Unlocking Secured Credit: International Ambitions and Domestic Realities


Giuliano G. Castellano
Associate Professor at the Faculty of Law of the University of Hong Kong
Andrea Tosato
Associate Professor at the School of Law of the University of Nottingham and Adjunct Lecturer at the University of Pennsylvania Law School


Time to read

4 Minutes

Personal property security law is a crucial element in the complex mosaic of access to credit and financial inclusion. The prevailing view among scholars, policymakers and legislators is that a legal framework enabling the effective use of personal property as collateral empowers both lenders and borrowers. Lenders offer financing at lower cost thanks to reduced credit risk; borrowers gain access to funding at more advantageous conditions by leveraging the value of their assets. Secured credit is the lifeblood that nourishes production and consumption through all phases of the economic cycle, especially at times of crisis.

Over the past fifty years, international and regional organizations have undertaken projects aimed at both modernizing and harmonizing secured transactions law across jurisdictions. These efforts have yielded a panoply of legal instruments that share the common policy objective of expanding access to credit. Binding conventions have been adopted to unify the rules of discrete facets of personal property security law (eg the Cape Town Convention on International Interests in Mobile Equipment), while soft-law texts, such as model laws and legislative guides, have been formulated to supply comprehensive legal templates to lawmakers keen to revise their domestic legal regimes (eg UNCITRAL Model Law on Secured Transactions and EBRD Model Law on Secured Transactions).

In our paper, ‘Personal Property Security Law: International Ambitions and Local Realities’, we explore the challenges and tensions that emerge when the ambitions enshrined in these international instruments come into contact with the local realities of domestic jurisdictions. This issue is especially relevant at a time when a variety of legal interventions are being enacted, both domestically and internationally, to support inclusive access to credit as a response to the ongoing economic crisis.

Over the past century, secured transactions law has evolved substantively in response to socio-economic challenges (for a critical prospective see here). Notwithstanding these transformations, we suggest that the aforementioned international legal instruments have progressively articulated a nucleus of ‘core tenets’ that constitutes the bedrock for an effective secured transactions regime. These core tenets can be summarised as follows. First, all forms of personal property should be viable collateral. Second, all transactions the function of which is to secure an obligation should be governed by a homogenous set of rules, regardless of their form and structure. Third, persons should be afforded ample freedom of contract in structuring their security agreements. Fourth, perfection of security interests should be attainable through clearly defined and streamlined methods that include the filing of a notice in a security rights register. Fifth, subject to limited exceptions, priority amongst competing claimants (eg secured creditors, insolvency administrators or purchasers) should be determined pursuant to temporal rules, based on the time at which notice of the proprietary interests in question was given to third parties (eg first-to-file or to otherwise perfect). Sixth, enforcement of security rights should be possible both through out-of-court and judicial remedial mechanisms that are both rapid and inexpensive, yet also balance the conflicting interests of the debtor in default, secured creditors and unsecured creditors.

Having identified these core tenets, we examine the manner in which they have been received in civil law jurisdictions. We focus specifically on Italy, as it provides an emblematic and representative case study of legislative reforms that, though inspired by international standards, have struggled to promote access to credit. In Italy, the original legal regime codified in the 20th century differed markedly from the aforementioned core tenets, reflecting its Romanistic and Napoleonic lineage. Over the past thirty years, successive legislative interventions have been enacted by Italian lawmakers with the express aim of modernising the existing secured transactions law framework to promote access to credit and to offer new financing sources to entrepreneurs. Yet, as shown in our analysis, these domestic initiatives have fallen short of their intended outcomes.

The reform strategy pursued by lawmakers is the primary cause of the current unsatisfactory state of Italian personal property security law. Wielders of legislative power have carried out a multitude of interventions that have either created new variants of existing security devices or spawned entirely new ones. Examined individually, these initiatives superficially appeared to bring positive novelties capable of improving the legal ecosystem for borrowers and secured creditors. Nevertheless, when considered in the broader context of the entire Italian secured transactions law framework, these reforms readily revealed their piecemeal nature and lack of systematic coherence. In a fulgid example of path dependency, each new legislative act added an ulterior layer of positive law, sowing ambiguity and legal uncertainty, and increasing both the cost and complexity of subsequent enactments.

Though most recent legislative reforms have made it possible to encumber all types of personal property for the purpose of securing any type of obligation (conforming to the first core tenet), grantors and secured creditors must still grapple with a plethora of heterogeneous security devices governed by substantively different rules (diverging from the second tenet). More profoundly, albeit to a varying degree, all these security devices limit the parties’ freedom of contract in structuring their security agreements; crucially, encumbering fluctuating pools of assets—such as inventory—remains highly problematic for most borrowers, due to either outright restrictions or legal ambiguities (diverging from the third tenet). Similarly, far from streamlining perfection rules, the reforms of the past three decades have muddled them, introducing overlapping and uncoordinated security rights registers that impose disparate filing requirements (diverging from the fourth tenet). Crucially, in this complex context, ascertaining priority amongst competing claimants has become more problematic. Absent a systematic approach, reforms have failed to address exhaustively conflicts between different security devices (diverging from the fifth tenet). All in all, these legislative interventions have increased the risks associated with secured lending, rendering vain attempts to promote access to credit.

It should be noted that political momentum to reform secured transactions law has emerged at times of crisis. In 1994, following the Italian sovereign debt crisis, lawmakers attempted to buttress access to credit by introducing a special security device intended to secure loans extended by financial institutions to enterprises. As part of its response to the 2008 global recession and the resultant reverberations on its domestic banking system, the Italian parliament enacted a new security instrument in 2016, explicitly intended to bolster access to credit by facilitating the use of personal property as collateral (see here for a critical assessment). Despite the fact that the 2016 reform remains unimplemented, the trend of creating new security devices continues unabated today.

In tackling the COVID-19 pandemic, the Italian government has enacted emergency legislation that, inter alia, addresses its personal property security law framework (see Art 78 L. n. 27 of 29 April 2020, converting into the law the D.L. n. 18 of 17 March 2020). Though this law calls for future implementing regulations, it is already apparent that this intervention introduces yet another variant of the traditional pledge that is additional to those already in existence, is limited to certain types of agricultural products, has its own filing system and is minimally coordinated with all other existing security devices. Once more, a piecemeal attempt to foster secured lending yields legal uncertainty. Plus ça change, plus c'est la même chose…

Giuliano G. Castellano is an Associate Professor at the Faculty of Law of the University of Hong Kong and a Deputy Director at the Asian Institute of International Financial Law (AIIFL).

Andrea Tosato is an Associate Professor at the School of Law of the University of Nottingham and Adjunct Lecturer at the University of Pennsylvania Law School.


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