by depositing such proceeds with the court-designated depositary.
 * 2) When the proceeds of joint collateral are distributed at the same time, the proceeds shall be allotted to the creditors in proportion to the proceeds of each collateral. In case a part of the proceeds of joint collateral is distributed earlier than schedule, junior secured creditor shall surrogate the right of senior secured creditor against other collateral so as to protect the junior secured creditors of each collateral.

* Right to apply for security registration and acceptance thereof (Articles 38, 41 and 45):
 * Security registration shall be carried out to create, transfer, modify, delete or extend the security interests in movable properties or receivables jointly by security holder and security grantor. The application for the change of security holder name may be conducted solely by the security holder. Such application shall be regarded as effectively accepted when the application data is recorded electronically by the electronic registration systems. Upon the registration by the Registrar, such registration shall be effective as from the time of acceptance.

* Term of existence of the security registration and extension registration (Articles 49):
 * In view of the fact that the most of secured claims are of commercial nature, and that security interests extinguish along with such secured claims, the term of existence of the security registration subject to this Act shall not exceed five year, same as the extinctive prescription period of commercial claims, but the period of the security registration may be extended.

* Registration of IPR security interests and effects thereof (Articles 58 and 59):
 * An intellectual property right holder provides more than two intellectual property rights to ensure the payment of the same claims, the security interests subject to this Act may be registered with the Official Registry of intellectual property rights. When such security interests in intellectual property rights are registered, the effect of such registration shall amount to the pledge on such intellectual property rights.

Implementation of the Act
It is one thing to establish a necessary act, it is another to realize its legislative intent.

In view of the reality that banks are reluctant to accept such collateral as movable assets, it is belived that the full-fledged implementation of the Act needs a considerable time and highly effective solutions after the entry into force.