THE Government of Jamaica has for some time now been discussing ways to go about simplifying the process of giving collateral with the hope of facilitating greater access to loans.

We all know that banks and other financial institutions are reluctant to give unsecured loans. One of the first questions when approached for a loan is: where is your collateral? For many of our micro, small and medium-sized enterprises (MSMEs), this question often brings the discussions to a screeching halt.

The best assets which the MSME may have to offer may simply be its equipment, inventory or accounts receivable. Banks may however be concerned about their ability to take security over these kinds of assets and therefore reluctant to accept these assets as the sole form of collateral. Can they be sure that it has not already been charged or that if the borrower defaults that they will be able to quickly go in, get the asset and sell it? When dealing with sole proprietors, the bank may even be concerned about whether they can legally take the kind of security that they would like over these assets. Floating charges, the form of security typically taken over shifting assets such as inventory, cannot now legally be given by an individual. One form of security is therefore now not an option available to a large number of MSMEs.

The cost of perfecting any kind of security over these assets may also create its own bar. These costs include not only the cost of drafting the required documentation, but also the cost of stamping and registering or recording the appropriate document in the places where registration may be required (if required at all), with all of these costs of course generally being passed on to the borrower for payment.

So what is the Government considering? Consultants to the Inter-American Development Bank (IADB) have, after several discussions and consultations with stakeholders in Jamaica, proposed a simplified system of registration under new legislation to be known as the Personal Property Security Act (PPSA). They suggest that the introduction of similar legislation in other countries has resulted in an increase in lending and a decrease in the costs of borrowing.

It is hoped that the PPSA will allow: (a) for the reduction in the cost of borrowing: with the suggested removal of stamp duty payable in relation to those transactions; (b) the simplification of the process: with only one place to register and search, regardless of whether you are a company or an individual; (c) greater certainty: with the order of priority being determined based on clear and unambigous rules based on first to file; (d) widening of available security options: with anybody, whether individual or company being able to give any form of security including floating charges; and (e) the removal of distinctions between types of secured creditors so that there is no longer any need to worry about the distinction between the floating and the fixed charge simplifying the drafting process.

This all generally sounds good but it is important to note that these changes may also give rise to issues which need to be carefully considered. For example, since registration is to be limited only to one register, the ease now of doing searches on companies may become a little more difficult not less so. Now, almost all charges given by companies, even if required to be registered elsewhere, must be registered at the Companies Office of Jamaica (COJ). Under the new system, a simple search to confirm the status of a company may end up requiring not only the search at the COJ but also with the Office of Titles (in relation to land) and with this new registry. More searches of course will probably mean more fees.

Additionally, if the distinction between floating charges and fixed charges is removed, the simplification of the drafting process may end up being at the expense of the protection now given to wages, redundancy payments, NIS and NHT contributions and the like which are now given preferential treatment. What about taxes? Is the Government prepared to give up its current preference?

Careful consideration should also perhaps be given to whether there are any factors which ought to be given preferential treatment when looking at the order in which payment is to be made out of the assets — does there need to be a distinction between dealing with a company and dealing with an individual in order to at least safeguard some of the assets of the individual so as to allow the individual to be able to survive after the creditor enforces its security?

The PPSA is not intended to cover land. However, not all land in Jamaica is under the registered land system. Although unusual for this type of legislation, could Jamaica benefit from including unregistered land within this system so as to reap some of the benefits of certainty?

As the discussions continue we hope we will be able to chart our way through these and all other issues. The certainty that this register will offer for dealings with assets other than land and the protections which already exist for dealings with registered land, make it likely that this intervention will result in making it easier for MSMEs to offer collateral for loans which banks are more willing to accept.

Hilary Reid is a Partner at Myers, Fletcher & Gordon and is a member of the firm’s Commercial Department. Hilary may be contacted via hilary.reid@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.