The overlooked building blocks of secured transactions law reforms: policing and the role of organized industries

Abstract

Two interlinked building blocks of secured transactions law have often been overlooked during the most recent round of secured transactions law reforms: the role of policing (monitoring) of the debtor and its affairs, and the role of institutionalized industries in the efficient working of secured transactions systems. Policing is often ignored because Article 9 of the Uniform Commercial Code (UCC)—the top global benchmark—made policing optional by discarding the ‘Benedict rule’, which had conditioned the validity of liens upon the secured creditor’s strict monitoring the debtor’s affairs. This shift was perceived as a positive development because it made the recognition of the most comprehensive security device—the floating (blanket) lien—possible. However, what many sources overlook is that parallel with this volte face, the risks corollary to the failure to monitor were transferred entirely onto secured creditors (banks and other financiers). In the USA, professional industries offering policing services were developed prior to the promulgation of the UCC, thanks precisely to the 1925 Benedict v Ratner case from whence the Benedict rule was derived. Moreover, these policing practices—the so-called ‘Benedict ritual’—had already become customary in the industries that were reliant on secure transactions law. This ‘know-how’ and the act of professional industries implementing it simply do not exist in many recipient reform countries. Similar to policing, equally disregarded is that the success of US secured transaction law is fundamentally attributable to the existence of ‘non-banking financial organizations’ specialized in various financing practices that exploit this branch of law, from the industries specializing in independent equipment leasing to those engaged in receivables financing. In contrast, the financial systems of countries interested in implementing major reforms tend to be dominated by conservative universal banks with limited capabilities. This article aims to cast a closer light on these neglected yet pivotal corollaries of secured transactions law.