Strength of legal rights index: World Bank-2019

Strength of legal rights index

The strength of legal rights index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. For each economy it is first determined whether a unitary secured transactions system exists. Then two case scenarios, case A and case B, are used to determine how a nonpos­sessory security interest is created, publicized and enforced according to the law. Special emphasis is given to how the collateral registry operates (if regis­tration of security interests is possible). The case scenarios involve a secured borrower, company ABC, and a secured lender, BizBank.
The strength of legal rights index covers functional equivalents to security inter­ests in movable assets (such as financial leases and sales with retention of title) only in its first component, to assess how integrated or unified the economy’s legal framework for secured transactions is.

The strength of legal rights index includes 10 aspects related to legal rights in collat­eral law and 2 aspects in bankruptcy law. A score of 1 is assigned for each of the following features of the laws:

The economy has an integrated or unified legal framework for secured transactions that extends to the creation, publicity and enforcement of four functional equivalents to security interests in movable assets: fiduciary transfers of title; financial leases; assignments or transfers of receiv­ables; and sales with retention of title.
The law allows a business to grant a nonpossessory security right in a single category of movable assets (such as accounts receivable, tangible movable assets and inventory), without requiring a specific descrip­tion of the collateral.
The law allows a business to grant a nonpossessory security right in substantially all its movable assets, without requiring a specific descrip­tion of the collateral.
A security right can be given over future and after-acquired assets, and extends automatically to the prod­ucts, proceeds and replacements of the original assets.
All types of debts and obligations can be secured between the parties, and a general description of such debts and obligations is permitted in the collateral agreement and in registra­tion documents.

A collateral registry or registration institution for security interests granted over movable property by incorporated and nonincorporated entities is in operation, unified geographically and with an electronic database indexed by debtors’ names.
The collateral registry is a notice-based registry—a registry that files only a notice of the existence of a security interest (not the underlying documents) and does not perform a legal review of the transaction. The registry also publicizes functional equivalents to security interests.

The collateral registry has modern features such as those that allow secured creditors (or their represen­tatives) to register, search, amend or cancel security interests online.
Secured creditors are paid first (for example, before tax claims and employee claims) when a debtor defaults outside an insolvency procedure.
Secured creditors are paid first (for example, before tax claims and employee claims) when a business is liquidated.
Secured creditors are subject to an automatic stay on enforcement proceedings when a debtor enters a court-supervised reorganization procedure, but the law protects secured creditors’ rights by providing clear grounds for relief from the automatic stay (for example, if the movable property is not used for the reorganization or sale of the business as a going concern, or if there is a risk to its existence) and setting a time limit for it.

The law allows parties to agree in the collateral agreement that the lender may enforce its security right out of court; the law allows the assets to be sold through public or private auctions and permits the secured creditor to take the asset in satisfac­tion of the debt.

The index ranges from 0 to 12, with higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit.

Higher Value = High protection

Countries and Economies