Utilizing chattel mortgage

Though a new type of collateral, chattel mortgage (동산담보/動産擔保), has been introduced in Korea, it remains to be seen the new Act will lead to increased availability of bank lendings to small and medium-sized enterprises (SMEs, 중소기업/中小企業) in need of financial assistance.

As for creditor banks, such problems as high mobility, quick depreciation and lack of an efficient market of second-hand goods, machinery and equipment should be solved for such property to be obtained as collateral. In this regard, technological solutions utilizing RFID/USN could be helpful as explained below. Also the Act on Security Interest in Movable Properties, Account Receivables, etc. (동산·채권 등의 담보에 관한 법률) and a proposed amendment to the Enforcement Decree of the Public-owned Properties and Goods Management Act (공유재산 및 물품관리법 시행령) provide statutory grounds to this end.

Key words
chattel mortgage, ABL (asset-based lending), RFID, SMEs (small businesses)

Problems of Chattel Mortgage
In reality, bank officers have to be reluctant to extend loans based on chattel mortgage because of following problems:

Case #1 Factory Machinery

After the term of lease for the use of factory machine expired, a bank extended a loan to a factory owner and acquired the mortgage by listing such machine in the existing factory mortgage registry. In the meantime, while using said machine, the factory owner transferred the title of the machine together with other machines to a third party by means of yangdo-dambo, a fiduciary transfer of title.

In such a scenario, is it possible for the creditor bank to enforce its own factory mortgage over a factory building and machinery at once? What if a person makes objections asserting the ownership of the machine?

Case #2 Solar Houses

Encouraged by the Korean government’s “Build Green Home” project, a number of banks are expected to begin financing the building or renovation of houses with solar energy equipment. Creditor banks will be granted collateral over the solar equipment including solar panels, inverters, batteries, etc. Faced with how to administer those geographically scattered solar houses, surely a very difficult job, creditor banks will have to choose one option on a cost-benefit analysis whether they entrust security service companies to administer the collateral, or give up such collateral administration.

Case #3 Security Problem of a Closed Factory

When a creditor bank dispatches a guard to a factory for the protection of properties of an insolvent debtor, it should bear in mind that a creditor in possession owes a legal obligation to third parties and is responsible for any wrongful acts like corruption of soil of the factory. Article 758 of the Civil Act.

How can a creditor overcome above-mentioned situations?

A Solution for Chattel Mortgage
When the Act on Security Interest in Movable Properties, Account Receivables, etc. comes into force on June 11, 2012, corporate movable assets, receivables and IPRs will be eligible for statutory collateral. It conforms to the global trend that collateral has been diversified from real estate only to the variety of movable properties, receivables, IPRs. The new Act provides for security registries that will be established via Internet-based computer systems.

The new Act premises that the Security Registry of movable properties and account receivables shall be conducted electronically (Article 7). Specifically, the following provision of the Act should be noted for the purpose of this paper.


 * Article 17 (Inspection of Status Quo Collateral and Supplement of Collateral) of the Act
 * (1) The security interest provider shall not, without any justifiable reason, deny the request of the secured creditor to inspect the status quo collateral. In this case, necessary measures including posting electronically identifiable tags, etc. may be taken for the inspection of status quo collateral subject to the agreement between both parties.

Thanks to this proviso in Paragraph 1 Article 17 of the Act, which was inserted during the course of the National Assembly deliberation, the security administrative issues, as discussed above in Cases 1 through 3, can be easily resolved.

Anticipating brand-new asset-based bank lendings (ABLs) could be provided to SMEs, the Financial Supervisory Service held a seminar on "How to Activate ABLs" on December 6, 2011.

RFID/USN Technologies
In this connection, RFID/USN technologies may be used in the administration of movable properties. In reality, the Public Procurement Service has applied RFID technologies in managing government-owned properties totaling 12 million units since 2010.

RFID systems are used to recognize the identity of machinery, equipment and inventories, to manage traceable history of collateral, and to control the operations and movement of collateral on an integrated basis, while USN (ubiquitous sensor network) technologies are useful for the monitoring of machinery and inventories, and real-time reporting to the secured creditors.

Cost reduction is another important factor, but many corporations will make the most of the existing asset and facility management systems to take movable properties as collateral. Systems connecting collateral administration and corporate financing may be incorporated into the whole systemic business administration.