What This Is: We explain what you should know about the Uniform Commercial Code (UCC) if you are conducting business in the United States.
What This Means: You will learn what scenarios call for a UCC search versus a UCC filing and the difference between the two.
Uniform Commercial Code is a commercial legislation that was adopted by all US states in a standardised manner (with minor variations), which facilitates commerce between companies based in different US states, on a common principle.
Among other things, Article 9 of UCC provides a framework for secured transactions to be recorded in the office of the Secretary of State in which a company operates and this information is publicly available for all interested parties. This unique legislation differs substantially on the method of creating, recording and satisfying charges by a company as compared to common law countries such as the United Kingdom.
When a company borrows money (hereinafter called the ‘debtor’) from a bank or financial institution (the ‘Creditor) against certain assets (the ‘Collateral), this transaction (the ‘Secured Transaction’) is immediately recorded by the Creditor in the form a UCC Financing Statement (UCC-1) with the Secretary of State where the company is registered.
The purpose of filing UCC-1 by the Creditor is to establish their legal right to seize/ liquidate the Collateral in the event of a default by the Debtor or in the event of Debtor’s bankruptcy. In other words, a lien or a charge is created on the asset in favour of the Creditor. This UCC lien also serves as a notice to other interested parties such as potential lenders/ investors of company.
The UCC Statute provides detailed guidance on how the Secured Transaction is to be recorded correctly and each US State has adopted it with certain variations. There could be circumstances where a particular Collateral asset is used to finance multiple loans. In these cases, the date of filing of UCC-1 by each Creditor determines the priority of their claim on the Collateral.
In the US, UCC searches have been a part of due diligence processes for many decades. Commercial/ investment banks, financial institutions, private investors, and other interested parties, prior to engaging in a commercial transaction with a company, will usually undertake a UCC search to determine its financial position in relation to its outstanding debts.
A UCC filing does not affect the day-to-day operations of a company nor does it indicate its credit unworthiness, it serves as a tool for potential investors/ lenders to assess the degree of business’ financial leverage.
Generally speaking, UCC filings are recorded at the state level in the Secretary of State’s office where the company is organised. However, to uncover liens against a real property or a fixture, it is important to search at the county level too.
If you are a lender conducting due diligence on a potential Debtor, in addition to the UCC searches, it is important to look for other types of liens such as tax liens or judgment liens against a company. These are usually maintained on a separate index, different from UCC searches.
Due to the nuances involved in UCC and other lien searches in the US, it is advisable to use a professional third-party to undertake the searches.