BAR EXAM COVERAGE:

ASSET-SPECIFIC RULES

i. Future property
ii. Rights to proceeds and commingled funds
iii. Tangible assets commingled in a mass
iv. Accounts receivables
ASSET-SPECIFIC RULES: FUTURE PROPERTY

CREATION – THE SECURITY AGREEMENT

SECTION 5

A security interest shall be

by a security agreement.
created

but the security interest in that

Security interest may be property is created only when
interest in a future property the grantor acquires rights in
it or the power to encumber it.
ASSET-SPECIFIC RULES: RIGHT TO PROCEEDS

property received in
exchange of original
collateral
SEC. 3 • upon sale, lease
(F) PROCEEDS
• collected on or distributed
  with respect to collateral,
• claims arising out of the loss
or damage, right to insurance
payment or other
compensation
ASSET-SPECIFIC RULES: TANGIBLE
ASSET COMMINGLED IN MASS

SECTION 8 Rules on Proceeds (funds) credited to a deposit account or

money are commingled with other funds or money:
(B). RIGHT TO
PROCEEDS (1) The security interest shall extend to the commingled money
or funds even if NOT identifiable BUT traceable:
AND (2) Limited to the amount of the proceeds immediately
COMMINGLE before they were commingled: and
(3) If at any time after the commingling, the balance credited to
D FUNDS the deposit account or the amount of the commingled money is
less than the amount of the proceeds immediately before they
AND MONEY. were commingled, the security interest against the commingled

— funds or money shall be limited to the lowest amount of the

commingled funds or money between the time when the
proceeds were commingled and the time the security interest in
the proceeds is claimed.
ASSET-SPECIFIC RULES: TANGIBLE ASSET
COMMINGLED IN MASS

Date Deposit Withdrawal Balance

March 15 None None
March 16 P400k (proceeds of car) P400k
March 17 P300k (rent) P100 k
March 25 P500k (paycheck) P600k
March 26 P50k (food/etc) P100k
March 27 P500k (paycheck) P600k
ASSET-SPECIFIC RULES: TANGIBLE ASSET COMMINGLED IN MASS

Rule 1.05 IRR Definition of Terms (kk)

Tangible asset

possession of such instruments

Tangible asset — means any results in the ownership of the
Money,
tangible movable asset. underlying rights or property
embodied by them

Certificated and non-

Negotiable instruments, Negotiable documents
intermediated securities
ASSET-SPECIFIC RULES: TANGIBLE ASSETS
COMMINGLED IN MASS

A security interest in a tangible asset

that is commingled in a mass extends to
the mass.
Section 3.07 IRR
Security Interest
Over Tangible
Assets Commingled in a A security interest that extends to a
Mass
mass is limited to the same
proportion of the mass as the
quantity of the encumbered asset
bore to the quantity of the entire
mass immediately after the
commingling.
ASSET-SPECIFIC RULES: TANGIBLE ASSET
COMMINGLED IN MASS
A security interest in a tangible asset that is commingled in a mass

Supplier A has supplied P10,000 of grain to buyer and

still unpaid

Mingled with 10,000 world of grains of buyer

Proportion is 50-50

30,000 18,000
Supplier A has supplied P10,000 of grain, Supplier A (2/6) P6,000 of grain,
Supplier B has supplied P15,000 of grain, and Supplier B (3/6) P9,000 of grain, and
Supplier C has supplied P5,000 of grain. Supplier C (1/6) P3,000 of grain.
ASSET-SPECIFIC RULES: ACCOUNT RECEIVABLE

SEC. 10 accounts receivable

ASSET- arising from:
SPECIFIC • (1) A contract for the supply or
lease of goods or services other
RULES- than financial services;
ACCOUNT • (2) A construction contract or a
RECEIVAB contract for the sale or lease of
real property; and
LE • (3) A contract for the sale, lease
or license of intellectual
property.
ASSET-SPECIFIC RULES: ACCOUNT RECEIVABLE
ASSET-SPECIFIC RULES: ACCOUNT RECEIVABLE

CONTRACTUA
L LIMITATION
Agreement limiting
ON THE grantor’s right to create a
CREATION OF security interest:
A SECURITY
INTEREST IN
ACCOUNT
RECEIVABLE VOID
(ON ACCOUNT
RECEIVABLE). Security Interest still
No effect on
obligation or liability
effective
— of the grantor
ASSET-SPECIFIC RULES: ACCOUNT RECEIVABLE

accounts receivable
ASSET- arising from:
SPECIFIC • (1) A contract for the supply or
RULES- lease of goods or services other
ACCOUNT than financial services;
• (2) A construction contract or a
RECEIVAB contract for the sale or lease of
LE real property; and
• (3) A contract for the sale, lease
or license of intellectual
property.
ASSET-SPECIFIC RULES: ACCOUNT RECEIVABLE

ACCOUNT Agreement limiting

RECEIVABLE grantor’s right to create a
security interest:
CONTRACTUAL
LIMITATION ON
THE CREATION
OF A SECURITY
INTEREST (ON VOID
ACCOUNT
No effect on
RECEIVABLE). Security Interest still
obligation or liability
effective
— of the grantor
 Perfection by Registration
BAR EXAM
COVERAG Perfection by Possession
E:
Perfection by Control
PERFECTI
ON OF Disposition of Perfected
Security Interest
SECURITY
Assignment of Perfected
INTEREST Security Interest
PERFECTION OF SECURITY INTEREST

Section 11. Perfection of Security Interest.—

Xxxx (b)

ON PERFECTION, A SECURITY EFFECTIVE

INTEREST AGAINST THIRD
BECOMES PARTIES.
PERFECTION OF SECURITY INTEREST

SECTION 12. 
MEANS OF PERFECTION.—

Section (a) Registration of a notice with the Registry

12. Means of (tangible asset and investment property and deposit account);
Perfection.—
A security (b) Possession
interest may (tangible asset)
be perfected (c) Control
by:
(investment property and deposit account)
 PERFECTION OF SECURITY INTEREST

Section 1.05, (r) IRR

Investment Property

Investment property — 1. property right arising 2.property in securities and

from an investment commodity contracts
PERFECTION OF SECURITY INTEREST

Rule 1.05 IRR

f) Deposit account — consists of deposits in deposit-taking institutions;

g) Deposit-taking institution — refers to a bank as defined under Republic Act

No. 8791, otherwise known as the "General Banking Law", a non-stock
savings and loan association as defined under Republic Act No. 8367, or the
"Revised Non- Stock Savings and Loan Association Act of 1997", or a
cooperative as defined under Republic Act No. 9520 otherwise known as the
"Philippine Cooperative Code" ;
PERFECTION OF SECURITY INTEREST

SECTION
Security — shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in
character. It includes but is not limited to:

1.05, (II) (i) Shares of stocks, bonds, debentures, notes as evidence of

indebtedness, asset-backed securities;

IRR
(ii) Investment contracts, certificates of interest or participation in
a profit=sharing agreement, certificates of deposit for a future
subscription;
(iii)Fractional undivided interests in oil, gas or other mineral

SECURITI rights;
(iv)Derivatives like options and warrants;
(v)Certificates of assignments, certificates of participation, trust

ES certificates, voting trust certificates or similar instruments

(vi)Proprietary or nonproprietary membership certificates in
corporations; and
(vii)Other instruments as may in the future be determined by the
Securities and Exchange Commission;
PERFECTION OF SECURITY INTEREST

This Photo by Unknown Author is licensed under CC BY-SA

PERFECTION OF SECURITY INTEREST

DERIVATIVES
Derivatives – financial investment, including options and warrants
whose value depends on the interest in or performance of an
underlying security, but which does not require any investment of
principal in the underlying security.
PERFECTION OF SECURITY INTEREST

SECURITIES
Warrants – are rights to subscribe or
purchase new shares or existing shares
in a company, on or before a
predetermined date, called the expiry
date, which can only be extended in
accordance with Exchange rules.
Warrants generally have a longer
exercise period than options.
PERFECTION OF SECURITY INTEREST

OPTIONS
Options – are contracts that give the buyer the right, but not the
obligation, to buy or sell an underlying security at a predetermined price,
called the exercise or strike price, on or before a predetermined date, called
the expiry date, which can only be extended in accordance with Exchange
rules.
Call options – are rights to buy.
Put options – are rights to sell.
PERFECTION OF SECURITY INTEREST
PERFECTION OF SECURITY INTEREST

COMMODITY
CONTRACT, IRR SEC
1.05 (a)
— a commodity futures contract, an option on a
commodity futures contract, a commodity option,
or another contract if the contract or option is:
(i) Traded on or subject to the rules of a board of
trade that has been designated as a contract
market for such a contract; or
(ii) Traded on a foreign commodity board of Commodity – means any goods, articles,
trade, exchange, or market, and is carried services, rights and interests, including any group or
on the books of a commodity index of any of the foregoing, in which commodity
intermediary for a commodity customer; interests contracts are presently or in the future dealt
in.
PERFECTION OF SECURITY INTEREST

SEC. 12 A SECURITY
INTEREST IN ANY
TANGIBLE ASSET MAY
BE PERFECTED BY
REGISTRATION OR
POSSESSION.
PERFECTION OF SECURITY INTEREST
A security interest in tangible
assets may be perfected by
either:
• Registration
Section 4.02, • Possession, whether actual or
constructive, of the tangible asset either
IRR by the secured creditor or a depositary
Means of acting for the secured creditor. Provided,
Perfection — that the debtor or the grantor cannot
possess the collateral on behalf of the
Tangible secured creditor for purposes of
Assets — perfecting and maintaining the security
interest over such collateral.
PERFECTION OF SECURITY INTEREST The priority of security interests and liens on the
same collateral

determined according to the time of registration of

a notice or perfection by other means
General Rule
without regard to the order of creation of the
security interests and liens

Section 6.01 to the mode of perfection

Time of
Perfection except

as provided in Sections 6.02 to 6.05 of these Rules

PERFECTION OF SECURITY INTEREST
PERFECTION BY CONTROL
OBJECT: DEPOSIT ACCOUNTS AND
INVESTMENT PROPERTY

Perfection by Control
1.Automatic – Banks and Intermediaries are the secured creditors
2.By execution of Control Agreement – investment property that are not electronic security whether
or not held by intermediaries; investment property are electronic security held by intermediary
3.Notation of the security interest in the books - for an investment property that is an electronic
security not held with an intermediary
PERFECTION OF SECURITY INTEREST

Section 13. Perfection by Control (deposit account or

investment property):

(1) The creation of

the security
interest in favor of (3) For an investment (b) Nothing in this Act shall
property that is an require a deposit-taking
Bank or institution or an intermediary to
(2) The electronic security not
Intermediary; held with an enter into a control agreement,
conclusion of a even if the grantor so requests. A
intermediary, the
control notation of the security deposit-taking institution or an
agreement; or interest in the books intermediary that has entered into
maintained by or on such an agreement shall not be
behalf of the issuer for required to confirm the existence
the purpose of recording of the agreement to another
the name of the holder of person unless requested to do so
the securities. by the grantor.
PERFECTION OF SECURITY INTEREST

Perfection by Control

Se. 18 Investment Property and Securities

Bank or intermediary is the secured creditor

Perfection
Control Agreement
by Control
Notation-Electronic Securities without
Intermediary

Possession- security interest in a security

certificate
Section 1.05 IRR, Definition of Terms

Intermediated
Intermediary Securities account
securities
Sec. 1.05, (o) Sec. 1.05, (p)
Sec. 1.05, (p)
PERFECTION OF SECURITY INTEREST

Security interest in security deposit

perfected by possession

POSSESSION
OF SECURITY security interest in negotiable document
OF
CERTIFICATE:
PRIORITY Priority and Right of Retention by
over Orientation of Law

REGISTRATION
PERFECTION OF SECURITY INTEREST

Person who:

1. provides services or materials, in

the ordinary course of business, and

2. retains possession of the goods

priority : over a perfected security

Section 20 interest in the goods until payment
thereof
PERFECTION OF SECURITY INTEREST

PRIORITY RULES FOR

INTANGIBLE ASSETS

security interest in a deposit account with respect to which the secured

creditor is the deposit-taking institution or the intermediary shall have
priority over all others.
PERFECTION OF SECURITY INTEREST

PRIORITY RULES FOR INTANGIBLE ASSETS

ETS

(a) ORDER OF PRIORITY in a security interest in a deposit account or

investment property:
(a) A security interest in a deposit account or investment
property
(b) 1. secured thatisisthe
creditor perfected by a control
deposit-taking agreement
institution or theshall have
intermediary
priority over a competing security interest except a security
(c) . interest of the deposit-taking institution or the intermediary.
(d) Bank’s rights to set-off priority over a security interest in the deposit account
(e) 2. control agreement
(f) Among security interests perfected by control agreements - time of conclusion
of the control agreements.
PERFECTION OF SECURITY INTEREST

PRIORITY RULES FOR INTANGIBLE

ASSETS
(a)3. Security interest in a security certificate -
possession
(b) 4.
(a) security interest
A security interest in electronic
in a deposit non-
account or investment
property that is perfected by a control agreement shall have
intermediated securities
priority over a competing – interest except a security
security
interest of the deposit-taking institution or the intermediary.
(c) Order of priority: notation of the security interests
in the books, then control agreement, then
registration
(d)If all by control agreement- time of conclusion
(e) conclusion of the control agreements.
PERFECTION OF SECURITY INTEREST

PRIORITY RULES FOR INTANGIBLE

ASSETS

(a) A security interest in a deposit account or investment

property
(a) 4. security thatinis electronic
interest perfected by a control
securities agreement
held shall have perfected
with an intermediary
priority
by control over a competing
agreement security
– priority over interest
Registry; except
any other amethod
security
interest of the deposit-taking institution or the intermediary.

(b) If all by control agreement- time of conclusion

(c) by the conclusion of control agreements is determined on the basis of the time
of conclusion of the control agreements.
PERFECTION OF SECURITY INTEREST

PARTIES AGREEMENT
(1) securities issuer or the intermediary, issuer or the intermediary
the grantor and the secured follow instructions from
Section 3 creditor, the secured creditor

(b) Control
agreement – (2) deposit account
deposit-taking institution,
the grantor and secured
deposit-taking institution
to follow instructions from
creditor, the secured creditor

commodity intermediary
will apply any value
grantor, secured creditor, distributed on account of
(3) commodity contracts
and intermediary the commodity contract as
directed by the secured
creditor
PERFECTION OF SECURITY INTEREST (b)
(a) disposition of the
disposition of collateral collateral and
Section 14. and proceeds are in the proceeds are in a
form of form different from
1. money, money, accounts
 Perfection in 2. accounts receivable, receivable,
negotiable
3. negotiable
Proceeds.— instruments or instruments or
deposit disposition
4. deposit accounts.
of the collateral
security interest in
security proceeds must be
interest shall perfected by means
extend to applicable within
proceeds 15 days after
grantor receives
proceeds
PERFECTION OF SECURITY INTEREST

SECTION 16. 
ASSIGNMENT OF SECURITY INTEREST.—

If a secured creditor assigns a

perfected security interest, an
amendment notice may be registered
to reflect the assignment.