Understanding the UCC: Everything You Need to Know
Understanding the UCC is important for businesses that regularly perform commercial transactions.3 min read
Understanding the UCC is important for businesses that regularly perform commercial transactions. While not legally binding, the Uniform Commercial Code (UCC) provides guidelines for handling almost every type of business transaction, including shipping both individual and bulk products.
What is the UCC?
The UCC is a set of rules that governs a wide range of business transactions, including:
- Bank deposits.
- Bulk sales and transfers.
- Bills of lading.
- Fund transfers.
Article 9, which governs Secured Transactions, is one of the most important sections of the UCC. The rules in Article 9 cover transactions where there is a debt involved and a creditor has an interest in the debtor's property. Article 9 was last revised in 1998, and these revisions received approval in 2001. Under Article 9, creditors can claim the property of a debtor in order to satisfy the debt.
To make sure that a borrower's collateral property can be claimed in order to fulfill a debt, creditors should make sure that the rules of Article 9 are followed and that the debt is fully documented.
The basic rules of Article 9 include:
- The creditor and debtor must reach an agreement.
- There must be a valid security agreement in place.
- A UCC1 financing form must be filed.
When there is more than one creditor, collateral property is awarded based on the security agreement.
A secured creditor has staked a claim in something that the buyer owns. This arrangement gives the creditor several important rights:
- The right to repossess the collateral property if the buyer does not repay their debts.
- Higher priority to future proceeds.
- Preference in bankruptcy filings.
Understanding the UCC
The UCC was designed to provide concrete rules for important areas of commerce. These rules were first published in 1952 and have been revised several times since they were first enacted. The UCC provides guidelines for commercial transactions, but it is not actually a law. Instead, individual states have the ability to adopt the UCC into their statutes and modify the code's rules.
Most commercial transactions are governed by the UCC, so it's crucial that all businesses and professionals understand these rules. In addition to the UCC, several other laws can apply to business transactions:
- State and federal law.
- Common law.
- Regulatory board requirements.
The UCC is comprised of nine articles that cover different areas of a commercial law. In Article 1, you can find general provisions of the UCC, including definitions that will help you understand the rules described in the other eight articles.
Article 2 of the UCC covers sale of goods contracts. The rules in this article can help you to write legally binding sales contracts, excluding real estate sales.
Article 2A covers the leasing of goods. This amendment, adopted in 1987, underwent revision three years later. Under Article 2A, a lease of goods is valid if the lessee receives a good, but the lessor keeps the property title. Article 2A also includes rules for financial leases.
UCC Article 3 provides rules for negotiable financial instruments, including drafts and promissory notes. Drafts can be used to provide payment to a third party, and a note is proof that one person owes a debt to another.
Article 4 of the UCC provides a framework for collections and bank deposits. In this article, you can find a variety of rules for using checks, which are an important component of daily commerce. In 1989, Article 4A was added to the UCC to govern electronic fund transfers between banks. Article 4A outlines rules both for the bank sending the transfer and the recipient institution.
Article 5 of the UCC covers letters of credit. When a creditor issues credit to a borrower, Article 5 requires the creditor to provide the borrower with a document proving the credit. Article 6 provides rules for bulk sales. The purpose of this section is to provide protection for creditors that work with businesses that sell stock merchandise. Without these rules, it would be possible for a business to make a bulk sale and flee with the profits, damaging the creditor.
The three remaining UCC articles include Article 7, which outlines rules for documents of tile, including bills of lading and warehouse receipts; Article 8, which governs investment securities; and Article 9, which institutes rules for secured transactions.
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