Uncertainty in banking and financial entities: how will they formalize their movable collateral with the entry into force of Law 45-20?

25 October 2022

Authors: Sebastián Jiménez and Máximo Melo

Available guarantees of first ranking priority, in accordance with the current legal framework

In the Dominican legal system, first-ranking priority is constituted over movable property under the following concepts: commercial or mercantile pledge, civil pledge, assignment of collateral rights, and the pledge without and with relinquishing possession.

The purpose of Law No. 45-20 on Movable Collateral is to expand the use and promotion of movable property as collateral for loans by SMEs (small and medium-sized enterprises).

News of Law No. 45-20: more benefits for creditors

In particular, this new Law establishes a publicity system and regime through an electronic registry, in which the security interests will be registered. This will grant creditors various benefits that do not exist to date, such as the following:

– Grant rankings on movable collaterals.

– Faster and more effective foreclosure route to reduce the risk of creditors, in case of debtors’ breach with the payment of the borrowed sums.

Easy availability to register and publish the movable collateral granted

Among the benefits of Law No. 45-20, we find the implementation of the Electronic System of Movable Collateral (SEGM). This system will be developed and implemented by the person with whom the Ministry of Industry and Commerce and MiPymes (MICM) signs the concession agreement for such purposes.

The SEGM will consist of a unique electronic filing with remote access, through which creditors will be able to register and publish the movable collateral granted to them. Law No. 45-20 and its implementing regulations will govern the SEGM, as well as any complementary regulations issued for such purposes.

An unprecedented legal void: uncertainty and high credit risk in the Dominican banking and financial sector

Law No. 45-20 establishes that with its entry into force, initially set for December 21, 2020, any provision regarding commercial or mercantile pledges, civil pledges with or without relinquishing possession that contradicts the Law would be automatically repealed; as well as any rule in the Dominican legal system that refers to them.

From that moment on, this Law would regulate everything related to the guarantee on movable assets (tangible and intangible). In this way, everything related to movable collaterals would be included under the unitary regime of movable collateral governed by Law No. 45-20.

When Law 45-20 [sic] entered into force, the Executive Power had not issued its regulations for enforcement, nor had the SEGM been created or set-up. However, Law No. 45-20 entered into force and expressly repealed the figure of the pledge in the Dominican legal system as it had existed thus far.

Consequently, at that time we had Law No. 45-20, which was impossible to enforce and the non-existence of the pledge as a collateral figure, causing an unprecedented legal void in the legal system of the Dominican Republic.

This, due to the fact that the creditors who took movable property as collateral for their credits were unable to register their collateral and foreclose them in an event of default.

Solution adopted in 2020 to solve the situation generated, with the entry into force of Law No. 45-20

With the purpose of solving the legal chaos that occurred with the entry into force of Law 45-20, the Council of the Judicial Power (CPJ) issued a memo through which it exhorted the judicial authorities to continue with the registration of the pledge, as was made prior to its entry into force.

Notwithstanding, some judicial entities did not abide by the provisions of said CPJ memo, which placed the credit entities in a pressing situation and the pledge registrations were subject to the criteria of the judicial entity, to which the registration corresponded.

To remedy this pressing situation, in August 2021 (after eight months of the legal void created by the entry into force of Law 45-20), the National Congress approved Law No. 170-21, through which the repealed articles referring to the pledge were temporarily reincorporated, the application of Law No. 45-20 was suspended and the new date of entry into force of Law No. 45-20 was set for January 20, 2023.

Are we ready for the implementation of Law No. 45-20?

A little over three months before the new date for the entry into force of Law 45-20, it is important that financial and credit entities and all creditors that use movable collaterals be aware that the SEGM has not yet been implemented and that the Executive Power has not issued the regulations for the application of Law No. 45-20.

It is imperative that credit institutions and law firms be proactive and take the necessary precautions in the face of these possible scenarios: the elimination of the pledge as a legal figure and the impossibility of implementing Law 45-20 on Movable Collaterals.