The recently passed “Law on Securities like Movables, Claims, and so forth” is to create a new “Security Interest” on the movables and the claims, which shall be made public by “Registration”, in order to promote mortgage financing that holds mortgages on the company’s stocks, facilities or account receivables. In accordance with the contents of the Law, the principles of property law are included intact without any special modification and the effect of security right on the movables by expanding the valid range of the real subrogation to the transactions and rentals. (Article 14) However, it might be a problem that the Law fails to notice the fact that the debtor of the movables is still occupying the objects without the security interest under distraint. Thus, it is questionable whether the security interest can replace the right of pledge, chattel mortgage and so forth and become the security interest on the movables in the true sense in the area of company financing, even though the contents of Law on Security Interest are constituted in the way of complying with the civil law. Concretely speaking, the followings look controversial and it is necessary to consider the legal principles of the uniform commercial code in order to cope with such limitations.
First, it is suspected if the effect of real subrogation can be properly detected in case that the collaterals are changed into the amount of purchase price for easy disposal. In order to execute the real subrogation, the secured party shall place the account receivables under distraint before the payment for or the transfer of such account receivables. After the amount of purchase price are paid in cash or in the other forms, or transferred into the bank account in the name of security setter, such secured interests become mingled with the debtors’ general properties to lose their specificity. In this case, the right of real subrogation becomes extinct and the security right owner on the movables, at the best, can demand fulfillment of the original liabilities or claim the return of unjust enrichment equivalent to the amount of secured debt against the surety who stood movables security. Without extraordinary measures, it is expected that the right on movable securities will repeat the mistakes of chattel mortgage which is operated in combination with the prohibition of provisional disposition. In the meantime, if distraint are not required in exercising the real subrogation as shown from the argument on revision of the civil law, the effect of security right seems to be able to reach the deposit accounts. Unless the specificity issue on the amount of purchase price mixed into the deposit accounts is properly settled, however, it cannot be said that the effect of security interest reach the deposit accounts. Therefore, distraint is not necessary in exercising the real subrogation against the amount of purchase price and rents before the payment for or the transfer of account receivables and so on is made to the security setter. In this case, the effect of security interest can reach the deposit accounts even after the amount of purchase price is paid into the deposit accounts. It does not differ from that of revision of the civil law. One of the concerns is that the amount of purchase price mingled into the deposit accounts shall be handled in the way of settling the interests of several interested parties including subordinated secured parties, unsecured creditors and so forth while not breaking the frame of “Specificity of the Objects”, which is the basic principal of the Law of Reality. The solution is to acknowledge that the effect of security right reaches the deposit accounts by taking the legal principles of equity law of UCC into consideration. Of the several methods in the equity law above, the most reasonable one is “lowest intermediate balance rule”. This rule is to find the lowest bank balances between the time when the amount of purchase price is mixed into the bank account and the time when the security right is exercised by comparing such bank balances with the mixed amount and to regard the lowest amount as the specific amount. This method can virtually consolidate the power of security of the security party and enhance the reliability of registration of movables security. Moreover, in case of losses, damages or public collections and in case of sale and lease, the causes of representative values are not same. When the exchange value is materialized by accident, all interested parties cannot obtain instantly the cash or the things in the other forms which are due to the security right setter but can claim them according to the relevant procedures. As it takes a considerable amount of time, the distraint is natural to such extent. In case of sale, on the contrary, there might be no enough time for distraint because the purchase amounts are frequently transferred to the bank account right after the actual transactions. In consideration of these situations, it is desirable to handle this matter in dual ways; distraint is required in case of losses, damages or public collections and distraint is not required in case of sale and lease. It is practical to handle such issue not in the civil law revision process but in the law on security of movables as a special law.
Second, it is suspected if the catch-up possibilities of movables security right with the objects can be cut off when the acquisition in good faith comes to be validated by the disposal of collaterals. The legislators insist that the acquisition in good faith is seldom validated because a third party, to whom the debtor disposes of the collaterals or provide them as securities after setting the security interest of movables according to the law of securiyu interest which secures the effectiveness of security registration, might have malicious will or faults. In addition, the legislators also say that the third party is able to know through the registries the fact that the collaterals of the debtor setter are mortgaged. Base on such information, the third party can find the detailed contents of security right by additionally checking the debtor and creditor. However, it is questionable that the existence of security registration on movables can constitute the situation that the third party as an acquisitor may know the existence of security right on the movables. In order to make a reasonable inference for the proper interpretation to the issue raised above, it is necessary to review the UCC theory which gives an explanation of the correlation of registered security interest and acquisition in good faith in the similar logical structure. Such review is expected to contribute to the interpretation of the laws. The legal principles of “Buyers in the ordinary course of business” correspond with the concept of actual transaction of movables. In order to adjust the interest in the financial and commercial transaction areas in terms of acquisition in good faith, it is required to more proactively approach the legal principles of the ordinary sales process. Of the necessary conditions of “Buyers in the ordinary course of business”, to put it concretely, the followings are corresponding in many aspects with the good faith and no faults in the process of acquisition in good faith; i) the vendee is not against the good faith, ii) the vendee is not aware of the fact that the transaction of secured movables infringes the other people’s right, and iii) the vendee shall purchase the movables from the persons who are selling the same kind of movables in the ordinary course of business.
Third, it is suspected if the disposal of security setter can be fully limited at the exercising stage of security interest on the movables. The law of security interest on the movables regulates in principle the execution of security right on the movables by the auction in the court but it also allows the private execution of attribution settlement and disposal settlement if there are good reasons. (Section 1 of Article 21). In this case, the occupation of the object shall be transferred from the security right setter to the executor first and then from the executor to the creditor later in accordance with the distraint procedure prescribed in the civil execution law when the debtor does not transfer the occupation of the object at its discretion. The problem might occur during the delay period of creditor’s acquisition of occupation of such object; the debtor may dispose such mortgaged object to a third party and the third party may acquire it in good faith, and such delay may cause difficulties in disposing the collateral at the fair price. In order to resolve such problems, the followings are proposed; i) legislative solution to approve the acquisition of occupation of the creditor in the limited cases, ii) approval on the execution expansion contract which acknowledges the acquisition of occupation of the creditor after the default on the relevant obligations, and iii) method to reflect the debtor’s appeal, that the reasonable realization is not properly executed because of the forcible acquisition of occupation, on the realization of the mortgaged properties.