United Nations

ECO/56/Corr.1
                                                                                                                        L/3061
                                                                                                                        6 April 2004

United Nations Working Group Concludes Session Concerning Draft Legislative Guide on Secured Transactions

NEW YORK, 29 March (UN Department of Public Information) -- The United Nations Commission on International Trade Law (UNCITRAL) Working Groups on Insolvency Law and Security Interests held today their second joint session and agreed on a number of issues relating to the treatment of security interests in insolvency proceedings.

The Working Group on Insolvency Law is expected to complete its work on a legislative guide on insolvency law next week, and submit it to the next session of the Commission to be held in June 2004. The Working Group on Security Interests held its fifth session on a legislative guide on secured transactions and adopted several recommendations last week, from 22 to 26 March.

The legislative guide will assist countries in adopting modern secured transactions legislation -- a necessary condition for increasing access to low-cost credit, thus facilitating the cross-border movement of goods and services and contributing to economic development.

“The Working Group has made excellent progress at this fifth session”, said the Working Group Chair, Kathryn Sabo, of Canada. “The guide aims to present to legislators recommendations for establishing a secured transactions regime that is efficient and transparent, that fairly balances the interests of the parties and that meets the goal of facilitating access to credit at lower cost.”

The private sector will benefit in that “if you are a lender, risk is always a big factor”, Ms. Sabo said. “The regime we are envisaging here will provide greater legal certainty both to lender and borrower.  We all agree on the objective. The issue is how to accommodate different approaches that may exist in different countries, and the common objective is a fair and efficient system.” The Working Group hopes to submit the draft guide to the Commission in 2005 for approval in principle, and in 2006 for final adoption, Ms. Sabo said.

“This guide is of great interest to my trade association”, said Richard Kohn, General Counsel of the New York-based Commercial Finance Association (CFA), who is a private attorney in Chicago and has been involved in the drafting.

Mr. Kohn said CFA members, which include large United States banks but also smaller lenders, often make loans to companies located in other countries supported by collateral. “The guide will help countries to modernize their laws, so that lenders who are interested in making loans in other countries will know with certainty and predictability what their rights and obligations are.”

In many countries, including in Western Europe, there is uncertainty in the legal regime, or laws are unfavourable to credit, or there are shortcomings in the system of publicity for security interests, Mr. Kohn said. “In some countries, in order for a creditor to obtain a security interest, he has to have possession of the collateral. This may be a problem, because the borrower needs possession of the collateral, for instance of equipment or inventory, in the operation of his business.” Lack of legislation may prevent prospective lenders from other countries from making loans.

“The whole concept of the guide is to have a balanced set of laws that protect the interests of all parties -- borrowers, creditors and all other parties”, Mr. Kohn said. The guide seeks to achieve balance, clarity and predictability, with the aim of helping countries “to attract capital, to improve their economy and to improve the overall standards of living. If the laws are more conducive to the provision of credit, this will help businesses in a country to compete in the global marketplace”, Mr. Kohn said.

The Commission decided to start work on the guide in 2002, agreeing that secured credit laws that removed legal obstacles to secured credit could have a significant impact on the availability and cost of credit and, thus, on international trade.  It also felt that modern secured credit laws could alleviate the inequalities in the access to lower-cost credit between parties in developed and in developing countries, and in the share such parties had in the benefits of international trade.

The Commission agreed that deficiencies in credit law could have a major negative effect on a country’s economic and financial system. An effective and predictable legal framework has both short- and long-term macroeconomic benefits, the Commission felt.  In the short term, when countries face crises in their financial sector, an effective and predictable legal framework was necessary to enforce financial claims, to assist banks and financial institutions in controlling the deterioration of their claims through quick enforcement mechanisms, and to facilitate corporate restructuring by providing a vehicle creating incentives for interim financing.

In the longer term, according to the Commission, a flexible and effective legal framework for security interests could serve as a useful tool to increase economic growth:  without access to affordable credit, economic growth, competitiveness and international trade could not be fostered, and companies would be prevented from expanding to their full potential.

The Working Group on Security Interests is composed of all UNCITRAL member States -- Austria, Benin, Brazil, Burkina Faso, Cameroon, Canada, China, Colombia, Fiji, France, Germany, Honduras, Hungary, India, Iran, Italy, Japan, Kenya, Lithuania, Mexico, Morocco, Paraguay, Romania, Russian Federation, Rwanda, Sierra Leone, Singapore, Spain, Sudan, Sweden, Thailand, the former Yugoslav Republic of Macedonia, Uganda, United Kingdom, United States and Uruguay (alternating annually with Argentina).

Several other countries that are not members of the Working Group participated as observers to the meeting. Also attending were representatives of the European Bank for Reconstruction and Development, the World Bank, the International Monetary Fund (IMF), the World Intellectual Property Organization (WIPO), the CFA, the American Bar Association, the International Chamber of Commerce (ICC) and other bodies.

The UNCITRAL, the core legal body of the United Nations system in the field of international trade law, works to modernize and harmonize the rules of international business.  As trade means faster growth, higher living standards, and new opportunities through commerce, UNCITRAL seeks to increase these opportunities worldwide by formulating modern, fair, and harmonized rules on commercial transactions.

For information, please contact Edoardo Bellando at the United Nations Department of Public Information, tel.: (212) 963 8275, e-mail: bellando@un.org; or visit the UNCITRAL Web site at www.uncitral.org.

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