Cross-Border Security over Receivables 9783866538597

Citation preview

GPR

Praxis

Schriften zum Gemeinschaftsprivatrecht

Die Schriften zum Gemeinschaftsprivatrecht werden herausgegeben von Professor Dr. Martin Schmidt-Kessel, Osnabrück Professor Dr. Christian Baldus, Heidelberg Professor Dr. Martin Gebauer, Tübingen Professor Dr. Brigitta Jud, Wien Professor Dr. Peter Jung, Basel Richter am OLG Dr. Jan Maifeld, Düsseldorf Rechtsanwalt Dr. Eike Najork, LL.M., Köln Notar Dr. Robert Schumacher, LL.M., Aachen

Cross-Border Security over Receivables

edited by

Harry C. Sigman Eva-Maria Kieninger

ISBN (print) 978-3-86653-117-8 ISBN (eBook) 978-3-86653-859-7 The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available on the Internet at http: // dnb.d-nb.de.

© 2009 by sellier. european law publishers GmbH, Munich. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of the publisher. Design: Sandra Sellier, Munich. Production: Karina Hack, Munich. Typeface: Agfa Rotis Serif and Agfa Rotis Semi Serif. Printing and binding: AZ Druck und Datentechnik, Kempten im Allgäu. Printed on acid-free, non-ageing paper. Printed in Germany.

Preface This book originates from a workshop, organised by the editors, that took place at the Academy of European Law in Trier (ERA) in October 2007. The case studies and national reports were presented, compared and discussed by the panel of authors and among the participants, mostly law practitioners and academics from a large number of EU Member States. The book presents significantly revised and expanded versions of the national reports (revisions made during the course of 2008), together with a comparative study of the current divergences, with detailed references to regional and international studies and treaties bearing on the subject and the relevant provisions of Uniform Commercial Code Article 9, as well as discussion of the prospects for and possible content of harmonised European law on the subject. In addition, the book presents a detailed analysis of the relevant provision of the Rome I Regulation and the private international law aspects of assignments of receivables. The editors and authors thank the Academy of European Law, especially Dr. Angelika Fuchs, for the possibility to hold the workshop and for the excellent facilities at the Academy’s premises in Trier. They also thank the participants for their stimulating comments and questions. We are grateful to Olaf Beller, research assistant at the University of Würzburg, for his diligent editorial work and – last but not least – to the editors of the Schriften zum Gemeinschaftsprivatrecht for the possibility to publish this book within this series. We hope that this book, together with its companion volume, CrossBorder Security over Tangibles, will foster a better understanding of each of the national laws studied and the nature and scope of the differences among them, help practice to overcome the current difficulties encountered in cross-border transactions and contribute to reform and to future European harmonisation measures. April 2009

Harry C. Sigman Eva-Maria Kieninger

Table of contents Preface

v

List of contributors

xvii

Abbreviations

xxi

The Law of Assignment of Receivables: in Flux, Still Uncertain, Still Non-Uniform Harry C. Sigman / Eva-Maria Kieninger I.

General Framework

1

II.

Scope and Terminology

3

III.

Overview of the legal systems studied 1. Relevant legislation 2. Formalities for effectiveness of the transfer between assignor and assignee 3. The role of notification 4. Restrictions on assignment 5. Assignor representations 6. Implementation of the Financial Collateral Directive 7. Need for further harmonisation and further reform

IV.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

The Case Studies Security right over “future” receivables Sale of existing receivables Security right in all existing and future receivables Sale of a partial undivided interest in a portfolio of receivables Security right in receivables that are secured by real rights in goods Security right in receivables that are supported by personal guaranties Security right in receivables that are supported by independent undertakings Contractual restrictions on assignment Legal restrictions on assignment Publicity; priorities in general

7 8 10 11 12 12 12

14 16 17 18 19 22 23 24 29 30

viii

11.

Table of contents

13. 14. 15. 16.

Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Notification Post-insolvency collection by buyer of receivables Post-insolvency collection by pledgee of receivables Securitisation

V.

National implementation of the Financial Collateral Directive

VI.

Private International Law Issues Analytical framework – distinguishing different issues Contractual relationship between assignor and assignee Relationship with the debtor Priority issues / third party effects a) State of the law under the Rome Convention b) The Rome I Regulation aa) The Commission proposal bb) The Debate in the Council cc) The outcome so far (1) No decision on third party effects (2) Proprietary relationship between assignor and assignee (3) Scope of application of Art. 14 – coverage of security rights c) The best solution aa) The basic rule – law of the assignor’s location bb) Corollary issues (1) Sphere of application of the assignor’s location rule; exceptions (2) The proper boundary between the law governing the receivable and the law governing priority / third party effects (3) The proper definition of the assignor’s location, particularly in the case of assignors with more than one place of business – the place of central administration (4) Change of location – the question of the “material time”

12.

1. 2. 3.

Appendix Comments by the Hungarian Delegation on the Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Article 13

33 35 35 39 40 40 41

41 43 43 46 46 50 50 51 54 54 55 59 60 60 62 63 65

70 71 75

Table of contents

ix

The Case Studies Harry C. Sigman / Eva-Maria Kieninger I.

General remarks

II.

The Case Studies Security right over “future” receivables Sale of existing receivables Security right in all existing and future receivables Sale of partial undivided interest in a portfolio of receivables Security right in receivables that are secured by real rights in goods Security right in receivables that are supported by personal guaranties Security right in receivables that are supported by independent undertakings Contractual restrictions on assignment Legal restrictions on assignment Publicity; priorities in general Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Notification Post-insolvency collection by buyer of receivables Post-insolvency collection by pledgee of receivables Securitisation

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. III.

83

84 85 85 85 85 85 86 86 86 87 87 87 87 88 88 88

1. 2. 3.

Substantive Variations: Nature of claim Nature of assignor Nature of assignee

88 89 89

IV.

Private international law issues

89

Germany Julia Klauer Rakob I. 1. 2.

Introduction Pledge vs. security transfer Trennungs- und Abstraktionsprinzip – obligations to create security and rights in rem

91 94

x

3. 4. 5. 6. 7. 8. II.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. III.

1. 2.

Table of contents

Pledges – Creation and Enforcement Security transfers – Creation and Enforcement Future receivables and a revolving portfolio as collateral Qualifying Receivables Financial Collateral Directive Substantive Variations on Case Studies Case Studies Security right over “future” receivables Sale of existing receivables Security right in all existing and future receivables Sale of partial undivided interest in a portfolio of receivables Security right in receivables that are secured by real rights in goods Security right in receivables that are supported by personal guaranties Security right in receivables that are supported by independent undertakings Contractual restrictions on assignment Legal restrictions on assignment Publicity; priorities in general Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Notification Post-insolvency collection by buyer of receivables Post-insolvency collection by pledgee of receivables Securitisation Private international law issues Basic Approach Cases

95 96 98 102 104 106

107 108 108 108 109 110 111 111 112 112 113 114 115 117 117 117

119 122

France James Leavy I.

Introduction

123

II.

Case Studies Security right over “future” receivables Sale of existing receivables

125 127

1. 2.

Table of contents

xi

3. Security right in all existing and future receivables 4. Sale of partial undivided interest in a portfolio of receivables 5. Security right in receivables that are secured by real rights in goods 6. Security right in receivables that are supported by personal guaranties 7. Security right in receivables that are supported by independent undertakings 8. Contractual restrictions on assignment 9. Legal restrictions on assignment 10. Publicity; priorities in general 11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods 12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods 13. Notification 14. Post-insolvency collection by buyer of receivables 15. Post-insolvency collection by pledgee of receivables 16. Securitisation

128 128

III.

Effect of the EU Financial Collateral Arrangements Directive

143

IV.

Private international law issues

144

130 131 131 132 133 133 134 136 136 139 142 142

England and Wales Michael Bridge I. 1. 2. 3. 4.

Introduction Basic Features of English Law – common law and equity Types of transactions Writing, notice and registration Financial Collateral Directive

II.

Case Studies Security right over “future” receivables Sale of existing receivables Security right in all existing and future receivables Sale of partial undivided interest in a portfolio of receivables Security right in receivables that are secured by real rights in goods Security right in receivables that are supported by personal guarantees

1. 2. 3. 4. 5. 6.

147 149 151 151

153 156 157 158 159 161

xii

Table of contents

7. Security right in receivables that are supported by independent undertakings 8. Contractual restrictions on assignment 9. Legal restrictions on assignment 10. Publicity; priorities in general 11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods 12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods 13. Notification 14. Post-insolvency collection by buyer of receivables 15. Post-insolvency collection by pledgee of receivables 16. Securitisation III.

1. 2. 3. 4. 5. 6. 7.

Private international law issues Assignments of Receivables Assignment and public policy Priority Registration Capacity to grant security Recharacterisation issues Land

162 162 165 166 167 168 169 171 172 173

175 177 178 178 179 180 180

Netherlands Sander Timmerman / Michael Veder I. 1. 2. 3.

4. 5. 6.

Introduction Transfer and encumbrance of assets under Netherlands law – general remarks Outright transfer of receivables Security over receivables a) Security transfer b) Right of pledge Outright transfer / pledge and set-off Insolvency of the assignor Implementation of the Financial Collateral Directive a) Introduction b) Scope c) Financial Collateral Arrangements d) Right of use e) Enforcement f) Insolvency law

181 183 185 185 185 188 189 191 191 192 192 194 194 195

Table of contents

7. Private international law a) Assignability b) Relationship between assignor and assignee c) Relationship between the debtor and the assignee d) Proprietary aspects e) Assimilation of foreign (security) rights in receivables II.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. III.

Case Studies Security right over “future” receivables Sale of existing receivables Security right in all existing and future receivables Sale of partial undivided interest in a portfolio of receivables Security right in receivables that are secured by real rights in goods Security right in receivables that are supported by personal guaranties Security right in receivables that are supported by independent undertakings Contractual restrictions on assignment Legal restrictions on assignment Publicity; priorities in general Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Notification Post-insolvency collection by buyer of receivables Post-insolvency collection by pledgee of receivables Securitisation

xiii 196 197 198 198 199 201

203 204 205 205 207 208 208 208 209 210 211 211 212 213 214 215

1. 2. 3.

Substantive Variations Nature of claim Nature of assignor Nature of assignee

217 217 217

IV.

Private international law issues

218

xiv

Table of contents

Belgium Eric Dirix / Ivan Peeters I. 1. 2. 3. 4. 5. 6. 7.

Introduction Historical background Outright transfer Pledge of receivables Enterprise pledge (pledge over the business) Security transfer Transfer of invoice Right to collect

II.

Case Studies Security right over “future” receivables Sale of existing receivables Security right in all existing and future receivables Sale of partial undivided interest in a portfolio of receivables Security right in receivables that are secured by real rights in goods Security right in receivables that are supported by personal guaranties Security right in receivables that are supported by independent undertakings Contractual restrictions on assignment Legal restrictions on assignment Publicity; priorities in general Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Notification Post-insolvency collection by buyer of receivables Post-insolvency collection by pledgee of receivables Securitisation

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. III.

1. 2. 3.

Substantive Variations Nature of claim Nature of assignor Nature of assignee

219 219 222 223 223 224 225

225 226 226 227 227 228 228 228 228 228 229 229 230 230 230 230

231 231 231

Table of contents

Private international law issues 1. The assignor is located in a country other than Belgium 2. The assignee and assignor are located in Belgium but the debtor that owes the assigned receivable and any collateral securing that person’s obligation is located in a different country 3. The assigned receivable is governed by the law of a country other than that in which the assignor is located

xv

IV.

232

234 234

Spain Cosme Colmenero García I. Introduction 1. The basic Spanish legal regime a) Outright transfer of a receivable b) Pledge of a receivable c) Security transfer of a receivable 2. Implementation in Spain of Directive 2002 / 47 / EC of 6 June 2002 on financial collateral arrangements II.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Case Studies Security right over “future” receivables Sale of existing receivables Security right in all existing and future receivables Sale of partial undivided interest in a portfolio of receivables Security right in receivables that are secured by real rights in goods Security right in receivables that are supported by personal guaranties Security right in receivables that are supported by independent undertakings Contractual restrictions on assignment Legal restrictions on assignment Publicity; priorities in general Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Notification Post-insolvency collection by buyer of receivables Post-insolvency collection by pledgee of receivables Securitisation

235 236 238 240 240

242 242 243 243 244 245 245 245 245 246 246 247 248 248 248 248

xvi

Table of contents

III.

Substantive Variations

IV.

Private international law issues The Rome Convention on the Law Applicable to Contractual Obligations of 19 June 1980 Effect of variations of the assumptions a) The assignor is located in a country other than Spain b) The assignee and assignor are located in Spain but the third debtor that owes the assigned receivable and any collateral securing that person’s obligation is located in a different country c) The assigned receivable is governed by the law of a country other than that in which the assignor is located d) The meaning of “location”

1. 2.

249

250 252 252

252

253 253

Italy Lisa Curran I.

Scope and Terminology

255

II.

Forms of assignment available with respect to receivables

255

III.

Substantive law re Security over Receivables

258

IV.

Perfection formalities

260

V.

Registration tax

261

VI.

Assignment of secured receivables

261

VII. Restrictions on Assignment

261

VIII. Enforcement and ranking of security created by

pledge / security transfer of receivables

262

IX.

Security over Bank Accounts

262

X.

Capacity, authority and corporate benefit

264

List of contributors Michael Bridge is Professor of Law at the London School of Economics. He was formerly Professor of Commercial Law and Dean of the Faculty of Laws of University College London and before that held chairs in McGill University (Montreal) and the University of Nottingham. He is also a barrister of the Middle Temple. He was a member of the Property Group for the Trento Common Core Project, and is an advisor to the European Civil Code Study Group (secured transactions and transfer of property). He has written The Law of Personal Property Security (2007) with co-authors, co-edited a collection on Cross-Border Security and Insolvency, contributed the chapter on Insolvency for the encyclopaedia on English Private Law and is the editor of the chapters on company charges in Palmer’s Company Law. Cosme Colmenero García is a senior associate in the Madrid office of Linklaters. He received his legal education at the Universidad Pontificia Comillas (ICADE), Madrid, where he qualified in both Law and Business Administration. Prior to joining Linklaters, he worked at the Madrid office of Ashurst (2002 to 2006). His practice involves financing transactions and security rights as well as restructuring and insolvency work. He is a member of the Madrid bar. Lisa Curran is of counsel in the Rome office of Allen & Overy. She received a Bachelor of Laws from Queen’s University (Canada) in 1986 and is admitted to practice in Ontario (Canada) and England. She has practiced in Italy since 1991 and joined the Rome office of Allen & Overy in 2000. Her practice focuses on banking and capital markets work. She is co-author of the netting and collateral opinions published by the International Swaps and Derivatives Association for Italy, and she was co-chair of the Banking Committee of the International Bar Association. Eric Dirix is judge in the Belgian Cour de cassation as well as professor at the University of Leuven, where he teaches Insolvency Law. He obtained his PhD with a thesis on Contracts and Third Parties. He has written extensively in the areas of Contracts, Securities and Insolvency. He is also the president of the Belgian Centre for Comparative Law.

xviii

List of contributors

Eva-Maria Kieninger is Professor of German Private Law, European Private Law and Private International Law at the University of Würzburg, Germany (since 2001). She studied law at the University of Passau, Germany, and at King’s College, London. She received her PhD from the Free University of Berlin in 1996. Secured Transactions Law is among her main fields of interest. Her major works in this area are: Mobiliarsicherheiten im Europäischen Binnenmarkt (1996) and Security Rights in Movable Property in European Private Law (2004). Together with Harry C. Sigman, she co-edited CrossBorder Securities over Tangibles (2007). Contact: [email protected]. Julia Klauer Rakob studied law at the Universities of Heidelberg and Freiburg and at the Free University of Berlin and completed a master’s program at Cornell (USA). She received a PhD from the University of Heidelberg for a doctoral thesis on security rights in movables in cross-border transactions. From 1999 to 2005, she worked as a banking and finance lawyer with Linklaters in their Frankfurt, London and Berlin offices. In 2005, she joined the Berlin School of Economics as Professor for business, banking and capital markets law. James Leavy is a member of the French and Quebec Bars and is a partner in the Paris office of Weil, Gotshal & Manges. He received his legal education at McGill University (Montreal), the University of Montreal, the College of Europe (Bruges) and the University of Paris XI. His practice involves secured transactions and he has written many articles in this area and is a member of the advisory board of the International Financial Law Review. He is a member of the legal affairs committee of Paris Europlace, an association of the principal institutions operating on the Paris financial market. Ivan Peeters is a member of the Brussels Bar and is a partner at the Brussels office of Stibbe. He received his legal education at the Universities of Antwerp and Leuven and has held teaching and research assignments (insolvency law, finance law) at Antwerp University and Ghent University. Before joining the bar in 1992 he was in-house counsel at a major Belgian commercial bank. He has published extensively on the areas of finance, security rights and insolvency. He regularly assists the Belgian banking sector in respect of the modernisation of Belgian financial legislation.

List of contributors

xix

Harry C. Sigman received his Juris Doctor from Harvard Law School in 1963, and has taught at USC and UCLA Law Schools in Los Angeles, as well as at law faculties in Belgium, the Netherlands and Switzerland, and has presented seminars and guest lectures throughout Europe and in Asia, Latin America and Australia. An experienced practitioner as well, he has been a member of the California Bar for over 40 years, specializing in commercial law. He was a member of the Drafting Committee to Revise Uniform Commercial Code Article 9, and he was a U.S. Delegate with respect to the UN Receivables Convention and the UNCITRAL Legislative Guide on secured transactions. He is a contributing author, Security Rights in Movable Property in European Private Law (2004), and co-editor, Cross-Border Security over Tangibles (2007). Contact: [email protected]. Sander Timmerman is senior legal counsel with the legal services division of the Dutch Central Bank (De Nederlandsche Bank). He received his legal education at the University of Nijmegen where he subsequently was a lecturer from 1998 to 2001. From 2001 to 2008 he worked as an attorney in the Amsterdam and New York offices of De Brauw Blackstone Westbroek, where his practice involved insolvency matters, financing transactions and security rights. Michael Veder is Professor of Law at the Molengraaff Institute of Private Law (Utrecht School of Law, the Netherlands). He specialises in property law, (international) insolvency law and security rights, fields in which he also gained extensive practical experience as an attorney in the Amsterdam office of De Brauw Blackstone Westbroek (where he worked until July 2008). He holds a doctorate in law from the University of Nijmegen and is author of Cross-Border Insolvency Proceedings and Security Rights (2004). He is secretary of the Government Committee on Insolvency Law (Commissie Insolventierecht) that advises the Dutch government on future reform of insolvency law.

Abbreviations AC

All ER ALR

App Cas App. Banca e borsa Bank Fin. R. Banque BCC BCLC

Beav BGB BGBl. BGH BGHZ

BKR BR-Drucks. BS

Bull. Civ.

Bus. Law. BW

C. civ. C. com. C. mon. fin.

Law Reports, Appeal Cases All England Law Reports Australian Law Reports Law Reports, Appeal Cases, House of Lords Corte d’appello (Italian Appeal court) Banca, borsa e titoli di credito (law journal) Bank – en Financieel Recht / Droit bancaire et financier (law journal) Banque: revue mensuelle du banquier, de son personnel et de sa clientèle (law journal) British Company Cases Butterworth’s Company Law Cases Beavan’s Rolls Court Report Bürgerliches Gesetzbuch (German Civil Code) Bundesgesetzblatt (German Government Gazette) Bundesgerichtshof (German Supreme Court) Entscheidungen des Bundesgerichtshofes in Zivilsachen (Decisions of Federal Supreme Court in Private Law Matters) Zeitschrift für Bank- und Kapitalrecht (law journal) Verhandlungen des Bundesrates, Drucksachen (Proceedings of the German Federal Council) Belgisch Staatsblad (Belgian State Gazette) Bulletin des arrêts des Chambres civiles de la Cour de Cassation (Decisions of the Commercial Civil Chamber of the French Supreme Court, as published in the official Bulletin) Business Lawyer (law journal) Burgerlijk Wetboek (Dutch Civil Code) Code civil (French Civil Code) Code de commerce (French Commercial Code) Code monétaire et financier (French Monetary and Financial Code)

xxii

C.c. CA

Cass.

Cass. ass. plén.

Cass. Civ. (1)

Cass. Civ. (3)

Cass. Com. CB (NS)

Cc CCo CE

Ch Ch D CLR

concl. proc. gen. Cr & Ph D. D. Aff. DCFR

De GM & G Dir. Fall. DZWir

ECJ EGBGB ERA ERPL EuLF EWCA Civ

Abbreviations

Código civil (Spanish Civil Code), Codice civile (Italian Civil Code) Cour d’appel (French Court of Appeal) Hof van Cassatie / Cour de cassation (Belgian Supreme Court), Cour de cassation (French Supreme Court), Corte di Cassazione (Italian Supreme Court) Arrêt de l’assemblée plénière de la Cour de cassation (Decision of the assemblée plénière of the French Supreme Court) Cour de cassation Chambre civile, première Chambre (first civil chamber of the French Cour de cassation) Cour de cassation Chambre civile, troisième Chambre (third civil chamber of the French Cour de cassation) Commercial chamber of the French Cour de cassation Common Bench Reports, New Series Code civil (Belgian Civil Code) Código de Comercio (Spanish Commercial Code) Conseil d’État (French Council of State) Law Reports, Chancery Division Law Reports Chancery Division (2nd series) Commonwealth Law Reports Conclusions du procureur général Craig & Phillip’s Chancery Reports Recueil Dalloz (law journal) Dalloz Affaires (law journal) Draft Common Frame of Reference De Gex, Macnaghten & Gordon’s Chancery Reports Il diritto fallimentare e delle società commerciali (law journal) Deutsche Zeitschrift für Wirtschafts- und Insolvenzrecht (law journal) European Court of Justice Einführungsgesetz zum Bürgerlichen Gesetzbuch (German Introductory Act to the Civil Code) Academy of European Law European Review of Private Law (law journal) European Legal Forum (law journal) Court of Appeal, Civil Division

Abbreviations

xxiii

Fw

Faillissementswet (Dutch Insolvency Act)

GAOR Gaz. Pal.

General Assembly Official Records Gazette du Palais (law journal)

HGB HR

Handelsgesetzbuch (German Commercial Code) Hoge Raad (Dutch Supreme Court)

I Contr. InsO Insolv Int Int. C. R. IPRax

I Contratti (law journal) Insolvenzordnung (German Insolvency Code) Insolvency Intelligence (law journal) International Corporate Rescue (law journal) Praxis des Internationalen Privat- und Verfahrensrecht (law journal)

JCP E

Jurisclasseur Périodique (La Semaine Juridique) – Édition Entreprises (law journal) Jurisclasseur Périodique (La Semaine Juridique) – Édition Générale (law journal) Journal de droit international (law journal) Journal Officiel de la République Française (French State Gazette) Jurisprudentie Onderneming Recht (law journal)

JCP G JDI JO JOR KB KWG

Law Reports, King´s Bench Division Gesetz über das Kreditwesen (German Banking Act)

L. Fall.

Legge fallimentare (Italian Insolvency Act) Ley Concursal (Spanish Bankruptcy Act) Ley de Enjuiciamiento Civil (Spanish Civil Procedure Act) Law and Financial Markets Review (law journal) Ley Hipotecaria (Spanish Mortgage Law) Ley de 16 Dec. 1954 de Hipoteca Mobiliaria y Prenda sin Desplazamiento (Spanish Law of Chattel Mortage and Pledge without Dissposession) Law Journal Reports, Chancery New Series Law Journal Reports, Queen’s Bench New Series Lloyd‘s Maritime and Commercial Law Quarterly (law journal) Les Petites affiches (law journal) Law Quarterly Review (law journal)

LC LEC LFMR LH LHMPSD

LJ Ch LJQB LMCLQ LPA LQR

xxiv

Abbreviations

LT

Law Times Reports

NIPR

Nederlandse Internationaal Privaatrecht (law journal) Nederlands Jurisprudentie (law report) Neue Juristische Wochenschrift (law journal) Neue Juristische Wochenschrift RechtsprechungsReport (law journal) New South Wales Law Report Nederlands tijdschrift voor Burgerlijk Recht (law journal) Neue Zeitschrift für das Recht der Insolvenz und Sanierung (law journal)

NJ NJW NJW-RR NSWLR NTBR NZI

OJ OLG

Official Journal of the European Union Oberlandesgericht (German Regional Appeal Court)

P Pas. PECL

Law Reports, Probate Pasicrisie belge (law journal) Principles of European Contract Law

QB / QBD

Law Reports, Queen´s Bench Division

R. Lamy dr. aff. RabelsZ

Revue Lamy Droit des Affaires (law journal) Rabels Zeitschrift für ausländisches und internationales Privatrecht (law journal) Revue Banque (law journal) Revue critique de jurisprudence belge (law journal) Amtliche Sammlung von Entscheidungen des Reichsgerichts in Zivilsachen (Decisions of the German Imperial Court in Private Law Matters) Revue critique de jurisprudence belge (law journal) Revue de jurisprudence de droit des affaires (law journal) Revue trimestrielle de droit commercial et de droit économique (law journal) Russell’s Chancery Reports tempore Eldon Wetboek van Burgerlijke Rechtsvordering (Dutch Code of Civil Procedure) Rechtskundig Weekblad (law journal)

RB RCJB RGZ

RJCB RJDA RTD com.

Russ Rv RW SI

Sol Jo

Statutory Instruments Solicitor´s Journal (law journal)

Abbreviations

xxv

Stb.

Staatsblad van het Koninkrijk der Nederlanden (Dutch State Gazette)

TLR TPR

TvI

Times Law Reports Tijdschrift voor privaatrecht (law journal) Tijdschrift voor insolventierecht (law journal)

Unif. L. Rev.

Uniform Law Review (law journal)

WCG

Wet conflictenrecht goederenrecht (Dutch Act on Conflict Rules in the Area of Property Law) Weekly Law Reports Wertpapiermitteilungen (law journal) Weekblad voor privatrecht, notariaat en registratie (law journal)

WLR WM WPNR

ZInsO ZIP ZPO ZVglRWiss

Zeitschrift für das gesamte Insolvenzrecht (law journal) Zeitschrift für Wirtschaftsrecht (law journal) Zivilprozessordnung (German Code of Civil Procedure) Zeitschrift für vergleichende Rechtswissenschaft (law journal)

The Law of Assignment of Receivables: in Flux, Still Uncertain, Still Non-Uniform Harry C. Sigman / Eva-Maria Kieninger I.

General Framework

This volume is a companion work to “Cross-Border Security over Tangibles”, published in November of 2007. Reference should also be made to that book, as it provides a deeper introduction to the legal systems studied and to the notion of security, as well as a more detailed study of filing / registration and of the basic structure of secured transactions law – thus, providing a context for the material contained in this volume. In the interest of brevity, that material is not repeated in this volume. During the past twenty-five years, there has been a great deal of legislative activity in Europe with respect to transactions in receivables. Virtually every country studied in this volume has engaged in this activity, albeit in varying ways.1 This activity is largely in response to demands of the marketplace. It reflects the recognition of the growing importance of receivables as a means of raising finance2 (both as collateral and as a commodity that can be sold) and the role that receivables financing can play in economies, particularly for the financing of small and medium enterprises, not to mention in the capital markets. The changes have ranged from changes in the basic rules provided in civil codes for transfers of claims to special legislation to make possible or to facilitate securitisation and other financing techniques that involve transactions in receivables. This activity has also occurred in the international and regional spheres, with the adoption of the United Nations Convention on the Assignment of Receivables in International Trade (covering both outright transfers and security transactions) (the “UN Convention”),3 the UNIDROIT Convention on 1

2

3

See the more detailed discussion below in this Introductory Chapter, as well as the National Reports. Also see, generally, Salomons, Deformalisation of Assignment Law and the Position of the Debtor in European Property Law, ERPL 2007, 639 et seq. In many instances, receivables are the most significant part of the assets of a business and they are often the most liquid and simplest to collateralise. The text of the UN Convention is set forth as the Appendix to the Report of UNCITRAL on its 34th Session (2001), GAOR, Supp. No. 17 (A / 56 / 17). The Report may be found on the UNCITRAL website http: // www.uncitral.org (1 April 2009).

2

Harry C. Sigman / Eva-Maria Kieninger

International Factoring,4 the struggles with respect to what is now Art. 14 of the EU Regulation on the law applicable to contractual obligations (the “Rome I Regulation”),5 and the UNCITRAL Legislative Guide on Secured Transactions (covering, with respect to receivables, both outright transfers and security transactions) (the “Legislative Guide”).6 And, of course, the national implementations of the EU Directive on Financial Collateral Arrangements (“Financial Collateral Directive”)7 have had a role, albeit to

4

5

6

7

The UN Convention was adopted by the General Assembly in 2001; it has not yet entered into force; it has been signed by Luxembourg, Madagascar and the United States, and acceded to by Liberia. For a detailed analysis of the UN Convention, including a comparison with relevant provisions of Article 9 of the Uniform Commercial Code in the U.S. (“UCC Article 9”), see Sigman / Smith, Toward Facilitating Cross-Border Secured Financing and Securitization: An Analysis of the United Nations Convention on the Assignment of Receivables in International Trade, 57 Bus. Law. 727 et seq. (2002). Text available at http: // www.unidroit.org (1 April 2009); adopted (Ottawa) 28 May 1988; entered into force 1 May 1995; ratified or acceded to by seven countries, including three of the countries studied in this volume: France, Germany and Italy. Regulation 593 / 2008 / EC of the European Parliament and of the Council of 17 June 2008 (OJ 4 July 2008 L 177 / 6 et seq.). See, with respect to the initial Commission proposal, Kieninger / Sigman, The Rome-I Proposed Regulation and the Assignment of Receivables, EuLF 2006, 1 et seq. The Rome I Regulation is discussed in depth in para. VI.3.b) infra. The most recent publicly available text may be found at http:// www.uncitral.org (1 April 2009). With respect to receivables, the Legislative Guide’s recommendations effectively track the UN Convention; thus, reform based on the Legislative Guide would result in the enactment of the UN Convention as national law. Directive 2002 / 47 / EC of 6 June 2002 (OJ 27 June 2002 L 168 / 43 et seq.). It should be noted that the European Commission has proposed amendments to the Financial Collateral Directive (Proposal for a Directive of the European Parliament and of the Council amending Directive 98 / 26 / EC on settlement finality in payment and securities settlement systems and Directive 2002 / 47 / EC on financial collateral arrangements as regards linked systems and credit claims, COM (2008) 213 final). Immediately prior to submission of the manuscript of this volume to the publisher, the Community institutions agreed to amendments to the Financial Collateral Directive. The actual state of affairs may be reviewed at http: // ec.europa.eu / prelex / detail_dossier_real.cfm?CL=en&DosID=196941 (1 April 2009). These amendments would, inter alia, extend to “credit claims” (very broadly defined) eligible for the collateralisation of central bank credit operations the same level of insulation from various national legal impediments enjoyed by other types of financial collateral under the Directive, several Member States having already included certain bank loans and other assets as eligible for use in collateral operations in financial markets, but operating

The Law of Assignment of Receivables

3

a widely varying extent, in the development of national law in this field as well. Although the focus of this volume is primarily on seven European countries – Germany, the Netherlands, France, Belgium, England, Spain and Italy – this Introductory Chapter will include references, for comparison and contrast purposes, to the above-mentioned international and regional instruments and also to the Principles of European Contract Law (“PECL”),8 now integrated into the Draft Common Frame of Reference (“DCFR”),9 the UNIDROIT Principles of International Commercial Contracts (“UNIDROIT Principles”),10 and the Uniform Commercial Code (“UCC”) in the United States.11

II.

Scope and Terminology

It is important to establish at the outset the terminology used in this volume. Two elements must be kept in sharp focus – (i) the asset that is the subject matter of the transaction, and (ii) the nature of the transaction itself. This volume, like the UN Convention, is confined to “receivables”. This is not a traditional legal term, but rather is a business term. It is a subset

8

9

10

11

under different legal regimes. This asset class has been eligible collateral for Eurosystem credit operations since the beginning of 2007. Lando / Clive / Prüm / Zimmermann (eds.), Principles of European Contract Law – Part III (2003), Chapter 11 (“Assignment of Claims”). v.Bar / Clive / Schulte-Nölke et al. (eds.), Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (DCFR). Interim Outline Edition (2008). The DCFR contains a Section on “Assignment of rights” (Art. III.– 5:101 et seq.), which is largely based on Chapter 11 of PECL. Cross-references between PECL and the DCFR can be found in the “Tables of Destinations and Derivations”, p. 51 et seq. and p. 59 et seq. As to the DCFR generally, see SchmidtKessel (ed.), Der Gemeinsame Referenzrahmen. Entstehung, Inhalte, Anwendung (2009). Because this manuscript was finished early in 2009, it is based on the Interim Outline Edition of the DCFR (2008). Thus, changes to Art. III.–5:101 et seq. that have been made in the Outline Edition (2009) and the content of the new book IX on security rights have not been taken into account. International Institute for the Unification of Private Law (ed.), UNIDROIT Principles of International Commercial Contracts (2004), Chapter 9, Section 1 (“Assignment of Rights”). References herein to the UCC are to the 2007 Official Text and references to UCC Article 9 are to the 2000 Official Text. Subject to minor variations, UCC Article 9 has been enacted and is in effect in all fifty states and the District of Columbia. For an in-depth discussion of key aspects of UCC Article 9, many of which apply also to receivables transactions, see, the Introduction to Sigman / Kieninger (eds.), Cross-Border Security over Tangibles (2007), p. 3 et seq.

4

Harry C. Sigman / Eva-Maria Kieninger

of the broader class “claim”, usually referred to in the countries studied as créances, créditos, Forderungen.12 This volume uses the term “receivable” to refer to a “contractual right to payment of a monetary sum”, the definition used in the UN Convention.13 This term, thus, excludes both non-contractual rights and rights to performance other than payment of a monetary sum.14 Nevertheless, the category of receivables embraces the vast majority of claims used in ordinary financing transactions,15 although in the codifications in Europe references are generally to the broader class “claims.”16

12

13

14

15

16

English law has historically used the term “book debts”, and the term is used in legislation requiring registration of certain types of transactions involving such assets. Consequently, that term has acquired a particular meaning, not precisely coterminous with “receivables” – “essentially an amount due in the course of a business which is normally entered into the ‘books’ of the business.” Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), p. 216. “However, modern commerce […] tends to use the wider term ‘receivables’ to refer to all debts owed to a business.” Ibid. Under the UCC, while most ordinary commercial receivables would likely be classified as accounts or chattel paper, a receivable within this volume (and, subject to its exclusions, within the UN Convention) could fall into one of the other UCC categories – promissory note or conceivably another instrument, payment intangible or conceivably another general intangible, investment property, deposit account or letter-of-credit right. These are all defined terms. The reason for the detailed subclassification of rights to payment is to facilitate the expression of refined rules (e.g., concerning perfection or priority) that are designed to satisfy differing business needs and efficiently support differing business practices. PECL defines “claim” as “a right to performance” and application of PECL Chapter 11 extends beyond contractual claims. See fn. 16 infra. The DCFR uses „right to performance“ instead of the usual term „claim“. The UNIDROIT Principles deal with the “transfer by agreement” of a “right to payment of a monetary sum or other performance from a third person” (Art. 9.1.1), although a number of the specific rules apply only to, or differently in the case of, non-monetary performance (e.g., Art. 9.1.3). Even this subset was narrowed in the scope of the UN Convention by exclusions in Art. 4, because the full subset would have added complexity and required detailed special rules in one or more particular aspects, susceptible of solution within a particular legal system but thought too difficult to deal with in a global instrument. The European codifications generally refer to “claims”. UCC Article 9 does not use the term “receivables”. See fn. 13 supra with respect to UCC terminology. Chapter 11 of PECL applies to (1) “the assignment by agreement of a right to performance (“claim”) under an existing or future contract, and (2) […] the assignment by agreement of other transferable claims.”

The Law of Assignment of Receivables

5

There is a list, in Art. 4 of the UN Convention, of excluded types of transactions and types of receivables – these are discussed below in the part of this Introductory Chapter dealing with private international law issues (in the context of the analysis of the Rome I Regulation), para. VI.3.c)bb)(1). The second element that requires terminological specificity is the nature of the transaction. This volume deals with transactions whereby the owner of a receivable (whether in a particular legal system this is an item of property or ‘only' a personal right), by agreement,17 transfers or creates a proprietary right in the receivable in favour of another person. This transaction may be (i) an outright transfer (sometimes referred to in the literature and the marketplace as a “true sale”), (ii) a transfer by way of security, i.e., title transfer for a security purpose (sometimes referred to as a “fiduciary transfer” or a “security transfer”)18, or (iii) the creation of a pledge or other security right denominated as such.19 In some legal systems, the term “assignment” may encompass all three categories. In other systems, only the first two categories are referred to as “assignments” and, in some cases, the applicable substantive rules make no distinction between them. In other systems, the latter two categories are collapsed into a single category;20 17

DCFR refers to “contract or other juridical act”.

18

The Financial Collateral Directive refers to such a transaction as a “title transfer financial collateral arrangement.” (Art. 2(1)(b)). The DCFR recognises that assignments for purposes of security are to be distinguished from outright transfers by providing expressly that “In relation to assignments for purposes of security, the provisions of Book IX apply and have priority over the provisions in this Chapter.” (Art. III.–5:103(1)). The Study Group made available a substantially final draft of Book IX (Proprietary Security in Movable Assets) shortly before the manuscript of this volume was sent to the publisher. The term “security right” is defined, in Art. IX.–1:102(3)(b), as including “security assignment”, and Comment F to that definition elaborates the reference to “A security assignment of intangibles, especially of rights to performance of payment […]. The Financial Collateral Directive refers to such transactions as a “security transfer financial collateral arrangement.” The UN Convention refers to all three transactions as an “assignment”, which is defined as a “transfer by agreement.” To the same effect, Art. 11:101(4) PECL states that “assignment” in Chapter 11 “includes an assignment by way of security”, and Art. 11:101(5) PECL provides that Chapter 11 “also applies, with appropriate adaptations, to the granting by agreement of a right in security over a claim otherwise than by assignment.” The UNIDROIT Principles, however, are less clear on the point. While Art. 9.1.1 of the UNIDROIT Principles states that “assignment” includes a “ transfer by way of security”, it lacks the explicit statement (found the UN Convention and PECL) of inclusion of the creation of a security right (indeed, Comment 3 to that Article suggests that a transfer for security purposes is covered but a security right is not – “The ‘transfer’ of the right means that it leaves the assignor’s assets to become part of those of the assignee.”).

19

20

6

Harry C. Sigman / Eva-Maria Kieninger

and in some systems, the second category is sometimes treated the same as the first category and for other rules treated the same as the third category. Finally, in some systems, the second category is prohibited altogether.21 Although the three categories are economically related, they are not identical. Based on relevant distinctions, certain differences in treatment are appropriate while others are not; at the same time, practical considerations may well sometimes justify similar treatment of non-identical categories. For purposes of this volume, to insure uniformity of expression, we shall use the following three terms: outright transfer, security transfer and pledge. When there is no difference in the rules applicable to outright and security transfers, the term “transfer”, without a modifier, will be used to refer to both transactions. When there is no difference in the rules applicable to a security transfer and the creation of a security right denominated as such, both transactions will be referred to as the grant of a “security right”; when a rule is applicable only to the creation of a security right denominated as such, the term “pledge” will be used. It must be observed that the various instruments referred to in this Introductory Chapter, such as the UN Convention, PECL and DCFR, which are efforts to deal comprehensively with the broad subject of “assignment of claims”, have exclusions from their respective scopes.22 These are neces21

22

See, e.g., the reports, infra, of Belgium, Spain and Netherlands, subject, however, to the effects of the respective national implementations of the Financial Collateral Directive and also, in the case of Netherlands, to the narrowing effect of the Sogelease case. See Art. 4 of the UN Convention. For a discussion of these exclusions, see Sigman / Smith, Toward Facilitating Cross-Border Secured Financing and Securitization: An Analysis of the United Nations Convention on the Assignment of Receivables in International Trade, 57 Bus. Law. 727 et seq. (2002). Art. 11:101(3) PECL provides that Chapter 3 does not apply “(a) to the transfer of a financial instrument or investment security where, under the law otherwise applicable, such transfer must be by entry in a register maintained by or for the issuer; or (b) to the transfer of a bill of exchange or other negotiable instrument or of a negotiable security or document of title to goods where, under the law otherwise applicable, such transfer must be by delivery (with any necessary endorsement).” The PECL exclusion clause has been broadened in the DCFR, Art. III.– 5:101(2): “It [the Section on assignment of rights] does not apply to the transfer of a financial instrument or investment security where such transfer must be by entry in a register maintained by or for the issuer or where there are other requirements for transfer or restrictions on transfer.” The exclusions from the scope of the UNIDROIT Principles assignment provisions are narrower and less precisely drawn than the list in the UN Convention, comprising only transfers of instruments “such as negotiable instruments, documents of title or financial instruments” and transfers of rights “in the course of transferring a business.” (Art. 9.1.2 of the UNIDROIT Principles).

The Law of Assignment of Receivables

7

sitated by the unsuitability for specified classes of transactions or receivables of the general rules (whether substantive or private international law rules) designed for “ordinary” receivables transactions. This matter will be referred to again below in the discussion of private international law issues and, in particular, the Rome I Regulation. Except as otherwise expressly indicated, this volume deals with “ordinary” receivables transactions.

III. Overview of the legal systems studied Before discussing the case studies, a general overview will prove useful.

1.

Relevant legislation

As mentioned above, almost all of the countries studied enacted legislation affecting the assignment of receivables during the last twenty-five years. These activities might be described as falling into four categories: (i) modification of basic Civil Code provisions;23 (ii) enactment of special provisions permitting new techniques, limited in scope of application in one or more respects, in co-existence with basic techniques subject to the general provisions;24 (iii) specific provisions permitting securitisation, typically needed because of limitations in the existing general regime;25 and (iv) national implementations of the Financial Collateral Directive. Generally, in the countries studied, the entire body of relevant law is not found in one place. The civil codes will typically deal with transactions in receivables in at least two places: the general law of obligations will contain a chapter on assignment of claims and the property law provisions will include a chapter on pledge over receivables. These latter provisions are modelled on the possessory pledge, despite the fact that receivables are intangible and thus not capable of delivery of physical possession. Delivery is therefore often replaced by notification of the account debtor or by some act of publicity. Further, in civil codes modelled on the French example, separate provisions on transfer of receivables are found in the part of the code dealing with sale of goods (on the basis that an outright 23

24 25

E.g., Belgium, deletion of notification as a pre-condition to effectiveness against third persons, in 1994; the Netherlands, introduction of “silent” or undisclosed pledge (stil pand), in 1992, and introduction of delivery by means of either an authentic deed of transfer or a registered non-authentic deed, in either case without notification to the debtor, in 2004; and the French reforms of the last two years. E.g., France, enactment of the Loi Dailly, in 1981. E.g., France, 1988 and 1998; Spain, 1998; and Italy, 1999. See, generally, Salomons, Deformalisation of Assignment Law and the Position of the Debtor in European Property Law, ERPL 2007, 639 et seq.

8

Harry C. Sigman / Eva-Maria Kieninger

transfer of a receivable is usually accomplished by a contract classified as a sale contract).26 This division of coverage sometimes leads to differing results, with the possibility of some incoherence, and may lead to circumstances such as the current situation in France, where the Civil Code provisions relating to property, such as pledge, were recently reformed but the provisions relating to obligations have not yet been reformed.27 Further, the Loi Dailly, which likely covers the greatest number of receivables financing transactions, is now found in the French Monetary and Financial Code, and separate legislation has recently been enacted governing the fiducie-sûreté. In addition, some of the securitisation legislation and the provisions resulting from the national implementations of the Financial Collateral Directive are found in other codes or in free-standing laws.28 It is interesting to note that in Spain, until recently, there had been no express legislative authorisation of a pledge of receivables, although it had long been recognised by case law and scholarly writings, deriving rules from those applicable to pledges of tangibles and those applicable to outright transfers of receivables. The Spanish Insolvency Act, which came into force 1 September 2004, expressly acknowledges pledges of receivables as being specially privileged (i.e., secured) claims. It appears also that a law enacted in December 2007 has created an alternative pledge device, a pledge without transfer of possession subject to the rules of the Law on Chattel Mortgage and Pledge without Dispossession of 16 December 1954.29

2.

Formalities for effectiveness of the transfer between assignor and assignee

The general rule is that there are no formalities for effectiveness of the transfer between assignor and assignee (other than a description of the 26

27

28 29

See also the Spain report infra, indicating that while an outright transfer of a receivable will typically fall under the category of a purchase and sale transaction, it may be carried out under any form of contract that calls for the transfer of the receivable. That report also indicates a number of additional rules found in special sectoral regulations. See Leavy, France, in Sigman / Kieninger (eds.), Cross-Border Security over Tangibles (2007), p. 101 et seq. On the reform proposals concerning assignment see Rapport Catala (Avant-projet de réforme du droit des obligations (Articles 1101 à 1386 du Code civil) et du droit de la prescription (Articles 2234 à 2281 du Code civil) Rapport à Monsieur Pascal Clément, Garde de Sceaux, Ministre de la Justice, 22 Septembre 2005, available at http: // www.lexisnexis. fr / pdf / DO / RAPPORTCATALA.pdf (1 April 2009)). See the France report infra. See the Spain report infra.

The Law of Assignment of Receivables

9

assigned receivables, with the different countries varying as to degree of specificity required). The UN Convention does not require that the contract of assignment be in writing or impose other formalities, such as the involvement of a notary or witnesses; formalities are left to the form requirements of applicable national law.30 PECL expressly provides that “An assignment need not be in writing and is not subject to any other requirements as to form. It may be proved by any means, including witnesses.”31 But there are important exceptions to the general rule. Under Netherlands’ law, a written deed is always a condition to effectiveness, even inter partes. In the absence of notification, either an authentic (notarised) deed is required or the private deed must be registered.32 An English statutory (‘legal’) assignment, under sec. 136 of the Law of Property Act of 1925, requires a writing. However, as pointed out in the England and Wales report, an equitable assignment, requiring no formalities, is the technique of choice, and, in any event, an attempted legal assignment that failed for lack of a “writing under the hand of the assignor” could nevertheless take effect as an equitable assignment. In France, although the classical Civil Code assignment imposes no formalities as a condition to effectiveness inter partes, the Loi Dailly im30

31

32

Art. 27 of the UN Convention, found in Chapter V (the optional private international law provisions that would apply in an adopting state to cross-border assignments and to cross-border receivables even if the Convention would not otherwise be applicable), provides a rule to determine which state’s law governs whether form requirements have been satisfied. If the contract of assignment is concluded between parties located in the same state, it is “formally valid as between them” if it satisfies either the law which governs it or law of the state in which it is concluded; and, if it is concluded between parties located in different states, if it satisfies either the law which governs it or the law of either of those states. Art. 11:104 PECL. UCC Article 9 generally requires that the assignor authenticate an assignment agreement that provides a description of the receivables in order for the assignment to be enforceable against the assignor or third parties. UCC § 9-203(b). “Authenticate” is defined in UCC § 9-102(a)(7) as “to sign [… or] to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record.” The DCFR provides that “The rules of Book IX on the formation and validity of security agreements apply to acts of assignment for purposes of security.” (Art. III.–5:110(3)). As explained in the Netherlands report, this registration is not in any way a form of public notice; the registration is with the tax authorities, is not searchable by the public and serves instead the purpose of establishing a date certain for the transaction. It should also be noted that the second method is available only for existing receivables or future receivables that arise directly from a relationship that already exists.

10

Harry C. Sigman / Eva-Maria Kieninger

poses substantial formalities on commercial assignments of professional receivables to financial institutions: a bordereau with a specified title which must provide specified information about the assigned receivables, must be dated by the assignee and signed by the assignor. With respect to securitisations, under the 1988 Law, repeatedly amended (most recently in June 2008), the special purpose vehicle, similarly, acquires the assigned claims by means of a bordereau which also must contain certain mandatory elements. The fiducie also has substantial formal requirements, although the relevant registry has not yet been established, so there is not yet experience in practice with this device. In Spain, the relevant provisions seem to indicate that a date certain is required for third party effectiveness – if the transfer is accomplished by a public document, then on the date provided therein, or, if by a private document, by establishment of the date, which will normally be by registration in a public registry. Scholarly opinion, however, is to the effect that these rules are only procedural, establishing evidentiary means of proof. While the date certain requirement is not a formality requirement, but rather is viewed as an evidentiary requirement, it establishes the procedural rules for proving the date of the transfer (and thus its existence) against third parties. An ordinary pledge, in Spain, must be accomplished by a public document. In Germany, there are no form requirements for the pledge or transfer agreement, although the description requirement (Bestimmbarkeitsgrundsatz) must be satisfied.

3.

The role of notification

In the countries studied, there exists a great deal of diversity with respect to notification to debtors of the assignment. In England, a statutory (“legal”) assignment requires a ‘written’ notification of the debtor, sent by either the assignor or the assignee. No particular verbal formula is prescribed. However, again, in the absence of complying notification, the assignment may take effect as an equitable assignment.33 In Belgium, notification is required to make the assignment effective against the debtor but is not required to make it effective against third parties. Although the Belgian Civil Code does not explicitly require that the notification be written, the travaux préparatoires make clear that a writing was intended. 33

With respect to English law, the legal and business risks and disadvantages of failing to give notification, relating to priority, set-off, discharge and the right to sue the debtor directly without joining the assignor, are discussed in Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), p. 225 et seq. For a discussion of issues relating to the timing of the notification, see ibid., at p. 229 et seq.

The Law of Assignment of Receivables

11

In Spain, notification is not a condition of effectiveness of a transfer, and there are no formalities concerning notification. Although there had previously been divergent opinions, it now appears settled that notification is not a condition to third party effectiveness of a pledge.34 In Germany, notification of the debtor, in writing, is required for a pledge to be effective at all. Notification is not required for the effectiveness of an outright or a security transfer, although it plays a very important role in the protection of debtors. In the Netherlands, notification may be made in any form and may even be inferred from conduct. In France, under Art. 1690 C. civ., notification to the debtor of the transfer is the most formalistic of all: signification by a huissier or acknowledgement by the debtor in an authentic deed is required for effectiveness against the debtor and against third parties. On the other hand, no notification is required under the securitisation law for effectiveness of the assignment against the debtor or third parties, although notification is required in order to enforce the assigned receivable directly against the debtor. The UNIDROIT Principles expressly provide for the effectiveness of an assignment “by mere agreement between the assignor and the assignee, without notice to the debtor.”35 PECL and the UN Convention reach the same result by providing for notification only in the context of the effect of an assignment on the debtor’s obligations.

4.

Restrictions on assignment

One of the most important issues in modern receivables financing transactions is the effectiveness vel non of contractual and legal restrictions on assignment. The UN Convention, PECL, the DCFR and UCC Article 9 all address this issue, though not in identical ways. This issue is dealt with in Case Studies 8 and 9 and is discussed in depth below. Again, there are very significant differences between the countries studied with respect to this issue.

34

35

Scholarly opinion to that effect is now supported by the 18 March 2008 Resolution of the General Directorate of Registries and Notaries, which provides that an unnotified pledge is nevertheless created and perfected and that the only consequence of the failure to notify the debtor is the continued ability of the debtor to obtain a discharge by paying the pledgor. Art. 9.1.7 of the UNIDROIT Principles. Under the heading “Basic requirements [for assignment]”, Art. III.–5:104(2) DCFR similarly provides: “Neither notice to the debtor nor the consent of the debtor to the assignment is required.”

12

5.

Harry C. Sigman / Eva-Maria Kieninger

Assignor representations

PECL contains a series of undertakings made by the assignor, “except as otherwise disclosed to the assignee.”36 Similar but not identical undertakings are provided in the UNIDROIT Principles, “except as otherwise disclosed to the assignee.”37 The DCFR, Art. III.–5:112, provides a longer list of undertakings “included in the act of assignment unless the act of assignment or the circumstances indicate otherwise” (emphasis added). A more limited set of “representations” are made under the UN Convention, “unless otherwise agreed.”38 The Spain report indicates the presence of statutory representations in the Civil Code. Given the broad variety of types and purposes of transactions involving assignments of receivables, it is not unlikely, however, that in many cases these statutory default provisions will have to be modified in the assignment agreement in order to better suit the particular transaction.39

6.

Implementation of the Financial Collateral Directive

Although this has been quite varied among the Member States,40 it has had the effect of introducing into all the legal systems, to a greater or lesser extent, certain concepts and certain rules that are useful (one might well argue, are needed) for effective and efficient financing. This fact, plus the separate codified treatment of intangible rights (as contrasted with tangible “property”), and the greater extent of a focused lobbying effort by certain segments of the financial community, suggest that the chances for harmonisation might be better than those with respect to the law governing security over tangibles.

7.

Need for further harmonisation and further reform

As already indicated, and as will be shown in detail below in the discussion of the Case Studies and in the national reports, and notwithstanding 36 37 38 39

40

Art. 11:204 PECL. Art. 9.1.15 of the UNIDROIT Principles. Art. 12 of the UN Convention. There are no particular warranties or representations made under the UCC (except for the statutory warranties made under UCC § 3-416 on a transfer of a negotiable instrument), leaving the matter to the parties’ contract. In the typical receivables financing transaction in the U.S., representations are negotiated by the parties, tailored to suit the particular transaction. E.g., compare the French and Spanish implementation with respect to the scope of covered assets.

The Law of Assignment of Receivables

13

the implementations of the Financial Collateral Directive, there still exist, particularly in the rules applicable to run of the mill receivables financing, numerous and significant differences between the laws of the countries studied and significant room for both modernisation and harmonisation. To date, the European Commission has not made a proposal for a harmonisation of the substantive law on assignment in general and / or secured transactions law involving assignment (the effort with regard to a private international law rule for third party effects of assignment is discussed in detail below). This stands in marked contrast to the manifold efforts to harmonise parts of general contract law41 and practically the whole of consumer contract law.42 The reason is that, as far as priority among competing claims to an assigned receivable is concerned, assignment law forms part of property law, so that any harmonisation or unification effort in this area will face the same difficulties as confront endeavours directed at property law and secured transactions law in general.43 The fact that the assignment chapter of PECL has been transferred, albeit with modifications, into the DCFR44 does not mean that we will see any European harmonisation of this area in the near future. Rather, the Commission and the Council plan45 to use the CFR only as a “toolbox” for future sector-specific legislation, especially for the current revision of the consumer acquis.46 It is expected that those parts of the DCFR which do not deal with contract law in the strict sense will not be carried over into the “political” CFR to be issued by the Commission.47 Therefore, the only real possibility to achieve a higher degree of harmony in the near term would seem to lie in the ratification of the UN Convention by the Member

41

42

43

44 45

46

47

E.g., Directive 2000 / 35 / EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactions (OJ 8 August 2000 L 200 / 35 et seq.). See, most recently, Commission Proposal of 8 October 2008 for a Directive on Consumer Rights, COM (2008) 614 final. Cf. Kieninger, Introduction, in id. (ed.), Security Rights in Movable Property in European Private Law (2004), p. 6, at p. 22. See fn. 9 supra. See “Draft Report to the Council on the setting up of a Common Frame of Reference for European contract law” (Council Document 8286 / 08 of 11 April 2008, available online at http: // register.consilium.europa.eu / pdf / en / 08 / st08 / st0 8286.en08.pdf (1 April 2009)) as endorsed by the Council on 18 April 2008. See Commission Proposal of 8 October 2008 for a Directive on Consumer Rights, COM (2008) 614 final. Cf. Staudenmeyer, Ein Europäisches Zivilgesetzbuch, in Ständige Deputation des Deutschen Juristentages (ed.), Verhandlungen des 67. Deutschen Juristentages Erfurt 2008, Band II (forthcoming).

14

Harry C. Sigman / Eva-Maria Kieninger

States and / or the EU, depending on the issue of competence.48 It is for this reason (among others) that the present authors advocate a private international law rule that is in harmony with the UN Convention.49 The authors also hope that the absence of substantive uniformity and the presence, in many cases, of uncertainty and counter-productive rules, illustrated in this volume, and the availability of the DCFR and the UN Convention as useful sources of modern rules, might inspire efforts to achieve improved national legislation.

IV. The Case Studies 1.

Security right over “future” receivables

Case Study 1 presents the issue whether a borrower can grant a security right (in any permitted structure) in a receivable that does not yet exist but is anticipated because the borrower is in negotiations concerning a contract to be performed by the borrower in the future. It also presents the follow-up question whether the borrower can do so after the work contract is signed by the borrower and the counter-party but before the borrower has begun the work. These questions explore the notion of “future” rights as possible collateral and the country reports indicate that the national laws vary both as to the meaning of the term “future” and as to whether a security right can be granted in a future right. Even if there is not a conceptual problem with whether a future right is property and whether it is transferable, and even where notification of the debtor is not a constitutive requirement, in some countries a problem may be presented by a requirement that a receivable must be “determinable” or identified. In this Case Study, the future receivable can be identified as arising out of a contemplated future contract between two particular parties and relating to a particular project, so there likely would not be a problem with adequate identification. The Netherlands report indicates that characterisation of a receivable as future will bring into play the rule that a pledge of future receivables will become effective only at the time the receivable comes into existence and the rule that the technique of an undisclosed pledge is available only for existing receivables and those that arise directly from a legal relationship that exists at the time the deed of pledge or the private pledge instrument is executed. The Netherlands report also indicates that the determination 48

49

Cf. ECJ 31 March 1971, Case 22 / 70 AETR; ECJ 7 February 2006, Opinion 1 / 03 on the Competence of the Community to conclude the new Lugano Convention. On the question, whether, based on the AETR-doctrine, the EU or the Member States are competent to accede to the UN Convention, see E. Schütze, Zession und Einheitsrecht (2005), p. 318 et seq. with further references. See para. VI.3.c) infra.

The Law of Assignment of Receivables

15

whether a receivable is future or existing is not simple. The Spain report indicates that the pledge of future receivables is generally accepted, although it suggests the advisability of limiting the receivables transferred on the basis of time and / or the nature of the receivables transferred. The France report indicates that transfer of claims deemed too remote or uncertain presents difficulties under traditional French law and that this would still be the case for the classic assignment under the not-yet-amended Civil Code provisions,50 but that Dailly transfers of future claims are expressly provided for and the amended pledge provisions of the Civil Code expressly permit the pledge of future claims.51 With respect to charges over future book debts given by English companies, the time for registration runs from the date of the charge, not the date that individual debts come into existence. Indeed, it is somewhat fictional to speak under English law of a charge over future debts; until the debt comes into existence, at which time it becomes automatically subjected to the charge, there is effectively only a contract to grant the charge.52 It is to deal with such issues that the UN Convention provides expressly that “An assignment is not ineffective as between the assignor and the assignee or as against the debtor or as against a competing claimant, and the right of an assignee may not be denied priority, on the ground that it is and assignment of […] future receivables […], provided that the receivables are described: [… i]n any […] manner, provided that they can, […] in the case of future receivables, at the time of the conclusion of the original contract [the time the receivable comes into existence], be identified as receivables to which the assignment relates.”53 The UN Convention goes on to provide 50

51

52

53

The Catala Report (fn. 27 supra), in its suggestions for changes to the provisions relating to transfers under the Civil Code, expressly would provide, in Art. 1252, that future receivables may be transferred (referring to them, apparently interchangeably, as créances à naître and as créance future), and that the transfer instrument must contain the elements permitting the identification of the assigned claim at le moment venu. This latter term presumably refers to the day (after conclusion of the transfer instrument) of the ‘birth’ (creation) of the receivable, in light of Art. 1254-1, which provides that the transfer of a future receivable does not take place until the date of creation (under Art. 1254, the transfer of an existing receivable occurs upon the conclusion of the transfer instrument). These matters, and the related issue of determinability, are discussed in more detail below in the France Report. Both a fixed charge and a floating charge can be created with respect to an obligor’s assets. “Thus, even where a fixed charge is created, the charge does not necessarily attach to all the charged assets at the moment of creation.” Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), p. 111 et seq. Art. 8 sec. 1 of the UN Convention.

16

Harry C. Sigman / Eva-Maria Kieninger

that “… an assignment of one or more future receivables is effective without a new act of transfer being required to assign each receivable.”54 The scope provision of PECL expressly states that Chapter 11 applies to assignment of a claim under a future contract.55 This is supported by two substantive provisions: “A future claim arising under an existing or future contract may be assigned if at the time when it comes into existence, or at such other time as the parties agree, it can be identified as the claim to which the assignment relates.”56, and, “An assignment of a future claim is dependent upon the assigned claim coming into existence but thereupon takes effect from the time the agreement to assign or such later time as the assignor and assignee agree.”57 The DCFR deals with this issue in a slightly different manner, but reaches the same results. The DCFR distinguishes between the “assignment” of a right (defined as “the transfer”) and the “act of assignment” (defined as “a contract or other juridical act which is intended to effect a transfer”).58 After providing that one of the “basic requirements” for an assignment is that “the right exists”,59 it provides that “A future right to performance may be the subject of an act of assignment but the transfer of the right depends on its coming into existence and being identifiable as the right to which the act of assignment relates.”60 The granting of security interests in future receivables presents no special issues under UCC Article 9.61

2.

Sale of existing receivables

Case Study 2 involves a merchant that sells outright, on a non-recourse basis, a batch of existing receivables, having an aggregate face value of 500.000 €, for the sum of 450.000 €. None of the national reports indicated 54 55 56

57 58 59 60 61

Art. 8 sec. 2 of the UN Convention. Art. 11:101(1) PECL. Art. 11:102(2) PECL. The UNIDROIT Principles provide: “A future right is deemed to be transferred at the time of the agreement, provided the right, when it comes into existence, can be identified as the right to which the assignment relates.” (Art. 9.1.5). Art. 11:202(2) PECL. Art. III.–5:102 DCFR. Art. III.–5:104(1)(a) DCFR. Art. III.–5:106(1) DCFR. Under UCC Article 9, collateral need not exist at the time the security interest is granted, nor at the time a filing is made that covers it. While the security interest will attach to a particular item of collateral no earlier than the moment when the debtor acquires rights with respect to that item of collateral (and, thus, perfection of the security interest in that item will not occur before that moment), priority will be based on the time of filing.

The Law of Assignment of Receivables

17

any issue arising from the fact that the sale price reflects a discount below face amount. (The France report indicates that factors continue to use the technique of contractual subrogation rather than a straight assignment; otherwise, the technique of transfer under the Loi Dailly (cession-escompte) would be used if the transaction falls within the scope of that law.) The Case Study brings out the difficulty, if any, in the context of a bulk sale of receivables, of complying with requirements (e.g., notification of individual debtors or description of the receivables) that are conditions to effectiveness of the sale (whether as between the parties or as against third parties or both). Transfers in bulk (and pledges of future receivables, the subject matter of Case Study 3) are today the primary form of receivables financing transactions. A legal system that fails to facilitate such transactions does not permit the efficient mobilisation of receivables as a source of capital for business, particularly for small and medium enterprises. Again, the UN Convention expressly authorises (i.e., makes fully effective) bulk assignments and permits, as to existing receivables, either individual description or description by any other manner that enables the receivables to be identified (at the time of the assignment) as the receivables to which the assignment relates. Likewise, there is no problem making bulk assignments under UCC Article 9. In Germany, the only issue would be the matter of description; there are no other legal issues with respect to bulk assignments. The Spain report likewise indicates no problems with bulk assignments, but discusses a claw-back issue under Spanish insolvency law (affecting both this Case Study and Case Study 3) which might have the effect of imposing a temporal limitation on the transfer. The UNIDROIT Principles support bulk assignments by providing expressly that “A number of rights may be assigned without individual specification, provided such rights can be identified as rights to which the assignment relates at the time of the assignment or when they come into existence.”62 A similar rule is to be found in Art. III.–5:106 (2) DCFR,63 but not in Chapter 11 of PECL.

3.

Security right in all existing and future receivables

Case Study 3 moves the problem from an outright sale to the grant of a security right (in any permitted structure) in “all of debtor’s present and future receivables.” This problem elicits differentiation, if any, between outright sale and security right, and brings out issues concerning description, concerning “future” receivables, and concerning absence of limitation by either time or amount. 62 63

Art. 9.1.6 of the UNIDROIT Principles. “A number of rights to performance may be assigned without individual specification if, at the time when the assignment is to take place in relation to them, they are identifiable as rights to which the act of assignment relates.”

18

Harry C. Sigman / Eva-Maria Kieninger

The France report indicates flatly that such a global security right (or even a Dailly transfer) cannot be accomplished, due to the requirement that the receivables must be described in sufficient detail to make them identifiable. This is, of course, in addition to the obstacle posed by the Civil Code requirement of notification. The 1994 Belgian modifications to its Civil Code which eliminated the requirement of notification with respect to outright transfers did not expressly delete the requirement of dispossession with respect to pledges. They did, however, effectively do so by equating conclusion of the pledge agreement with sufficient dispossession. In Belgium, a pledge of the debtor’s existing and future receivables can be accomplished by an enterprise pledge or by a pledge under the Civil Code. The Spain report indicates that it has there been argued that a pledge of receivables in bulk, though permitted in principle, would be unlawful if it seriously threatened the financial situation of an individual pledgor. In Germany, there is no problem with making such a Globalzession (other than the exclusion of claims that must be left available for assignment to titleretaining sellers). In the Netherlands, the prohibition against title-transfer for security purposes would require this transaction to be done in the form of a pledge, by means of a deed that adequately identified the receivables being pledged. As previously noted, an undisclosed (non-notified) pledge of future receivables is not possible. Thus, this transaction would entail the signing of additional deeds periodically (and the registration of those deeds with the tax authorities), in order to pick up the future receivables as they come into existence.

4.

Sale of a partial undivided interest in a portfolio of receivables

Case Study 4 involves the sale by a lender of an undivided interest in the loans currently in its portfolio, defined as a percentage of the total face amount of the portfolio. This presents the additional issues arising out of a transfer of a partial interest in a batch of receivables. A related issue is whether part of a single receivable may be assigned. In France, new Art. 2358 C. Civ. specifically provides for a pledge of a fraction of a receivable. This provision, however, applies only to pledges; the as-yet-unreformed Civil Code provisions governing transfers do not contain a parallel rule (although such a transfer under the Loi Dailly would be possible; but the Loi Dailly only operates in connection with financing by the transferee, something not likely present in this Case Study). In England, a partial assignment is possible in equity but not under the Law of Property Act. Assignment of a fractional interest presents no problems under Spanish law; the transaction would be carried out in the form of a transfer of an interest in each receivable. The Netherlands report indicates

The Law of Assignment of Receivables

19

that such a transaction might entail problems relating to the management of the joint ownership of the receivables. The UN Convention’s definition of assignment includes an assignment of “part of or an undivided interest in” a receivable64, and the UN Convention expressly makes effective assignments of “parts of or undivided interests in receivables.”65 PECL provides that “A claim which is divisible may be assigned in part, but the assignor is liable to the debtor for any increased costs which the debtor thereby incurs.”66 The UNIDROIT Principles, at Art. 9.1.4 provide: “(1) A right to the payment of a monetary sum may be assigned partially. (2) A right to other performance may be assigned partially only if it is divisible, and the assignment does not render the obligation significantly more burdensome.” Art. III.–5:107 of the DCFR combines these approaches; it provides: “(1) A right to performance of a monetary obligation may be assigned in part. (2) A right to performance of a non-monetary obligation may be assigned in part only if: (a) the debtor consents to the assignment, or (b) the right is divisible and the assignment does not render the obligation significantly more burdensome. (3) Where a right is assigned in part the assignor is liable to the debtor for any increased costs which the debtor thereby incurs.” UCC Article 9 provides even more protection to the debtor in the case of assignment of a part of a receivable.67

5.

Security right in receivables that are secured by real rights in goods

Case Studies 5-7 explore issues presented when assigned receivables are themselves supported by other rights, whether real rights (including security rights) in tangibles or personal rights against third parties. Those issues include whether the assignee gets the benefit of those rights, by operation of law or otherwise, whether any formalities must be complied with in order to achieve that result and whether it makes any difference which type of right secures the receivables. 64 65 66 67

Art. 2(a) of the UN Convention. Ibid., Art. 8 sec. 1. Art. 11:103 PECL. UCC § 9-406(b)(3) makes a notification ineffective “at the option of an account debtor, if the notification notifies the account debtor to make less than the full amount of any installment or other periodic payment to the assignee, even if (A) only a portion of the [receivable] has been assigned to that assignee; (B) a portion has been assigned to another assignee; or (C) the account debtor knows that the assignment to that assignee is limited.” (emphasis added). The UNIDROIT Principles contain a general provision (not limited to cases of partial assignment) that “The obligor has a right to be compensated by the assignor or the assignee for any additional costs caused by the assignment.” Art. 9.1.8.

20

Harry C. Sigman / Eva-Maria Kieninger

PECL provides that an assignment of a claim transfers to the assignee “all accessory rights securing […] performance [of the claim].”68 The UN Convention also provides a beneficial rule, but because not all legal systems use the accessory / non-accessory distinction and because that terminology does not everywhere have an identical content, the UN Convention refrains from using that terminology. Rather, the UN Convention states directly the flat rule that “A personal or property right securing payment of the assigned receivables is transferred to the assignee without a new act of transfer. If such a right, under the law governing it, is transferable only with a new act of transfer, the assignee is obliged to transfer such right and any proceeds to the assignee.”69 This general transfer rule is supported in the UN Convention by an override of contractual limitations on the right of the assignor to assign the receivable or the right securing payment of the assigned receivable.70 The general transfer rule applies to most of the receivables that are likely to be involved in ordinary financing transactions. The Legislative Guide has a similar rule, but without the limitations as to the types of receivables that benefit from that rule, as well as a slight dif-

68

69 70

Art. 11:201(1)(b) PECL. The term “accessory” is not defined. The UNIDROIT Principles similarly provide, but without the use of the term “accessory”, that the assignment transfers “all rights securing performance of the right assigned.” Art. 9.1.14. The DCFR (like PECL, using without defining the term “accessory”) provides: “The assignment of a right to performance transfers to the assignee not only the primary right but also all accessory rights and transferable supporting security rights.” Art. III.–5:115(1). Art. 10 sec. 1 of the UN Convention. Art. 10 sec. 2 of the UN Convention provides: “A right securing payment of the assigned receivable is transferred under paragraph 1 of this article notwithstanding any agreement between the assignor and the debtor or other person granting that right, limiting in any way the assignor’s right to assign the receivable or the right securing payment of the assigned receivable.” This override, however, is limited; under Art. 10 sec. 3, the override is applicable only to assignments of receivables: “(a) Arising from an original contract that is a contract for the supply or lease of goods or services other than financial services, a construction contract or a contract for the sale or lease of real property; (b) Arising from a original contract for the sale, lease or license of industrial or other intellectual property or of proprietary information; (c) Representing the payment obligation for a credit card transaction; or (d) Owed to the assignor upon net settlement of payments due pursuant to a netting agreement involving more than two parties.”

The Law of Assignment of Receivables

21

ference in expression.71 UCC Art. 9 also deals with this matter very directly and without reference to ‘accessoriness’.72 Case Study 5 involves the grant to a lender by a merchant of a security right in receivables arising from the merchant’s sales of goods, when the customers’ obligations under the receivables are secured by a proprietary right in the sold goods (either by a title-retention arrangement or by a nonpossessory security right created by the customers in favour of the merchant). The national reports indicate that the issues presented in this Case Study are generally dealt with by analyzing the nature of the right in the goods. If it is classified as being accessory (none of the national reports attempts to define the term), the right passes automatically to the assignee of the receivable, at least when the assignee seeks to enforce the receivable against the debtor. If it is classified as non-accessory, the right does not pass automatically by law but instead passes only if the assignor and assignee have agreed to that effect. Again, the national reports indicate variations among the countries studied in this volume. In Germany, this issue is dealt with expressly in § 401 BGB, which lists accessory rights that pass automatically. This category includes a pledge over goods, but not a retained title to goods. Dutch law reaches the same result, although not based on an express statutory provision. In France, new Art. 2367 C. civ. expressly recognises title retention to be a security interest and that it is to be treated as an accessory right, so both a pledge and a title retention right would pass automatically

71

72

In the discussions of the UNCITRAL Working Group that developed the Legislative Guide, there was raised by certain delegates a conceptual difficulty with the notion of a security right in a security right (i.e., the automatic creation of a security right (in favour of the secured party holding the security right in the receivable) in the security right in the goods which secures the receivable). [None of the national reports indicated such a difficulty.] As a result, the language of recommendation 25 was altered to indicate that the secured party would, instead of having a security right in the supporting rights, have the “benefit” of those rights. The effect of this new textual expression should be (and was intended to be) the same; if there is any difference, the secured party has not received the “benefit.” Under UCC §§ 9-203(g) and 9-308(e), attachment and perfection of a security interest in a receivable automatically constitute, respectively, attachment and perfection of a security interest in a security interest or other lien on movables or immovables which secures payment of the receivable. No reference in the security agreement or the filed financing statement to such lien or security interest is required. This is achieved through the notion of “supporting obligation”, discussed in fn. 76 infra.

22

Harry C. Sigman / Eva-Maria Kieninger

to the assignee of the receivable.73 The Belgium report indicates that both the title retention right and the pledge right would pass automatically to the assignee.74 In Spain, Art. 1528 C.c. provides for the automatic assignment of accessory security rights and collateral. There is, however, a division of opinion as to whether title retention constitutes an accessory right; if not, special contractual provisions would have to be made to either transfer the title to the goods or otherwise provide to the assignee of the receivable an appropriate proportion of monies realised by the title-retaining assignor upon sale by it of the repossessed goods. The England and Wales report indicates that the assignor / seller’s retained title would not pass automatically to the assignee but that the assignee would likely provide in the assignment contract for the right to demand transfer of the goods when they are recovered by the assignor / seller.

6.

Security right in receivables that are supported by personal guaranties

Case Study 6 is a variation on Case Study 5; instead of each receivable being secured by a real right (a right in the sold goods), it is secured75 by a personal right (e.g., a guarantee from a third party of the customers’ payment obligation). This personal right is generally considered accessory and in the countries studied would usually pass automatically. The England and Wales report, however, notes that the guarantee does not automatically pass there. The Germany report distinguishes between Bürgschaften (accessory and transferred automatically under § 401 BGB) and Garantien, a personal but independent guarantee (non-accessory). The Netherlands report indicates that an ordinary suretyship (borgtocht) will automatically redound to the benefit of the lender once the lender has become entitled to collect the receivable (i.e., has notified the debtor), unless the contract of suretyship 73

74

75

Art. 2359 C. civ. The Catala report (fn. 27 supra) would provide the same rule with respect to transfer of receivables; the proposed Art. 1255 would provide that the transfer of the receivable includes its accessories and the assignee can avail itself of them without any other formality. If the receivables are secured by mortgages over immovables, however, under Art. 5 of the Mortgage Act, publicity by registration in the land register is required, without which neither the sale of the receivables nor the transfer of the mortgages is effective against third parties. This requirement was modified, however, in the case of certain securitisations. In U.S. legal terminology, the term “supported” would be used. Because a personal guarantee is not an interest in property but only a right to sue the guarantor, this right is viewed as a right but not as a security interest in property, i.e., the guarantee supports but does not secure the buyer’s obligation to pay the purchase price of the goods. See the following footnote.

The Law of Assignment of Receivables

23

restricts the transfer of rights under that contract. If the guarantee obligation is independent rather than accessory, the lender could obtain the benefit of that guarantee only by means of a separate pledge of that right. UCC Article 9 deals with guaranties in a manner parallel to its treatment of real security that supports an obligation.76

7.

Security right in receivables that are supported by independent undertakings

Case Study 7 is yet another variation on Case Study 5. In this case, the debtor’s obligation under each receivable is supported by a bank letter of credit or independent guarantee (often referred to in France as an autonomous guarantee) – a personal right usually classified as non-accessory. The Case Study stipulates that the bank obligation is a form of credit support for its own customer, it being anticipated that the bank will pay the receivable only if the customer fails to pay the seller. The Case Study is not intended to explore issues concerning the transferability (or method of transfer) of the beneficiary status under the letter of credit itself, matters usually regulated by letter of credit law and custom (most typically by the International Chamber of Commerce’s Uniform Customs and Practices, brought into play by contract between the issuing bank and its customer). The point of this Case Study is to identify whether the legal system accommodates, automatically or otherwise, the desire of a lender that takes a security right in a receivable the value of which is enhanced by the credit support provided by a letter of credit to obtain a security right in the funds generated upon honour of the letter of credit should that come about. It must be stressed that the object of this latter right is not the right to make a drawing under the letter of credit; rather, the object is the “proceeds” (as that term is used in letter of credit practice) of a drawing. To enable any person other than the initial beneficiary under the letter of credit to make a drawing would require the substitution of that person as a new beneficiary, something that, under the law governing letters of credit, can be done only by a “transfer” agreed to by the issuer. Again, the object of security being addressed in this Case Study is rather the right to receive the value (which 76

Using the newly coined term “supporting obligation”, UCC §§ 9-203(f) and 9-308(d) provide that attachment and perfection of a security interest in a receivable automatically constitute, respectively, attachment and perfection of a security interest in a supporting obligation for that receivable. No reference in the security agreement or the financing statement to the supporting obligation is required. “Supporting obligation” is defined as a letter-of-credit right or secondary obligation that supports the payment [of a receivable].” UCC § 9-102(a) (77). By dint of this definition, this footnote also indicates the solution under UCC Article 9 for Case Study 7.

24

Harry C. Sigman / Eva-Maria Kieninger

might be a credit, cash, a negotiable instrument) paid by the issuer upon a proper drawing. The Legislative Guide, at recommendation 25, makes the foregoing distinction clear and recommends adoption of such an approach, making the benefit of this right automatically available to the secured party (without inquiry into ‘accessoriness’). UCC Article 9 also makes this distinction, underlined by the coining of a new term, “letter-of-credit right”77, and including that right among the supporting obligations in which the secured party holding the receivable automatically gets a security interest.

8.

Contractual restrictions on assignment

Case Study 8 presents the issues arising from the presence in the contract from which the receivable arises of a provision that prohibits, restricts or requires the debtor’s prior consent to a sale of or the grant of a security right in the receivable. It also asks whether it makes any difference whether the buyer or secured party knows of the existence of such a provision. The matter of the effectiveness of contractual restrictions is of great significance for the efficiency of receivables financing. The general principle of party autonomy in matters of contract between the contracting parties supports the effectiveness of such provisions to preclude assignment.78 From a marketplace standpoint, however, there is a competing interest that supports making such clauses ineffective, at least as against the assignee and other third parties, if not also against the debtor. If such clauses are effective, an assignee would be obliged to examine each individual contract or take the risk that, because of presence of restrictions on assignment in some of the contracts, the assignee will not receive all of the receivables for which it had bargained. This examination, or the losses suffered as a result of foregoing it, would greatly increase costs, particularly in the context of assignments in bulk – the paradigm of modern receivables financing. Moreover, in the large majority of cases, such clauses are unlikely to be present, as they will appear only in cases where the buyer’s economic power is such that it is able to impose such restrictions on the seller. Furthermore, even if the restrictions are over-ridden, unless they are rendered totally without effect, the debtor would have recourse for damages against the breaching assignor, and, in any event, the generally applicable debtor pro-

77

78

UCC Article 9 defines “letter-of-credit right” as “a right to payment or perform-

ance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. The term does not include the right of a beneficiary to demand payment or performance under a letter of credit.” (UCC § 9-102(a)(53)). On the other hand, the principle disfavouring restraints on alienation cuts in the other direction.

The Law of Assignment of Receivables

25

tections79 continue to apply despite the effectiveness of the assignment, i.e., the basic principle that an assignment cannot increase the burden on the debtor continues in force. Nevertheless, there are legitimate interests that a buyer might have in prohibiting assignment. While there is some clerical burden in keeping track of notified assignments, this should in most cases be insubstantial, as it is not usual for there to be multiple assignments, and it is not common for a seller to be making assignments of different batches of receivables to different assignees in a given time frame. Another detriment to the buyer that might occur as a result of an assignment is potential loss of later-arising counterclaims and setoffs; the identity of the debtor’s counterparty may be important in certain contexts. Again, however, this should not arise very often in the run of the mill receivables financing transaction. In jurisdictions that do not have clear debtor protection rules (e.g., whom must the debtor pay in order to obtain a discharge; can the debtor be forced to make multiple partial payments to multiple assignees in the event of multiple partial assignments), the debtor might have legitimate concerns. These, however, should also be rare cases. On the other hand, making receivables more attractive collateral and improving the efficiency involved in financing receivables redounds ultimately to the benefit of the overall economy (and debtors collectively) by lowering the cost of credit. It is for this reason that the UN Convention, PECL, the DCFR, the UNIDROIT Principles and UCC Article 9 all have provisions for override of contractual restrictions, making the assignment effective. Once it is conceded that receivables may be transferred and that third parties can acquire rights in receivables, the interests of such third parties must be considered. Indeed, proper analysis of the effectiveness of anti-assignment provisions must consider the distinction between effectiveness as against the assignor and effectiveness against third parties (a distinction of particular importance in the context of private international law issues). The UN Convention addresses the matter of anti-assignment clauses directly and forcefully. It provides: “An assignment of a receivable is effective notwithstanding any agreement between the […] assignor and the debtor […] limiting in any way the assignor’s right to assign its receivables.”80 Three points should be noted. One, this provision applies only to contractual limitations. Two, while the effect of the provision is to make the assignment effective, the debtor’s rights against the assignor for breach are

79

80

See, e.g., Arts. 15-21 of the UN Convention. Art. 15 sec. 1 provides: “Except as otherwise provided in this Convention, an assignment does not, without the consent of the debtor, affect the rights and obligations of the debtor, including the payment terms contained in the original contract.” Art. 9 sec. 1 of the UN Convention.

26

Harry C. Sigman / Eva-Maria Kieninger

preserved.81 Three, the Convention override does not apply to assignments of all receivables, although it does cover most ordinary commercial receivables.82 The Convention override is narrower in scope of application and in effect than the override provided for in UCC Article 9.83 PECL addresses the matter of anti-assignment clauses somewhat differently. Stating the rule in terms of ineffectiveness of the assignment “against the debtor”, PECL provides that “An assignment which is prohibited by or is otherwise not in conformity with the contract under which the assigned claim arises is not effective against the debtor unless: (a) the debtor has consented to it; or (b) the assignee neither knew nor ought to have known of the non-conformity; or (c) the assignment is made under a contract for the assignment of future rights to payment of money.”84 It is important to note that PECL does not take the ‘all or nothing’ position found in some legal systems; it recognises that the anti-assignment clause is there to protect the debtor, not to control the ultimate entitlement to the money. PECL expressly provides that even if an assignment is not effective against the debtor by reason of a contractual limitation on assignment, the assignment is nevertheless “effective as between the assignor and assignee, and entitles the assignee to whatever the assignor receives from the debtor, […].”85 The DCFR deals with this issue in a complex provision (it appears to reflect a not fully successful effort to achieve a compromise) whose policy ambivalence may well undermine its utility for receivables financing. Art. III.–5:108 begins, in paragraph (1), with a powerful override rule: “A contractual prohibition of, or restriction on, the assignment of a right does not affect the assignability of the right.” This is qualified by paragraph (6), which provides, in partial protection of the debtor’s interests, that “The fact that a right is assignable notwithstanding a contractual prohibition or re81 82

83

84

85

Art. 9 sec. 2 of the UN Convention. Art. 9 sec. 3 of the UN Convention. The types of receivables within the scope of the override are the same as those within the scope of the Art. 10 secs. 2 and 3 of the UN Convention, relating to the transfer of personal and property rights that secure assigned receivables, quoted in fn. 70 supra. UCC § 9-406(d) provides: [Subject to certain exceptions], a term in an agreement between an account debtor and an assignor or in a promissory note is ineffective to the extent that it: (1) prohibits, restricts, or requires the consent of the account debtor […] to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, the account, chattel paper, payment intangible or promissory note; or (2) provides that the assignment or transfer or the creation […] of the security interest may give rise to a default, breach, right of recoupment, claim, defense, termination, right of termination, or remedy under the account, […]” (emphasis added). Art. 11.301(1) PECL. Art. 11.301(2) PECL adds: “Nothing in the preceding paragraph affects the assignor’s liability for the nonconformity.” Art. 11:203 PECL.

The Law of Assignment of Receivables

27

striction does not affect the assignor’s liability to the debtor for any breach of the prohibition or restriction.” The override in paragraph (1), however, is further modified by paragraphs (2)-(5), the last of which is set forth in square brackets. Notwithstanding the override provided in paragraph (1), paragraph (2)(a), reflecting a German peculiarity discussed immediately hereafter, nevertheless permits the debtor to obtain a discharge by paying the assignor, and paragraph (2)(b) nevertheless preserves for the debtor “all rights of set-off against the assignor as if the right had not been assigned” (unless the debtor is deprived of the benefits of paragraph (2) under the unlikely circumstances specified in paragraph (4)86). Thus, the assignee cannot rely on the override to assure itself that it will be paid by the debtor (and that notification to the debtor of the assignment will limit the availability to the debtor of subsequently arising set-offs that the debtor might later obtain against the assignor). Having deprived the assignee of the full benefit of the override promised under paragraph (1), the DCFR, in paragraph (3), attempts to give the assignee a limited partial benefit, as follows: “Where the debtor is discharged under paragraph (2) by performing in favour of the assignor, the assignee’s claim against the assignor for the proceeds has priority over the right of a competing claimant as long as the proceeds are held by the assignor and are reasonably identifiable from the other assets of the assignor.” This provision presupposes that the assignee has, under the applicable law [the determination of which may not be so simple or predictable] an in rem right in the proceeds (as contrasted with a personal claim against the assignor based on the failure of the assignment). Further, (i) the proceeds may well be less than the assigned claim if the debtor has asserted any preserved set-offs or otherwise less than the entire debt, and (ii) since the payment will usually go into the assignor’s bank account, the specified conditions may not be satisfied, again depending on tracing rules or other relevant provisions of the applicable law. And, since “competing claimant” is not defined, the term may be held not to include the most likely competitor, the insolvency administrator of the assignor. Finally, paragraph (5), apparently optional, as it is set forth in square brackets, would, when the assigned right is a right to payment for the provision of goods or services, withhold from the debtor the right under paragraph (2)(a) to choose to pay the assignor, but preserve for the debtor the right under paragraph (2)(b) to assert against the assignee set-offs available against the assignor. In a somewhat intermediate position, the UNIDROIT Principles provide flatly, with respect to monetary claims, the assignment “is effective notwithstanding an agreement between the assignor and the obligor limiting or prohibiting such an assignment. However, the assignor may be liable to

86

Art. III.–5:108(4) DCFR provides: “Paragraph (2) does not apply if: (a) the debtor has consented to the assignment, or (b) the debtor has caused the assignee to believe on reasonable grounds that there was no such prohibition or restriction.”

28

Harry C. Sigman / Eva-Maria Kieninger

the obligor for breach of contract.”87 Comment to Art. 9.1.9 of the UNIDROIT Principles expressly recognises that it is “important to favour the assignment of rights as an efficient means of financing.” The picture in Europe is not uniform. In Germany and the Netherlands, the general rule is that the restriction is effective erga omnes to preclude assignment. In 1994, however, § 354a was added to the German Commercial Code. This provision, applicable only with respect to receivables arising from transactions between merchants, moved in the right direction but in a curious way. It provides that the anti-assignment restriction is overridden vis-à-vis third parties (and, in the context of enforcement of the receivable against the debtor, it will be the assignee not the assignor that decides when and how to enforce) but that the debtor may elect to pay the assignor. We have no data as to how frequently debtors choose to ignore the assignment or as to what effect this new rule has had on the availability and cost of credit secured by receivables. In France, the law is somewhat unclear but it appears that an assignment made under the Civil Code despite a contractual restriction would nevertheless be effective, with the debtor left with its claim against the assignor for breach. Under the French Commercial Code, an anti-assignment clause with respect to trade receivables would be void. The Belgium report indicates that the predominant opinion (in the absence of any case law) is that an anti-assignment clause would be effective only between the contracting parties, although an assignee who took with knowledge of the clause might be liable for tortious interference. In Spain, the picture is not entirely clear. Although the general rule appears to be that anti-assignment clauses are effective, there is scholarly opinion that a bona fide transferee would take the receivable notwithstanding the clause. The England and Wales report indicates that the effect of an anti-assignment clause is that no contractual rights against the debtor are transferred to the assignee, but that the proceeds of the receivable would be held by the assignor in trust for the assignee.88 An issue related to the matter of anti-assignment clauses arises from the use of the undefined term “assignability” in the Rome Convention89 and, more importantly, the Rome I Regulation. It is there, as in PECL, grouped with other issues that concern only matters as between the assignee and 87

88

89

Art. 9.1.9(1) of the UNIDROIT Principles. In Art. 9.1.9(2) of the UNIDROIT Principles, the assignment of a right to non-monetary performance is ineffective, i.e., no anti-assignment clause override, unless the assignee, at the time of the assignment, neither knew nor ought to have known of the anti-assignment agreement. See also, the extensive discussion of English law in Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), p. 218 et seq. Rome Convention on the law Applicable to Contractual Obligations of 19 June 1980 (OJ 9 October 1980 L 266 / 1 et seq.; consolidated version OJ 31 December 2005 C 334 / 1).

The Law of Assignment of Receivables

29

the debtor90 and, being part of the debtor-protection rules, submitted for private international law purposes to the law governing the receivable. If “assignability” is understood as pertaining only to restrictions on assignment inserted by the debtor into the original contract (or possibly into a separate agreement) and, presumably, legal restrictions intended for the protection of the debtor, inclusion of this term in the Regulation would present no problem, particularly if properly understood as pertaining only to contractual issues and not proprietary issues. If, however, it is understood to embrace every limitation on assignment regardless of source, nature or purpose, and if it is thought to preclude third party effectiveness of an assignment, then it would be highly problematic.91 This issue, and the general question of the applicable law governing the effect of contractual restrictions on assignment, are discussed extensively in part VI. below.

9.

Legal restrictions on assignment

Case Study 9 is a variation of Case Study 8. In this Case Study, the restriction on assignment is a legal one rather than a contractual one and the question is raised whether it makes any difference whether the purpose of the legal restriction is to protect the assignor or debtors. This question is asked because, at the very least, this might make a difference for private international law purposes.92 For example, should a legal restriction on assignment designed to protect the debtor have any impact on the effectiveness of a transfer of the receivable between transferor and transferee if that restriction is part of the law of debtor’s residence but is not found in the law that governs the proprietary aspects of the transfer? The most common legal restrictions are laws prohibiting or limiting the assignment of wages and alimony.93 These, however, are designed to protect the assignor (or his or her dependents), not the debtor (in the case of a law limiting assignment of wages, the debtor is the employer and the assignor is the employee making the assignment).

90

91

92 93

Likewise, the only limitations stated in PECL on the general right to assign a claim are references to Art. 11:301 PECL and Art. 11:302 PECL, which are found in Section 3, “Effects of Assignment As Between Assignee and Debtor”, and which render certain assignments ineffective “against the debtor.” Regrettably, the DCFR uses the terms “assignable” and ”assignability” loosely, without definition, in several provisions. See the discussion in part VI. infra. See, e.g., France report infra, para II.8. The France report also identifies certain types of public sector contracts as subject to legal restrictions on assignment. The Germany report indicates that § 400 BGB provides that a receivable that is not vulnerable to execution may not be assigned.

30

Harry C. Sigman / Eva-Maria Kieninger

PECL does not address the issue of legal prohibitions against assignment. Art. III.–5:105 (1) DCFR provides that “All rights to performance are assignable except where otherwise provided by law”. The UN Convention explicitly states that, subject to specified exceptions, it “does not affect any limitations on assignment arising from law.” These specified exceptions are the provisions of Art. 9 and Art. 10(2) and (3) [relating to contractual limitations, discussed in Case Study 8] and the explicit override in Art. 8(1) rendering “ineffective” legal limitations on the ground that the assignment is “of more than one receivable, future receivables or parts of or undivided interests in receivables [provided that the receivables are sufficiently described].” 94 In sharp contrast, UCC Article 9, in a provision parallel to its override of contractual limitations, explicitly provides that “a rule of law, statute, or regulation that prohibits, […] is ineffective […].”95

10. Publicity; priorities in general Case Study 10 seeks to bring out the presence or absence of some form of publicity enabling the prospective outright buyer in Case Study 2 or the prospective secured lender in Case Study 3 to determine whether there has been a prior assignment of the same receivable to another party. In general, none of the countries studied in this volume provides comprehensive and effective publicity for assignments of receivables. The rules vary, ranging from Germany, with no publicity at all, and France, no publicity96 (registration of transfers under the Loi Dailly being a non-searchable registration) except for a requirement of registration of fiducie (registry not yet established and possibly also not searchable), and the Netherlands, with a requirement of registration with the tax authorities (a non-searchable registration) for “silent” pledges; to Belgium, with no publicity except for registration of enterprise pledges (which typically do cover receivables) – this registration is in the land registry, but it is discoverable; and to England, where there is registration of a company charge over book debts, although subject to 94

95 96

In addition, Art. 40 of the UN Convention provides for a declaration by a State that it will not be bound by Art. 9 and Art. 10 if the debtor or any person granting a personal or property right securing payment of the assigned receivable is located in that State at the time of conclusion of the original contract and is a Government, central or local, any subdivision thereof, or any entity constituted for a public purpose. This provision is designed to accommodate the practice in some States to prohibit such assignments by contract rather than by law. UCC § 9-406(f). It should be noted that although the recently modified Civil Code provisions relating to pledges of tangibles, generally made applicable also to pledges of intangibles (Art. 2356 C. civ.), require registration (Art. 2337 C. civ.), registration of pledges of receivables is not required.

The Law of Assignment of Receivables

31

the 21-day blind period, but there is no registration of factoring contracts or other outright transfers. It is worth noting that Austria (not one of the countries studied in this volume) has a form of what is often referred to as geheime Publizität (secret publicity), in a requirement that an assignment be noted in the assignor’s books. It goes without saying that notification of the debtor (even where this is a requirement for third party effectiveness of the assignment) is not really an effective form of publicity. Case Study 10 also explores general priority rules (leaving for Case Studies 11 and 12 the special issues arising in the competition between the rights asserted by sellers of goods in receivables that arise from the subsale of those goods and the rights in those receivables acquired from the subseller by, respectively, a buyer or secured party). The general priority rules vary from country to country. In the absence of a registration system, priority among competing claimants, or at least between successive assignees, is based on (i) the time of conclusion of the transfer (e.g., Germany97 and France98); or (ii) the time of notification (e.g., Belgium, in the case of Civil Code assignments, notification is determinative as against third parties having a proprietary claim to the receivable, but not vis-à-vis others such as an insolvency administrator or an attaching creditor; in France, the time of notification is relevant in certain cases involving Dailly transferees); or (iii) a variant of the time of notification (e.g., England, the rule of Dearle v. Hall 99); or (iv) the time of registration (e.g., Belgium, in the case of enterprise pledges, which are registered in the land registry, the priority rule is time of registration of the enterprise pledge as against time of notification of the civil code assignment), In some countries, good faith may also play a role. PECL has a series of priorities rules in Section 4.100 In the case of “successive assignments of the same claim, the assignee whose assignment is first 97

98

99

100

Although, in principle, a first assignment transfers all the assignor’s rights and a later assignee takes nothing, a debtor that, without knowledge of the first assignment, pays a later assignee in reliance on having received a notice from the later assignee will receive a discharge. The Catala report (fn. 27 supra) proposes that Art. 1254-3 C. civ. would provide the first in time rule for successive assignees. The general rule in France is based on the date of the relevant documents. (1828) 3 Russ 1. This rule has been roundly criticised. See, e.g., Goode, Commercial Law (3rd edn. 2004), p. 652: “It is high time that the rule in Dearle v. Hall was abolished.” The rule is extensively discussed in Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), p. 437 et seq. The complex scheme of priorities in English law generally is discussed, id., at p. 407-546. In contrast, book III, chapter 5, section 1 of the DCFR has only one provision, Art. III.–5:120, in Sub-Section 6 “Priority.” This provision deals with “Competition between successive assignees” (notwithstanding that in Art. III.–5:109(3), the DCFR uses the term, without definition, “competing claimant”). It is also interesting to note that this provision introduces the term “purported” (used only in

32

Harry C. Sigman / Eva-Maria Kieninger

notified to the debtor has priority over any earlier assignee if at the time of the later assignment the assignee under that assignment neither knew nor ought to have known of the earlier assignment.”101 Subject to the preceding rule, PECL provides a fallback rule for successive assignments – the order in which the assignments are made.102 In addition, it provides that an assignee has priority over an attaching creditor that attaches after the assignment agreement, and that, in the event of the assignor’s insolvency, the assignee has priority over the administrator and creditors, “subject to any rules of the law applicable to the bankruptcy relating to: (a) publicity required as a condition of such priority; (b) the ranking of claims; or (c) the avoidance or ineffectiveness of transactions in the bankruptcy proceedings.”103 UCC Article 9 has a still more elaborate set of priorities rules, specifying rules for both competitions between two or more secured parties and competitions between a secured party and competing claimants.104 The UN Convention has only one substantive priority rule105, a very specific rule relating to the competition between the right of an assignee of a receivable in the proceeds of the assigned receivable and the right of a competing claimant in the receivable or in the proceeds.106 No agreement was reached on general priorities rules; instead, frameworks for various

101

102

103

104

105

106

this context), albeit without explanation; the significance of the use of the term is not readily apparent – it might relate to the point that, in principle, once the assignor has made an assignment, it no longer has the power to make another assignment of the same claim. Art. 11:401(1) PECL. The rule has been adopted in Art. III.–5:120(1) DCFR, although the later assignee that receives protection is expressed as one that “neither know nor could reasonably be expected to have known of the earlier assignment.” “Good faith” is an element under the Belgian rules. See Belgium report infra. It is interesting to note that in Belgium the good faith requirement is applied to both the assignee and the debtor. Art. III.–5:120(2) DCFR provides that “The debtor is discharged by paying the first to notify even if aware of competing demands.” Art. 11.401(2) PECL (not adopted by the DCFR). The UNIDROIT Principles provide only a single simple rule for the case of successive assignments – “the obligor is discharged by paying according to the order in which the notices were received.” (Art. 9.1.11). Book III, chapter 5, section 1 of the DCFR contains no priority rules for attachment and insolvency. For an extensive description of the UCC Article 9 priorities regime see Sigman / Kieninger, Introduction, in id. (eds.), Cross-Border Security over Tangibles (2007), p. 49-53. In addition, in an article dealing with debtor’s discharge by payment, the UN Convention also provides four provisions specifying to whom payment results in a discharge in cases where the debtor receives more than one notification or payment instruction. Art. 17(3)-(6). Art. 24 of the UN Convention (Special rules on proceeds).

The Law of Assignment of Receivables

33

priorities schemes are presented as optional Appendices. Agreement was reached, however, on a private international law rule for priorities – the law of the assignor’s location.107

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Case Study 11 deals with the priority contest between the Case Study 2 outright buyer of the receivable and a title-retaining seller of the goods the sale of which generated that receivable, when the title-retaining seller has, by contract or by law, rights in that receivable. Here, we see that the different countries approach this problem in various ways and produce differing results. In Belgium, on a theory of “real subrogation”, the seller prevails, the receivable being substituted for the sold goods. However, if the sub-seller collects the receivable and commingles the cash with its own cash, the seller’s proprietary rights disappear. Likewise, if the receivable is collected from the sub-buyer by a transferee or pledgee of the sub-seller acting in good faith, the seller loses. On the other hand, if the sub-seller becomes the subject of an insolvency proceeding while the receivable is still unpaid, the seller is the “owner” of the receivable and will prevail, even if the receivable is collected by the administrator (in whose hands no commingling is deemed to occur). In France, similar results are achieved under both the earlier and reformed Civil Code. Even though the new provisions make explicit that the seller’s right in the sold goods is a security right and is an accessory to the obligation evidenced by the receivable, new Art. 2372 C. civ. expressly extends the seller’s ownership into the receivable, so presumably it would prevail over the factor that bought the receivable. On the other hand, in Germany, despite acquiring its rights in the receivable later in time, the buyer of the receivable prevails – on the analysis that payment for the receivable by the buyer of the receivable is the same as receipt of cash paid by the sub-buyer of the goods upon the sub-sale or upon payment of the receivable by the sub-buyer (which collection by the sub-seller was authorised by the seller of the goods). In England, the title retention does not of itself extend into the receivable generated by a subsale; this receivable can be captured by the seller only by a charge of the sub-seller’s book debts (registrable under the Companies Act). The priority rule between the title-retaining seller as chargee of the receivable and the buyer of the receivable from the sub-seller is the rule in Dearle v. Hall, first to notify the debtor (provided that person 107

Art. 22 of the UN Convention (Law applicable to competing rights); this is discussed in part VI. infra.

34

Harry C. Sigman / Eva-Maria Kieninger

was without knowledge of an earlier in time assignment) – this will usually result in the factor having priority. In the Netherlands, the rights of a title-retaining seller do not by operation of law extend to receivables arising from subsales, and no special priority inheres in the seller’s status. The seller might obtain a pledge of the receivables resulting from subsales, but in the usual case these would be future receivables not susceptible to an undisclosed pledge. If the sub-buyer were notified of a pledge of the purchase price obligation to the seller prior to the outright sale by the sub-seller of the receivable, the pledge would prevail (even if the buyer of the receivable was unaware and could not have been aware of the pledge), but this priority does not depend on the pledgee’s being the seller of the goods. In Spain, the title-retaining seller does not obtain an interest in the receivable arising from the subsale by law. However, if, as would most likely be the case, the original title-retention sale was registered, the sub-buyer would not take free as a bona fide purchaser, so the seller would be able to retake the goods if the sub-buyer failed to pay the seller for them. Further, generally, the sub-buyer would not have the right to subsell without the seller’s consent. If, the seller had consented to subsales on the condition that its buyer pledge receivables arising from subsales, the later in time sale of the receivable to the factor would be subject to that earlier pledge. The UN Convention does not have a substantive priority rule for this case, but does provide that the applicable law to determine priority will be the law of the assignor’s location.108 Under UCC Article 9, the title-retaining seller that enjoys a purchase money security interest109 will often but not necessarily always prevail, as the Article 9 priorities scheme is nuanced and does not provide a single ‘all circumstances’ rule. As between two competing secured parties each of which filed a financing statement that covered the receivable, regardless of the nature of the secured party (i.e., seller or lender), priority between them will be determined under the general first-to-file-or perfect rule (§ 9-322). The specific rules for purchase money priorities in the initial collateral and proceeds are very detailed and precise. Even if the seller was not the first to file with respect to the receivable, however, the seller that sold a machine to the debtor for use by the debtor (i.e., the machine was equipment in the hands of the debtor) and retained a purchase-money security interest in the sold equipment, and thus enjoyed a super-priority with respect to the equipment (having priority over a com108 109

Art. 22 of the UN Convention. Defined in UCC § 9-103. It should be understood that a purchase money security interest is not a different type of right, but is merely a security interest that in particular circumstances enjoys advantageous priority status vis-à-vis certain earlier-filed security interests. Importantly, it is not limited to sellers, but can be held by anyone that provides “value given to enable the debtor to acquire rights in or use of the collateral.”

The Law of Assignment of Receivables

35

peting security interest in the equipment), will also enjoy that super-priority with respect to the receivable that is the proceeds of that sold equipment (§ 9-324(a)). However, if the seller sold an item for resale (i.e., the item was inventory in the hands of the debtor), its security interest in the inventory will carry forward into the receivable (as proceeds) but its purchase money super-priority in the inventory will not carry forward as against an earlier filer against the account resulting from the resale (but will carry forward into receivables that are instruments or chattel paper). (§ 9-324(b); see also Official Comments 4, 8 and 9 to that section and § 9-330(e)). So, under the UCC, the super-priority is available to any holder of a purchase money security interest (i.e., not limited to sellers), and extension of the purchase money super-priority into the receivable resulting from a subsale will depend on whether the original collateral was equipment or inventory and the nature of the receivable.

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods In Germany, this priority contest is regularly decided in favour of the seller, on the theory that since banks taking a Globalzession (security transfer over present and future receivables) should know that it is highly likely that their borrower merchants will be acquiring their inventory under extended title retention contracts (so that the suppliers of those borrowers will be taking security rights in the receivables generated by subsales), it is an act of bad faith on the part of the banks to take security transfers of those receivables.110 As a consequence of that case law, it has become customary for the standard bank form to exclude such receivables. Thus, such a priority contest is unlikely to arise. In the other countries studied, the reports indicate no difference in the analysis from that in Case Study 11. In the Netherlands, the seller enjoys no particular priority based on its status as seller.111 If it obtained a pledge of the receivable, priority vis-à-vis the competing pledgee would be based strictly on time of creation of the two pledges.

13. Notification As one would expect, in all the countries studied, notification of the assignment to the debtor plays the key role in determining whether the debtor obtains a discharge by paying the assignor and in cutting off the development of setoff rights. There are, however, differences between the specific 110 111

Cf. BGH 8 December 1998, NJW 1999, 940 with further references. Discussed in para. IV.11. supra.

36

Harry C. Sigman / Eva-Maria Kieninger

rules in the various countries as to what constitutes notification and there are major differences in the other roles played by notification – whether it is a constitutive element of an assignment between the parties, whether it is a prerequisite for third-party effectiveness of the assignment, what impact it has on the debtor, and what role, if any, it plays in determining priority vis-à-vis competing claimants. In Germany, notification is not an element of effectiveness of a transfer (but is with respect to a pledge, § 1280 BGB) between the parties or against third parties. Notification is, however, important with respect to the debtor’s discharge and setoff rights (§ 407 and § 408 BGB), and the debtor’s reliance on a notification is protected under § 409 BGB even if the assignment did not in fact occur or was for some reason ineffective. In France, notification is a constitutive requirement only for outright transfers under the unreformed Civil Code provisions. However, the role of notification with respect to opposability against the debtor is not perfectly clear under the reformed Civil Code provisions concerning pledge. Notification is not a requirement under the Loi Dailly, but when it is given, the debtor is thereupon obliged to pay the transferee (and the same rule applies in the case of a pledge). In Belgium, the role of notification is somewhat complicated. Notification is not required for effectiveness of any type of transaction as between the parties or as against the insolvency administrator, levying creditors and other third parties, but is relevant in determining priority as against third parties that have a vested right in the receivable (or in payments made thereunder), and, of course, it is relevant as against the debtor with respect to discharge and the availability of certain defences (a “good faith” requirement obliging the debtor to act without knowledge may apply even when there has not been notification). The time of notification is determinative of priorities as between competing transferees. In England, notification is not required for an effective equitable assignment, but it does play a key role in determining priorities under the rule of Dearle v. Hall. Under Dutch law, as already noted, an assignment (an outright transfer or a pledge) may be disclosed or undisclosed. If it is disclosed, the notification is a constitutive element; in the absence of notification, the assignee acquires no proprietary rights (neither vis-à-vis the assignor nor against third parties). If it is an undisclosed assignment, the absence of notification is irrelevant to creation of the assignment (although in the case of an undisclosed assignment, the written deed must be either notarised or registered with the tax authorities), but it deprives the assignee of the power to collect the receivable or enforce accessory security rights (the Netherlands report indicates the presence of scholarly debate on this point). PECL has several provisions dealing with notification. The general rule is that “the debtor is bound to perform in favour of the assignee if and only if

The Law of Assignment of Receivables

37

the debtor has received a notice in writing from the assignor or the assignee which reasonably identifies the claim which has been assigned and requires the debtor to give performance to the assignee.112 This rule, however, must be read in conjunction with three other provisions. One: “[w]here the debtor has acquired knowledge of the assignment otherwise than by notice conforming to paragraph (1), the debtor may either withhold performance from or give performance to the assignee.”113 Two: “[w]here the debtor gives performance to the assignor, the debtor is discharged if and only if the performance is given without knowledge of the assignment.”114 Three: "a debtor who performs in favour of a person identified as assignee in a notice of assignment under Art. 11:303 PECL is discharged unless the debtor could not have been unaware that such person was not the person entitled to performance.”115 With respect to the debtor’s discharge, PECL provides a private international law rule, but not a substantive rule, for the situations where the debtor receives “notice of two or more competing demands for performance” – “the law of the due place of performance, or, if the performances are due in different places, the law applicable to the claim.” The DCFR takes a similar but more elaborated and in some respects different approach. Art. III.–5:118 provides: “(1) The debtor is discharged by performing to the assignor so long as the debtor has not received a notice of assignment from either the assignor or the assignee and does not know that the assignor is no longer entitled to performance. (2) Notwithstanding that the person identified as the assignee in a notice of assignment is not the creditor, the debtor is discharged by performing in good faith [undefined] to that person.” Art. III.–5:119 DCFR provides: “(1) A debtor who believes on reasonable grounds that the right has been assigned but who has not received a notice of assignment, may request the person who is believed to have assigned the right to provide a notice of assignment or a confirmation that the right has not been assigned or that the assignor is still entitled to receive payment. (2) A debtor who has received a notice of assignment which is not in textual form on a durable medium or which does not give adequate information about the assigned right or the name and address of the assignee may request the person giving the notice to provide a new notice which satisfies these requirements. (3) A debtor who has received a notice of assignment but not from the assignor may request the assignee to provide reliable evidence of the assignment. Reliable evidence includes, but is not limited to, any statement in textual form on a durable medium emanating from the assignor indicating that the right has been assigned.

112 113 114 115

Art. 11:303(1) PECL. Art. 11:303(3) PECL. Art. 11:303(4) PECL. Art. 11:304 PECL.

38

Harry C. Sigman / Eva-Maria Kieninger

(4) A debtor who has made a request under this Article may withhold performance until the request is met.”116 The UN Convention’s treatment of these issues is somewhat different.117 Among other things, it more specifically distinguishes between notification of the assignment and payment instructions, and places some debtorprotective limitations on notifications and payment instructions.118 With 116

117 118

By way of comparison, the analogous provisions of UCC Article 9 are as follows: UCC § 9-406 provides: “(a) […] an account debtor […] may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor. (b) […] the notification is ineffective under subsection (a): (1) if it does not reasonably identify the rights assigned; […] (c) […] if requested by the account debtor, an assignee shall seasonably furnish reasonable proof that the assignment has been made. Unless the assignee complies, the account debtor may discharge its obligation by paying the assignor, even if the account debtor has received a notification under subsection (a) […].” The UCC Article 9 rules differ in several respects from the DCFR rules, including the DCFR’s explicit reference to subjective elements (the knowledge and good faith of the debtor), and, most importantly, the DCFR’s enabling of the debtor to use actual or purported doubts as the basis for withholding performance altogether. Official Comment 4 to UCC § 9-406 states flatly that “This section does not excuse the debtor from timely compliance with its obligations.” As the UCC rules link payment with discharge, the debtor is protected by its ability to obtain a discharge by paying the assignor in appropriate circumstances (and, of course, by its ability to pay into court in an interpleader procedure). Receivables financing is not enhanced by involving the debtor in the determination, as between assignor and assignee, of ultimate entitlement to the funds in a way that allows the debtor to withhold payment from both assignor and assignee. In the UN Convention, the basic discharge rule is set forth in Art. 17. Art. 16(1) and Art. 15(2) of the UN Convention. Art. 16(1) deals with the language of notifications and payment instructions, providing that they are effective if “in a language that is reasonably expected to inform the debtor about its contents”, with a safe harbour rule making sufficient the language of the original contract (the contract that gave rise to the assigned claim). Art. 15(2) provides that a payment instruction may change the person, address or account to which the debtor is required to pay, “but may not change: (a) The currency of payment specified in the original contract; or (b) The State specified in the original contract in which payment is to be made to a State other than that in which the debtor is located.” PECL also includes a debtor-protective provision with respect to change in place of payment. Art. 11:306(1) PECL. The DCFR provides: “Where the assigned right relates to an obligation to pay money at a particular place,

The Law of Assignment of Receivables

39

respect to situations where the debtor receives more than one notification or more than one payment instruction, four specific substantive rules are provided.119 In addition, the UN Convention provides that Art. 17 “does not affect any other ground on which payment by the debtor to the person entitled to payment, to a competent judicial or other authority, or to a public deposit fund discharges the debtor.120 With respect to defences and rights of set-off, PECL, the DCFR, the UNIDROIT Principles and the UN Convention have essentially similar rules.121 The UN Convention, however, adds two helpful provisions. One, it expressly provides for the permissibility of an agreement by the debtor not to assert defences and rights of set-off against the assignee,122 a provision that greatly enhances the value of receivables. Two, in another assigneeprotective provision, also greatly enhancing the value of receivables, it makes clear that the failure of the assignor to perform the original contract does not entitle the debtor to recover from the assignee sums already paid by the debtor to the assignor or the assignee.123

14. Post-insolvency collection by buyer of receivables In Germany, notification plays no role so it is irrelevant whether it is given before or after insolvency. As long as the outright transfer was made prior to the commencement of the proceedings, the insolvency administrator has no rights with respect to the receivables and may not interfere with direct collection by the buyer (this would not, however, be true in the case of a security transfer). In France, both (i) the Dailly transfer and the Civil Code pledge must have occurred and (ii) the receivable must have

119 120 121

122

123

the assignee may require payment at any place within the same country or, if that country is a Member State of the European Union, at any place within the European Union, but the assignor is liable to the debtor for any increased costs which the debtor incurs by reason of any change in the place of performance.“ (Art. III.–5:117(1)). UCC Article 9 includes a debtor-protective provision with respect to a notification that instructs the account debtor to make less than the full amount of any installment or other periodic payment to the assignee – it gives the account debtor the option to treat the notification as ineffective. Art. 17(3)-(6) of the UN Convention. Art. 17(8) of the UN Convention. Art. 11:307 PECL, Art. III.–5:116 DCFR, Art. 9.1.13 of the UNIDROIT Principles and Art. 18 of the UN Convention. The UCC Article 9 rule is set forth in UCC § 9-404(a). Art. 19 of the UN Convention. Similarly, UCC Article 9 also provides for such an agreement by the account debtor. UCC § 9-403. Art. 21 of the UN Convention. UCC § 9-404(b) has a provision to the same effect.

40

Harry C. Sigman / Eva-Maria Kieninger

come into existence before the commencement of the proceedings for the transfer / pledge to prevail over the insolvency administrator; otherwise, the receivable is property of the estate. The receivable is considered to have come into existence when it is “earned”, not when the contract from which it arose was concluded.124 In Belgium, like in Germany, the assignment is effective against the administrator upon conclusion of the assignment. The opening of the insolvency proceedings will not prevent the buyer from giving notification to the debtors and will not hinder its right to collect the receivables. The insolvency administrator will be obliged to account for collections paid to the insolvent estate (but not for payments received by the transferor prior to the commencement of the insolvency but not paid over to the buyer – these sums were, most likely, commingled with other funds of the transferor). In the Netherlands, again, a distinction must be made between a disclosed and an undisclosed outright transfer. In the former case, notification is a constitutive element, so it must have been accomplished prior to the commencement of the insolvency proceedings. In the case of an undisclosed outright transfer, if all the steps required to make the transfer effective were taken prior to the commencement of the insolvency proceedings, the transferee may give notification even after commencement of the proceedings. If, prior to receipt of notification, the debtor had paid the insolvency administrator, the debtor is discharged and the transferee has only a claim against the estate, with no priority position.

15. Post-insolvency collection by pledgee of receivables The national reports suggest that, for the most part, there seems to be no significant difference between Case Studies 14 and 15. In Germany, the pledgee may collect directly pursuant to statutory provision in the insolvency law, but the insolvency administrator will do the collecting (and receive its fee) in the case of a security transfer. See the very practical discussion in the Netherlands report infra (at para. II. 15.) of the issues involved when a pledgee of receivables is confronted with an insolvency proceeding.

16. Securitisation The national reports describe the enabling or facilitating legislation that has, in most countries, been enacted during the past two decades.125 It 124

125

See the discussion in the France report of the “successive performance” cases, as well as the different conceptual approach applicable in the factoring practice of maintaining a compte-courant between the factor and its customer. See also Salomons, Deformalisation of Assignment Law and the Position of the Debtor in European Property Law, ERPL 2007, 639 et seq.

The Law of Assignment of Receivables

41

should be noted that the sweeping general change to the Belgian Civil Code in 1994, deleting the requirement of notification to the debtor as a condition to effectiveness (of both outright transfers and pledges) against third parties, was made in order to facilitate securitisation, although its impact went far beyond such transactions. Additional legislative changes were also made in Belgium, e.g., relaxation of certain requirements for registration in the land registers in the case of securitisations involving mortgages over immovables. In France, legislation was required to overcome the obstacle posed by the Civil Code requirement of debtor notification by a huissier; it took the form of a regime modelled after the Loi Dailly. Legislative activity has been continuous, as recently as June 2008.126 Many of the legislative changes were aimed at attracting securitisation business by making French law competitive with that of other countries.

V.

National implementation of the Financial Collateral Directive

Three key features of the Financial Collateral Directive that, when applicable, pertain to the subject of this volume are the explicit permissibility of security transfers, the liberalisation of secured party remedies and the significant restrictions on avoidance in insolvency. Some of the national reports provide descriptions of the implementation of the Directive in those countries. These have varied from what might be called a maximal approach by a broadening of the scope of application of the Directive’s rules (e.g., Belgium), to a very narrow approach by not expanding the scope beyond the minimum required under the Directive (e.g., France) – making the favourable provisions of the Directive unavailable to routine commercial transactions at the non-governmental assignor level. In Germany, as the regime in place was already rather liberal, implementation of the Directive had very little impact on practice. Most significant changes were in the insolvency situation, both in the restriction of the avoidance powers and in the ability of the secured financier to realise the security itself (without the cost of the fee of the administrator for making the realisation).

VI. Private International Law Issues Analytical framework – distinguishing different issues When a receivable is assigned, multiple issues may arise. As in substantive law, so too in private international law, the different relationships involved

126

See France report infra, at para. II.16.

42

Harry C. Sigman / Eva-Maria Kieninger

must be carefully distinguished; because they involve different issues and interests, they may well be submitted to different conflicts rules.127 First, the contract to assign a receivable creates a contractual relationship between assignor and assignee. Second, because the object of the transaction is itself a legal relationship, the relationship between the assignor or the assignee, on the one hand, and the debtor, on the other, must be taken into account. Third, because the assignment involves not only the mutual rights and obligations between the assignor and the assignee (often referred to as “contractual” aspects) but also the transfer of the asset pursuant to the contract, what is often referred to as the “proprietary” aspect of the transaction, must also be considered. There likely will be third persons (often referred to collectively as “competing claimants”) whose rights might be in conflict with the rights of the assignee, i.e., a prior or subsequent assignee, an executing creditor of the assignor, or the assignor’s insolvency representative (generally referred to herein as priority conflicts).128 In addition, in some jurisdictions, the contractual relationship between assignor and assignee is distinguished from the proprietary transfer of the claim between the same parties in particular respects.129 Finally, all this is still more complicated than it seems – it must not be assumed that the line between contract and property is clear in all cases or is drawn in the same place by all legal systems.130 And, as is typical in private international law analysis, different answers to the same problem can be produced depending on how the question is framed or whether the analysis is formulated as posing a “preliminary” question which may then become outcome-determinative.131 With regard to the first two relationships, there can be no doubt about the proper connecting factor. Only the proper boundaries of the respective rules are matters for debate.

127 128

129

130

131

See also Netherlands report infra, at para. I.7. Art. 5(m) of the UN Convention refers to parties having such conflicting claims to the assigned receivables as “competing claimants.” This is the case, e.g., in German law, where the proprietary transfer necessitates a separate agreement which is abstract from the underlying contractual obligation, although, in practice, (1) the contractual obligation and the proprietary transfer will most typically be contained in a single act, and (2) most defects which affect the contractual obligation will also render the separate proprietary agreement ineffective. Cf. Münchener Kommentar zum Bürgerlichen Gesetzbuch / Roth, Vol. 2 (5th edn. 2007), § 398 n. 23 and 25. Cf. Bauer, Die Forderungsabtretung im IPR (2008), p. 51 et seq. (comparison of German, French and English law). See also Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC [2001] QB 825, discussed in detail in fn. 156 infra. See, e.g., the Raiffeisen case, fn. 130 supra.

The Law of Assignment of Receivables

1.

43

Contractual relationship between assignor and assignee

This relationship is governed by the same conflicts rules as govern contract issues in general. The rule is expressly spelled out by Art. 12(1) of the Rome Convention and repeated in Art. 14(1) of the Rome I Regulation, albeit in less familiar and slightly ambiguous words, the ambiguity arising from the desire to include under this rule the proprietary relationship between assignor and assignee.132

2.

Relationship with the debtor

The relationship between assignor / assignee, on the one hand, and the debtor, on the other, is submitted to the law governing the assigned receivable. This rule is stated in Art. 12(2) of the Rome Convention and repeated verbatim in Art. 14(2) of the Rome I Regulation. It reflects several basic propositions.133 Needless to say, the assignor cannot, unilaterally, by making an assignment, divest itself of its obligations vis-à-vis the debtor. Further, as a general proposition, the position of the debtor may not be adversely affected by the assignment, at least so long as the debtor is not aware of the assignment.134 Thus, the effect of an assignment, if any, on the debtor’s defences, its right of set-off and its ability to discharge its debt by paying the assignor must be protected according to the law governing the receivable. Discussion therefore relates only to the proper boundaries of the realm of application of this rule, especially with respect to the ambiguous word “assignability”, which, unfortunately, has been preserved in Art. 14(2) of the Rome I Regulation.135 Case Studies 8 and 9, discussed above, deal with the effects of an assignment made in the teeth of either (i) an anti-assignment agreement between the debtor and the assignor,136 which will, in all cases, be intended to protect the debtor; or (ii) a rule of law restricting assignment,137 which 132 133

134

135 136

137

See para. VI.3.b)cc)(2) infra. See also the Netherlands report infra, at para. I.7.c). See also Art. 29 of the UN Convention, an optional autonomous private international law rule, modelled on the Rome Convention. As seen above in the discussion of the substantive law, there are variations between the countries studied as to whether the standard is the debtor’s knowledge of the assignment or the debtor’s receipt of notification, and also with regard to subsidiary issues such as by whom the notice must be sent, whether it must be formal etc. See text four paragraphs infra. An anti-assignment agreement might be either in the assigned contract itself or in a separate document. The restrictive rule might be statutory or judicial.

44

Harry C. Sigman / Eva-Maria Kieninger

might in some cases be designed to protect the debtor138 but in other cases have nothing to do with the debtor but are instead designed to protect the assignor or other creditors of the assignor.139 The Germany and Netherlands reports discuss specifically the scope of application of Art. 12(2) Rome Convention. According to the Bundesgerichtshof (German Supreme Court), Art. 12(2) of the Rome Convention covers all aspects (contractual and proprietary140) of the assignment except the contractual obligations between assignor and assignee (i.e., the contract in which the assignor undertakes the obligation to assign the receivable).141 Hence, under that approach, all provisions that regulate whether a claim may be effectively assigned are submitted to the law governing the receivable. The predominant opinion in Germany does not distinguish between contractual or legal anti-assignment rules that are designed to protect the debtor and those that exist in order to protect third persons; all are, without exception, subjected to the German domestic transposition of Art. 12(2) of the Rome Convention. In contrast, the Netherlands report indicates that Netherlands private international law distinguishes between different aspects of “assignability.” With respect to the assignability of future receivables, for example, the report indicates that the question whether a receivable is, as a matter of principle, assignable, is governed by the law governing the assigned receivable, whereas the requirements that must be satisfied in order to assign a future receivable are regarded as a proprietary issue and hence submitted to the conflicts rule governing the proprietary aspects of the assignment.142 The authors of this Introductory Chapter have argued previously that the word “assignability” is unacceptably ambiguous and that it should have been dropped from the proposed Rome I Regulation.143 To the extent assign138

139

140

141 142 143

E.g., protection of patient confidentiality by prohibiting the assignment by a doctor of claims against patients without the patient’s consent (see the Germany report infra, at para. I.6.). E.g., rules preventing or restricting temporally the assignment of future claims; or rules prohibiting or imposing formal or other prerequisites to effectiveness of security assignments as against third persons; or rules restricting the assignment of wages – which protect the assignor / worker, not the debtor / employer. While the Raiffeisen case, fn. 130 supra, is sometimes mistakenly cited for the proposition that the English view of the Rome Convention is that Art. 12(2) covers proprietary matters, the court characterised the issue it was deciding as a contractual matter; it did not decide what the effect of the post-assignment attachment would be or which law would govern that question. This case is discussed in detail in fn. 156 infra. See Germany report infra, at fn. 96. See para. VI.3. infra. See Kieninger / Sigman, The Rome-I Proposed Regulation and the Assignment of Receivables, EuLF 2006, 1, at 8 et seq. We there noted, in particular, not only the

The Law of Assignment of Receivables

45

ability relates to anti-assignment provisions, contractual or statutory, that are properly regulated within Art. 14(2) of the Rome I Regulation, that word should have been replaced by a more specific formula,144 along the lines of the English language version of the Rome I Commission proposal.145 Insofar as substantive rules lay down special requirements for, or even prohibit, the assignability of future claims or the making of security assignments, such rules are not designed to protect debtors but rather seek to protect third persons such as creditors of the assignor. Hence, for private international law purposes, such rules should be submitted to the conflicts rule governing third party effects.146 The UN Convention avoids the word “assignability”, instead referring to the “effectiveness of contractual limitations on assignment”; it allocates that effectiveness “as between the assignee and the debtor” to the law governing the original contract,147 and allocates issues concerning satisfaction of “requirements necessary to render the right effective against a competing claimant” – a “priority” issue – to the law of the assignor’s location.148

144 145

146

147

148

differences in expression of this provision in the proposed Regulation across the different languages, but also the debate within Germany of the meaning of the term. Regrettably, the final version of the Regulation did not reflect the more narrow and precise English version, but chose instead the ambiguous single word “assignability.” Whatever its meaning, however, it should be limited to the relationship between the assignee and the debtor, since it is found in the paragraph dealing with that relationship. The proposal is reproduced after fn. 205 infra. Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I), COM (2005) 650 final, Art. 13(2): “The law governing the original contract shall determine the effectiveness of contractual limitations on assignment as between the assignee and the debtor, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor’s obligations have been discharged.” See para. VI.3.c)bb)(2) infra. In Dutch law, an even more refined solution is put forth. See the Netherlands report infra, at para. I.7.a). Art. 29 of the UN Convention. It should be noted that the UN Convention’s override of limitations on assignments applies only to contractual limitations (Art. 9 and Art. 10), and, further, that, under Art. 40, a State may by declaration render the override provisions inapplicable (in whole or in part) to the rights and obligations of a debtor that is “a Government, central or local, any subdivision thereof, or an entity constituted for a public purpose”, if the debtor is located within that declaring State at the time of the conclusion of the original contract (the assigned claim). Art. 22 of the UN Convention. The UN Convention defines “priority” as including the determination whether “any requirements necessary to render the right effective against a competing claimant have been satisfied.” (Art. 5(g)).

46

3.

Harry C. Sigman / Eva-Maria Kieninger

Priority issues / third party effects

The most controversial issue is the proper conflicts rule for priority issues or “third party effects”. These terms are used to cover not only competitions between multiple assignees of the same receivable from the same assignor but more broadly whenever third persons are involved, most importantly competing claimants such as a creditor of the assignor that attaches the receivable or the insolvency administrator of the assignor. The national reports in this volume highlight the substantive law differences that exist among the Member States. Involvement of third persons increases the likelihood that private international law issues may arise.

a)

State of the law under the Rome Convention

The first question is whether the Rome Convention149 covers third party effects. According to the authoritative Report by Giuliano and Lagarde,150 the Rome Convention covers only contractual relationships: “First, since the Convention is concerned only with the law applicable to contractual obligations, property rights and intellectual property are not covered by these provisions. An Article in the original draft had expressly so provided. However, the Group considered that such a provision would be superfluous in the present text, especially as this would have involved the need to recapitulate the differences existing between the various legal systems of the Member States of the Community.”151 This position is further supported by the reference in Art. 12(1) to the “mutual obligations” of assignor and assignee – language traditionally understood as referring to contractual obligations. Nevertheless, the German152 and Dutch153 Supreme Courts clearly have answered in the affirmative (although they disagree as to which paragraph 149

150

151 152 153

The Rome Convention is presently in force in all EU Member States. It will cease to be in force from 17 December 2009 (see Art. 24(1) and Art. 29 of the Rome I Regulation), except for those Member States that do not participate in the Rome I Regulation. These are Denmark (without opt-in possibility) and Ireland (with opt-in possibility). The United Kingdom has opted into the Rome I Regulation. Cf. COM (2008) 730 final of 7 Nov. 2008. OJ 31 October 1980 C 282 / 1, at 10. In 1977, the Irish and Danish delegations pressed to leave the “proprietary aspects” out of the drafts of the Rome Convention. See Kieninger, Das Statut der Forderungsabtretung im Verhältnis zu Dritten, RabelsZ 62 (1998), 678, at 690. Ibid., Commentary on Art. 1. See Germany report, at fn. 96. See Netherlands report infra, at para. I.7.d). The Hoge Raad’s solution has been approved by the legislator in the new Wet Conflictenrecht Goederenrecht (Wet

The Law of Assignment of Receivables

47

of Art. 12 provides the proper rule154), whereas the English Court of Appeal in Raiffeisen155 left the question open.156 In this volume, the England and

154

155

156

van 25 februari 2008, houdende regeling van het conflictenrecht betreffende het goederenrechtelijke regime met betrekking tot zaken, vorderingsrechten, aandelen en giraal overdraagbare effecten, Stb. 2008, 70; German translation in IPRax 2008, 560 et seq.); see also Struycken / Sujecki, Das niederländische Gesetz zur Regelung des internationalen Sachenrechts, IPRax 2008, 558 et seq. The Dutch legislator has followed a somewhat inconsistent approach. On the one hand, it follows the Hoge Raad in the Hansa case (HR 16 May 1997 Brandsma q.q. / Hansa Chemie, NJ 1998, 585), which considered itself bound to find a solution within the Rome Convention; on the other hand, it must have denied applicability of the Rome Convention in order to consider itself competent to legislate in this area. The German approach was that since the proprietary question is not covered by Art. 12(1), which deals with the contractual aspects between the assignor and the assignee, it must be covered by Art. 12(2), while the Dutch approach was that Art. 12(1) would be superfluous if it did not cover anything else but the contractual relationship between assignor and assignee. Hence, the Hoge Raad decided that subsection (1) must be interpreted as also including the proprietary side of an assignment. See the extensive discussion of the case in the following footnote. The court did hold that Art. 12(2) applied to the issue it was deciding – which it characterised as a contractual issue – “what steps, by way of notice or otherwise, require to be taken in relation to the debtor for the assignment to take effect as between the assignee and debtor” (emphasis added). Also, see England and Wales report, which notes that with respect to charges granted by an English company over its book debts, registration is required under the Companies Act, although not necessarily to the exclusion of a need to satisfy additional requirements (e.g., registration) under the otherwise applicable law. Although the Raiffeisen case is (mistakenly, in the view of the present authors) cited for the proposition that the English judicial view of the Rome Convention is that Art. 12(2) covers proprietary matters as against third parties, the difficulty of precise explication of the court’s holding is apparent in English authorities. See e.g. Perkins, A question of priorities: choice of law and proprietary aspects of the assignment of debts, LFMR 2008, 238 et seq., illustrating that difficulty. See also the analysis of the case in Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), p. 693 et seq. The Raiffeisen court characterised the issue before it as a contractual matter and did not decide what the effect of the post-assignment attachment would be or which law would govern that question. Indeed, as elaborated in the following detailed analysis, the decision announced a ruling focused on the effect of the assignment vis-à-vis the debtor, not the attaching creditor, and did not decide a third party effects rule turning on the contractual / proprietary dichotomy. See also, with respect to this dichotomy, the court’s language, quoted in the following footnote. Because the case is so often

48

Harry C. Sigman / Eva-Maria Kieninger cited as establishing the English position on proprietary issues, it is worthwhile at this point to examine the case in depth. Raiffeisen involved, ultimately, a contest between a collateral assignee of an insurance contract and an attaching creditor of the assignor. An Austrian bank, acting through its London office, financed the acquisition of a ship by Dubai buyers. The bank received an “assignment” (stated to be “absolutely and unconditionally”, but clearly for the purpose of securing the loan) of rights under a marine insurance policy. The policy was issued by French insurers, and the governing law of the policy was expressly stated to be English law. The ship collided with another ship, and cargo aboard the other ship was damaged. Owners of the other ship, as well as the Taiwanese owners of the cargo, brought proceedings against the owners of the first ship, had it arrested and sold pursuant to a Malaysian court order. The cargo owners also obtained a provisional attachment of the insurance proceeds in a French court. In the English court, the bank sought a number of declarations, including that the owners of the first ship (assignors) had no further right in the insurance from the date of the Deed of Assignment. The cargo owners claimed that the assignment had not exhausted the interest of the ship owners because notice of the assignment had not been served on the French issuers in accordance with French law, arguing that the issue was a proprietary one, governed, under the lex situs rule, by French law, the law of the issuers’ domicile. The ship owners (assignors) argued that the issue was a contractual one, governed by the law governing the insurance rights that were assigned, English law. Thus, according to the court, the counsel arguing the case framed it as hinging on a contractual/proprietary dichotomy; both sides focused on whether the assignors had any interest after making the assignment. The court, like the parties, did not identify the case as presenting a "priority" contest between an assignee of a claim and a creditor of the assignor that subsequently seized the claim by levying on the debtor (or, put in "third party effects" terms, whether the assignee had “perfected” its assignment so that, under the applicable law, the assignee’s rights were not vulnerable to the seizure by the levying creditor). Rather, the court’s approach was to determine, as an initial issue, as though no seizing creditor were involved, whether, by virtue of the mortgage provisions between the bank and the assignors, the Deed of Assignment and the notice sent to the insurers, there had been an assignment the effect of which was to move title to the claim “as against the insurers” [debtor] (emphasis added) to the bank/assignee from the ship owners/assignors. The court characterised this as a contractual issue to be decided under the law governing the assigned rights, per Art. 12(2) of the Rome Convention (about which more below). The court then framed as a potential second issue whether, even if the bank had become the owner of the claim against the insurers, the attachments in France might override that title. The court did not determine this second issue – the real heart of the case – but addressed it only to note that “No-one has produced evidence to show that, if [the first] issue were to be decided in [the bank’s] favour, the French attachments could still apply, or that any second issue would remain. […] there is nothing in Prof. Malaurie’s opinion to suggest that, under French law, the attachments could override this position […] there is also nothing positive to

The Law of Assignment of Receivables

49

Wales report tentatively suggests that an English court would possibly try to find a solution within Art. 12 of the Rome Convention.157 The Belgian legislator has taken the view that the effectiveness of an assignment against third persons is not covered by the Rome Convention. Thus, it considered itself competent to provide, in Art. 87 § 3 of the Belgian private international law code,158 that third-party relationships issues are governed by the law of the assignor’s location. The France report takes no view on this question but rather points to the fact that there is hardly any French case law on the Rome Convention in this respect because all commercially important assignments are done either under the Loi Dailly or the special legislation on securitisations, both of which regard their own rules as applicable regardless of the law applicable under the general conflicts rules. The interesting but unresolved question here is whether and how these French rules can be accommodated with the Rome Convention. The France report suggests that the Loi Dailly provisions could be regarded as lois de police within the meaning of Art. 7(2) of the Rome Convention. However, this position might be difficult to maintain under the rather narrow definition of lois de police in the new Art. 9(1) of the Rome I Regulation.159 The

157

158

159

assist us as to what attitude French law would take in this situation.” The court proceeded to deal with the first issue “in light of the way in which the case has been presented and argued on both sides”, and stated that the “second issue will have to be identified and considered separately, whether in these or in the French proceedings.” Indeed the court’s Order, expressly declared that the bank became entitled as against the assignor and “as against the insurers” on dates preceding the attachments, but that “The above declarations leave open for subsequent determination, if necessary, any case that […] the preventive attachments obtained by the appellants in France override that effect.” See England and Wales report infra, at para. III.1. The court in Raiffeisen noted that “there is, as yet, no international court to which issues of construction of the Rome Convention may be mandatorily referred, […]” It did state that “National courts must clearly strive to take a single, international or “autonomous” view of the concept of contractual obligations, that is not blinkered by conceptions […] that may be peculiar to their own countries. Further […] the man-made concepts of contractual obligations and proprietary rights are neither so clear nor so inflexible that they may not receive shape from the subject matter and wording of the Convention itself.” Although the Protocol that enables national courts to refer cases to the ECJ for interpretation of the Rome Convention entered into force on 1 August 2004, no request for preliminary ruling on Art. 12 has yet reached the ECJ. Loi portant le Code de droit international privé du 16 juillet/Wet van 16 juli 2004 houdende het Wetboek van internationaal privaatrecht, BS 27 July 2004, 57344. Overriding mandatory provisions are domestic substantive provisions the respect for which is regarded by a country as crucial for safeguarding its public interests,

50

Harry C. Sigman / Eva-Maria Kieninger

Spanish report indicates the view that the Rome Convention does not cover third-party effects. Thus, neither private international law case law nor the Rome Convention has resulted in a single conflicts rule in Europe with respect to third party effects issues. It goes without saying that this state of the law is highly unsatisfactory. Since each country’s courts apply their respective national conflicts rules, different substantive laws may be applicable depending on the location of the court that is the forum for the particular case. The resulting uncertainty affects not only intra-Community trade with respect to receivables but also trade with parties in third states because the private international law rules of the Rome Convention (and the Rome I Regulation) apply to all cross-border cases alike.160 Insofar as the Rome Convention is held to apply, the differing interpretations of the courts of the contracting states is also contrary to their obligation to interpret the Rome Convention in an internationally uniform manner.161

b)

The Rome I Regulation

aa) The Commission proposal

In the course of the preparation of the UN Convention and during the work162 done by the EC Commission prior to the publication in December of 2005 of its proposal for the Rome I Regulation163, there was an ongoing de-

160 161 162

163

such as its political, social or economic organisation, to such an extent that the provisions must be applied to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under the Regulation. Such rules are often referred to as “internationally mandatory” rules or rules of “immediate application”. Art. 2 of the Rome Convention and Art. 2 of the Rome I Regulation. Art. 18 of the Rome Convention. Cf. Green Paper of 14 January 2003 on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a Community instrument and its modernisation, COM (2002) 654 final; on the Green paper see Max Planck Institute for Foreign Private and Private International Law, Comments on the European Commission’s Green Paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a Community instrument and its modernization, RabelsZ 68 (2004) 1 et seq.; Leible (ed.), Das Grünbuch zum Internationalen Vertragsrecht (2004); Magnus / Mankowski, The Green Paper on a Future Rome I Regulation - on the Road to a Renewed European Private International Law of Contracts, ZVglRWiss 103 (2004) 131 et seq. COM (2005) 650 final.

The Law of Assignment of Receivables

51

bate164 about the best private international law solution for the proprietary aspects of assignment, i.e., more precisely, the third party effects, or, in the language of the UN Convention, the “priority of the right of an assignee in the assigned receivable over the right of a competing claimant.”165 The rule adopted by both the UN Convention (Art. 22) and the EC Commission proposal for the Rome I Regulation (Art. 13(3)) was the law of the assignor’s location.

bb) The Debate in the Council

In the time between the initial publication of the Commission’s proposal on 15 December 2005 and the final decision by the Community institutions in early 2008, the debate continued.166 In the Council, several positions were 164

165

166

Cf. Lagarde, Retour sur la loi applicable à l’opposabilité des transferts conventionnels de créances, in Droit et actualité: études offertes à Jacques Béguin (2005), p. 415 et seq.; Mäsch, Abtretung und Legalzession im Europäischen Kollisionsrecht, in Leible (ed.), Das Grünbuch zum Internationalen Vertragsrecht (2004), p. 197, at p. 203 et seq.; Magnus / Mankowski, The Green Paper on a Future Rome I Regulation – on the Road to a Renewed European Private International Law of Contracts, ZVglRWiss 103 (2004), 131, at 185 et seq.; Max Planck Institute for Foreign Private and Private International Law, Comments on the European Commission’s Green Paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a Community instrument and its modernization, RabelsZ 68 (2004) 1, at 79 et seq.; Kieninger / E. Schütze, Die Forderungsabtretung im Internationalen Privatrecht, IPRax 2005, 200 et seq.; Kieninger, Brussels I, Rome I and Questions Relating to Assignment and Subrogation, in Meeusen / Pertegás / Straetmans (eds.), Enforcement of International Contracts in the European Union (2004), p. 363, at p. 371 et seq. Further statements from governments, business organisations, practitioners and academics on question 18 of the Green Book can be viewed at http: // ec.europa.eu / justice_home / news / consulting_public / rome_i / news_summary_rome1_en.htm (1 April 2009). Art. 22 of the UN Convention. The UNCITRAL Working Group and the UN Commission on International Trade Law did not reach agreement on substantive priority rules, but there was consensus about the appropriate conflicts rule. Cf. Flessner / Verhagen, Assignment in European Private International Law (2006); Flessner, Privatautonomie und Interessen im Internationalen Privatrecht, am Beispiel der Forderungsabtretung, in Heldrich et al. (eds.), Festschrift für ClausWilhelm Canaris zum 70. Geburtstag (2007), p. 545; van der Weide, Mobiliteit van goederen in het IPR (2006), p. 146 et seq., all arguing for application of Art. 13(1) Rome I Proposal; see further Steffens, The New Rule on the Assignment of Rights in Rome I – The Solution to All Our Proprietary Problems? – Determination of the Conflict of Laws Rule in Respect of Proprietary Aspects of Assignment,

52

Harry C. Sigman / Eva-Maria Kieninger

presented. These ranged from (i) a comprehensive Hungarian proposal167 that adopted the UN Convention approach of the assignor’s location and articulated detailed exceptions from the reach of this rule parallel to the exclusions stated in the UN Convention (adoption of this approach would have enabled Member States to ratify the UN Convention and provided important support for the global acceptance of the UN Convention); to (ii) positions that would have adopted the assignor’s location rule but with some (primarily wording) deviations from the UN Convention’s exclusions;168 ERPL 2006, 543, arguing for application of Art. 13(2) Rome I Proposal. The

167

168

majority of commentators on the Rome I Proposal, however, concurred, as a matter of principle, with the EU Commission. Cf. Lagarde, Remarques sur la proposition de règlement de la Commission européenne sur la loi applicable aux obligations contractuelles (Rome I), Rev. crit. dr. int. priv. 2006, 331, at 347; Kieninger / Sigman, The Rome-I Proposed Regulation and the Assignment of Receivables, EuLF 2006, 1; Mankowski, Der Vorschlag für die Rom I-Verordnung, IPRax 2006, 101 at 111; Max-Planck-Institute for Comparative and Private International Law, Comments on the European Commission’s Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Contractual Obligations – Rome I, RabelsZ 71 (2007), 225 (para. 149 et seq.). See the Appendix to this Introductory Chapter, which provides the Hungarian proposal, Council Document 12445 / 07 of 28 August 2007, in full. The proposal is also available online at http: // register.consilium.eu.int / pdf / en / 07 / st12 / st124 45.en07.pdf (1 April 2009). Cf. Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Article 13(3). Comments by the Spanish Delegation, Council Document 11393 / 07 of 30 June 2007, available online at http: // register.consilium.europa.eu / pdf / en / 07 / st11 / st11393-ad01. en07.pdf (1 April 2009). While Spain supported the assignor’s location rule and the bulk of the UN Convention‘s exclusions, Spain objected to the exception from the exclusion of financial contracts governed by netting agreements of the “receivable owed on the termination of all outstanding transactions”, although this exception is both consistent with the rationale for the exclusion (i.e., so as not to interfere with netting arrangements) and was acceptable to ‘industry’ as well as national delegations in the preparation of the UN Convention. Spain also objected to the exclusion, in Art. 4(2)(c) of the UN Convention, of foreign exchange transactions, despite the fact that this exclusion had been requested by ‘industry’ and had been acceptable to the national delegations at UNCITRAL. Further, on the specific point, it should be noted that exclusion from the Convention does not preclude any individual state or group of states from adopting the assignor’s location rule as its conflicts pointer for an excluded transaction or receivable. Thus, receivables arising under or from foreign exchange transactions could have been submitted to the assignor’s location rule if that would have been the will of the EU Member States without thereby creating an inconsistency with the UN Convention.

The Law of Assignment of Receivables

53

to (iii) positions that would have adopted the assignor’s location rule but with few or no exclusions;169 to (iv) the United Kingdom position that the UN Convention rule of the assignor’s location was acceptable for “commercial receivables” but not for “capital markets transactions” – this position, however, was unaccompanied by usable precise definitions for those categories and was accompanied by an insistence that the law governing the receivable be stated as the general rule and the law of the assignor’s location be stated as the exception.170 This approach, particularly the latter aspect, would likely have diminished the scope, and would certainly have undermined the reliability, of the assignor’s location rule; the approach was not acceptable to the majority. It also would have prevented ratification of the UN Convention by the Member States. This debate was no doubt also affected by negotiations concerning other provisions of the Regulation unrelated to the merits or articulation of this particular provision. It appears that support for the UN Convention (or, more precisely, recognition of the negative effect that would ensue from the failure to adhere to the UN Convention’s rule and articulation of exclusions) was not a significant factor for many of the Member States, despite the fact that many of them had played a substantial role in the preparation of the UN Convention.171 169

170

171

Cf. Belgian Delegation, Committee on Civil Law Matters (Rome I) of 31 October 2007. Cf. Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Article 13(3). Comments by the United Kingdom Delegation, Council Document 11393 / 07 of 9 November 2007, available online at http: // register.consilium.europa.eu / pdf / en / 07 / st14 / st 14917.en07.pdf (1 April 2009). A leading recent treatise on English law states: “Especially in view of the needs of global assignment transactions, the basic approach taken in Article 13(3) of the draft Rome I Regulation should command strong support in what is largely a matter of first impression. […] An approach based on the location of the assignor is preferable to applying the rule currently contained in Article 12(2) of the Rome Convention, which would […] introduce unwanted complexity in the field of global assignments. […] In addition, it would not be a coherent solution to apply the law governing the right in the case of a single assignment, and the law of the assignor’s residence in all cases of plural assignments.” Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), p. 728. In the course of the work of UNCITRAL on the Legislative Guide, the UNCITRAL Secretariat took note of the work on the proposed Rome I Regulation and recommended that “increased efforts be made to ensure consistency between both texts to facilitate adoption of the Assignment Convention by EU Member States.” On 22 June 2006, the Director General of the EU Commission’s DG Justice Freedom and Security sent a note to the participants of the UNCITRAL 39th session which included the following: “The European Commission shares the concerns of the UNCITRAL Secretariat. It admits that the adoption of a different solution at

54

Harry C. Sigman / Eva-Maria Kieninger

cc)

The outcome so far

(1)

No decision on third party effects

The debate about the “best” rule was also reflected in the discussions among the participants of the ERA workshop from which this book emanates. In particular, the practitioners among the participants stressed repeatedly that legal certainty was of utmost importance, and that adoption of even one of the lesser solutions discussed would be better than leaving the matter outside of the Rome I Regulation. Unfortunately, omission of a rule for third party effects is exactly what did occur, at least for the time being. It is clear from a comparison of the Commission’s proposed text (Art. 13(3)) and the final version of the Rome I Regulation (Art. 14), as well as from Art. 27(2)172 of the Rome I Regulation, that third party effects have been left out of the Rome I Regulation as adopted.173 This omission will have several effects. First, after the entry into force of the Regulation, the Dutch and German approaches, which are grounded on the view that the Rome Convention covered third-party effects, will no longer have a textual foundation. The respective rules can live on only as autonomous national private international law rules. This may lead some courts to reconsider their position and adopt a solution that is not contemplated in the Rome Convention, for example, applicability of the law of the assignor’s location, as suggested by the Commission’s Rome I Regulation proposal, or to fall back on traditional private international law rules, such as looking for a ‘situs’ of the debt,174 or applying, under

172

173

174

European level would undermine the certainty reached at international level and might have a negative impact on the availability and the cost of credit. As underlined in the explanatory memorandum to its Rome I proposal, this is precisely why the European Commission proposed the application of the law of the assignor’s habitual residence, as does the Assignment Convention.” This provision, the review clause, obliges the Commission to submit a report “on the question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim [sic] over a right of another person.” The reference in the latter part of the sentence, of course, should have been to the priority between the right of the assignee and the right of another person in the assigned claim. Cf. the language of Art. 22 of the UN Convention: “[…] the priority of the right of the assignee in the assigned receivable over the right of the competing claimant”. Contra Flessner, Die internationale Forderungsabtretung nach der Rom I-Verordnung, IPRax 2009, 35 at 38 et seq. This is the older English solution, cited in the England and Wales report infra., at fn. 167.

The Law of Assignment of Receivables

55

that label or another, the law of the debtor’s domicile.175 Others may cling to the law governing the receivable (the same as, but no longer based on, Art. 12(2) Rome Convention). Another, more detrimental, effect relates to the UN Convention. Its ratification in Europe continues to be blocked. Notwithstanding the question whether Member States are still competent to ratify the UN Convention due to the overlap between the Rome I Regulation and the UN Convention’s private international law rules,176 it is the binding private international law rule in Art. 22 of the UN Convention (applicability of the law of the assignor’s location for priority conflicts) which presents the major hurdle, since it might or might not be identical to, or at least compatible with, a future European solution. The only benefit of the Rome I Regulation’s absence of a solution lies in the fact that it gives the European legislator more time to achieve a sound and uniform result – a result that one hopes would be determined neither by internal or cross-border Member State politics nor by the special interests of particular private groups but rather by sound policy considerations, taking into account the most frequent and commercially most important (at least from the viewpoint of virtually all Member States) cross-border transactions involving receivables.

(2)

Proprietary relationship between assignor and assignee

The private international law rule applicable to this relationship is less controversial because it has less practical impact. Proprietary questions derive their importance primarily from the effectiveness of a transaction erga omnes. As long as a legal relationship is limited to the two parties privy to the contract, it rarely matters whether the relationship is effective only as a contractual one or also in a proprietary sense.177 Of course, in an 175 176 177

See France report infra, at para. IV. See para. III.7. supra. This is not to say that there is no difference between a promise to create a security right and the actual creation of a security right, even if the secured party will not enjoy priority over the rights of third parties. See, e.g., UNCITRAL Legislative Guide and, in this respect, to the same effect, UCC Article 9. Even assuming there are no third persons with claims against the debtor, one to whom a security right was promised has no proprietary right in the promised collateral and would be forced either to seek judicial enforcement of the promise or to pursue its claim as a general unsecured claim through the jurisdiction’s ordinary enforcement regime, while the existence of a security right established as a proprietary matter between the parties does change the status of the creditor vis-à-vis the collateral, enabling it to enforce its rights against the collateral directly through the remedies available in that jurisdiction to a secured party. In many regimes,

56

Harry C. Sigman / Eva-Maria Kieninger

abstract system, an effective proprietary transfer will not be invalidated by a defective contract, but there will be a claim in restitution requiring that the property be retransferred to its original owner. The text of Art. 14(1) of the Rome I Regulation now refers to the “relationship between assignor and assignee”, and is no longer limited to the “mutual obligations of assignor and assignee” (as set forth in Art. 12(1) of the Rome Convention). In addition, the 38th recital explains that the term “relationship” should “make it clear that Article 14(1) also applies to the property aspects of an assignment as between assignor and assignee in legal orders where such aspects are treated separately from the aspects under the law of obligations”. However, it is not altogether clear what the drafters meant by “relationship” and by “property aspects”. Since it is clear that there was a firm decision to defer establishment of an EU private international law rule, only an interpretation of the current text that does not impinge on this decision can be accepted. In some recent German reactions, the text has been equated with the real agreement that, under German substantive law, is needed to make a transfer effective in a proprietary sense.178 Such an interpretation, however, could lead to inconsistencies with a future rule relating to priority conflicts. The following example might illustrate the problem: An assignor whose central administration is in Germany assigns a receivable governed by German law to an assignee located in France. The parties choose French law for the contract of assignment. Suppose that the assignment would be effective under French law, but that under German law both the contractual obligation and the real agreement suffer from a defect that renders them void (or voidable, with the agreements having been avoided). Later, the assignor assigns the same receivable to an assignee located in Germany, without any choice of law clause. Under Art. 14(1) of the Rome I Regulation, the proprietary relationship between the assignor and the first assignee is governed by French law, according to which the contract is effective. This rule, however, must be read as not deciding which of the two assignees enjoys priority because the Regulation has not yet determined the rule that designates which law governs priority between the two assignees. If, under any applicable law rule that governs priority (whether the assignor location rule or another rule), German substantive law would apply, this would produce the result that the first assignment was ineffective and only the second assignment

178

the remedies of a secured party are speedier and more effective than those of a general creditor. Cf. Pfeiffer, Neues Internationales Vertragsrecht, EuZW 2008, 622, at 629. Pfeiffer cites the 14th recital but this is most likely an error. In the same direction Mankowski, Die Rom I-Verordnung – Änderungen im europäischen IPR für Schuldverträge, IHR 2008, 133, at 150.

The Law of Assignment of Receivables

57

was effective. Yet, if one interprets Art. 14(1) of the Rome I Regulation as including – between the parties – the question whether the claim has passed from the hands of the assignor to those of the assignee (in German: die Verfügung), the acquisition of the claim by the second assignee would, under German law, be prevented by the fact that at the time of the second assignment, the assignor was no longer the holder of the claim (and that there is no bona fide acquisition of claims under German law), since the claim had been transferred to the first assignee by a transfer that was effective under French law. As a result, neither of the two assignees would acquire the receivable although the assignor has assigned it twice, each time effectively under the law governing the assignment inter partes.179 Following this analysis, one could say that, at least when a third party is involved, the question when and under what conditions, “ownership” in a claim is transferred as between the parties cannot be submitted to a different law than that which governs that transfer erga omnes.180 As Paul Lagarde, one of the leading experts on European PIL, has stated: „Dans la recherche de cette autre loi [the law governing priority conflicts] on ne peut imaginer, que la loi applicable au transfert inter partes soit différente de celle applicable au transfert à l’égard des tiers.“181 If Art. 14(1) of the Rome I Regulation were meant to cover the “real agreement” (Verfügung), this could mean that the solution of priority conflicts must also be submitted to Art. 14(1); but this would clearly be contrary to the decision of the European legislator to leave this question unresolved for the time being. Moreover, the law governing the assignor-assignee relationship was the conflicts rule for priority questions least favoured among the possibilities considered in the Council. There are two possible interpretations of Art. 14(1) and the 38th recital that avoid any conflict with a future private international law rule for priority questions: One has been presented by Bauer182 on the basis of a careful analysis of French law, which is the prototype of a system that does not require a separate real agreement for transferring property. Rather than distinguishing between an obligatory and a proprietary side of a transaction, French law distinguishes between the effectiveness of a contract between the parties and the conditions under which that contract becomes effective as against the debtor and third parties (opposabilité). The transfer of “owner179

180

181

182

Basedow has already discussed the same problem using a similar example. Cf. Basedow, Internationales Factoring zwischen Kollisionsrecht und UnidroitKonvention, ZEuP 1997, 615 at 623. In the same sense Flessner, Die internationale Forderungsabtretung nach der Rom I-Verordnung, IPRax 2009, 35 at 40, who, however, uses the argument for advocating Art. 14(1) as the proper conflicts rule. Lagarde, Retour sur la loi applicable à l’opposabilité des transferts conventionnels de créances, in Droit et actualité: études offertes à Jacques Béguin (2005), p. 415, at p. 424. Bauer, Die Forderungsabtretung im IPR (2008), p. 51 et seq.

58

Harry C. Sigman / Eva-Maria Kieninger

ship” between the parties is not considered to be an issue for the relationship between the parties. The transfer only takes place when the conditions of opposability as against the debtor and third parties are fulfilled.183 Bauer therefore suggests that the extension of Art. 14(1) beyond purely contractual matters covers only those aspects of the inter partes relationship which in French law are viewed as proprietary (e.g. the risk of accidental loss) but which in other systems are looked at as contractual.184 This narrow interpretation is further supported by the fact that the German text of the 38th recital was corrected after the Council’s decision on the Regulation on 29 November 2007. The original German text spoke of a „dinglicher Vertrag zwischen Zedent und Zessionar“ (real agreement between assignor and assignee), a text which would have more clearly referred to the assignment as a proprietary transfer (Verfügung) than the final (corrected) text which now, in conformity with the English and French versions, only speaks of “dingliche Aspekte” (property aspects) of an assignment. A second possible interpretation would be to limit Art. 14(1) strictly to situations where no priority conflict is presented, i.e., where no third party has entered the scene. This interpretation is supported by the first sentence of the 38th recital, which expressly limits the reach of Art. 14(1) to matters between the two parties to the assignment, and clarifies that the embrace of the proprietary aspects of that relationship was to assure that this result would be reached also in “legal orders where such aspects are treated separately from the aspects under the law of obligations.” One could interpret this part of the recital as being directed to the problem that, in an abstract system, an effective proprietary transfer will not be invalidated by a defective contract (in such a system, of course, there will be a claim in restitution requiring that the property be retransferred to its original owner). As long as no priority conflict with a third person is involved, there is no conceptual problem with applying the lex contractus to govern the proprietary as well as the contractual aspects of the assignment as between the assignor and the assignee. Such a rule has the advantage that, as between the assignee and the assignor, both the contractual and the proprietary aspects of a single transaction are governed by the same law, making easier, for example, rescission of a void or voidable contract. However, the picture changes when a third party enters the scene. If the proprietary aspects between assignor and assignee are governed by the same law as the contractual aspects only so long as no third party is involved, but once a third party enters the scene the law that governs priority issues thenceforth governs proprietary aspects, at least as they relate to third parties, there might be a difference between the two substantive laws that alters the proprietary position of the first assignee, or leaves that assignee in differing 183

184

Bauer, Die Forderungsabtretung im IPR (2008), p. 65 et seq. with further references. Bauer, Die Forderungsabtretung im IPR (2008), p. 65 et seq.

The Law of Assignment of Receivables

59

positions depending on which relationship is being examined. In some legal systems, this might present conceptual difficulties. This suggests that, at the end of the day, it might be best to allocate ab initio to the law governing third party effects all proprietary issues, even those between assignor and assignee. Submitting the proprietary side of the transaction inter partes to the same law as that which governs priority conflicts (consistent with the interpretation presented by Bauer, cited at fn. 182 supra) would not lead to insurmountable problems with respect to the assignor-assignee relationship. Solutions exist even for difficult and unusual situations. For example, if the contract between assignor and assignee is governed by French law and suffers from a defect that renders the contract void, and if the proprietary side is governed by German law, under which only the contract but not the proprietary agreement would be void, a possible solution would be to construe, also under French law, a claim in restitution under which the assignee would be obliged to retransfer the claim to the assignor. This operation is called “adaptation” (Anpassung) and is well known in the theory of private international law. That body of law not infrequently must deal with the circumstance that different legal aspects of a single transaction might be submitted to different private international law rules, and hence possibly to different substantive laws.

(3)

Scope of application of Art. 14 – coverage of security rights

One additional issue has been resolved by the Rome I Regulation, in Art. 14(3). Under the Rome Convention, it was (arguably) not clear whether its rules on assignment of claims also cover the granting of a security right by way of a charge or pledge.185 Art. 14(3) makes it clear that Art. 14’s rules (and – one hopes – a future rule on third party effects / priority issues) apply to the transfer or granting of security rights in claims, regardless of their nature or nomenclature, as well as outright transfers.

185

See, generally, the discussion on Scope and Terminology at the beginning of this Introductory Chapter. Also see the Netherlands, Belgium and Spain reports in this volume, which equate assignment and pledge in matters of private international law, and Sagaert / Kieninger / Sigman, De cessie van schuldvorderingen in het voorstel van de Rom I-Verordening: een kritische analyse, Bank Fin. R. 2006, 336 at 344; Art. 10(1) WCG. On the French position, see also Ancel / Kieninger / Sigman, Banque & Droit 2006, 39 at 40 et seq.

60

c)

Harry C. Sigman / Eva-Maria Kieninger

The best solution

aa) The basic rule – law of the assignor’s location

This leads to the final, important but controversial, question: what would the best solution look like? The authors of this Introductory Chapter have already presented their views on this issue in a number of articles.186 They continue to suggest that the law of the assignor’s location, properly defined, is the best law to govern priority conflicts. This rule • provides a pointer that is easily visible to all third persons concerned with the proprietary issues (including particularly subsequent assignees and creditors of the assignor), not hidden in or derived from an agree186

Cf. Kieninger, Das Statut der Forderungsabtretung im Verhältnis zu Dritten, RabelsZ 62 (1998) 678 et seq.; Kieninger, Brussels I, Rome I and Questions Relating to Assignment and Subrogation, in Meeusen / Pertegás / Straetmans (eds.), Enforcement of international contracts in the European Union (2004), p. 363 et seq.; Kieninger / Sigman, The Rome-I Proposed Regulation and the Assignment of Receivables, EuLF 2006, 1 et seq.; Kieninger / Sigman, Assignment of Receivables and the Applicable Law Under the Rome I Proposed Regulation, Int. C. R. 3 (2006), 189 et seq.; Ancel / Kieninger / Sigman, La proposition de règlement Rome I et les effets sur les tiers de la cession des créances, Banque & Droit 2006-III, 39 et seq.; Sagaert / Kieninger / Sigman, De cessie van schuldvorderingen in het voorstel van de Rome I-Verordening: een kritische analyse, Droit bancaire et financier, 2006, 331 et seq.; Kieninger / Sigman, Abtretung und Legalzession, in Ferrari / Leible (eds.), Ein neues Internationales Vertragsrecht für Europa – Der Vorschlag für eine Rom I-Verordnung (2007), p. 179 et seq.; Kieninger, General Principles on the law applicable to the assignment of receivables in Europe, in Basedow / Baum / Nishitani (eds.), Japanese and European Private International Law in Comparative Perspective (2008), p. 153 et seq. The overwhelming majority of recent academic studies on the issue also propose the assignor’s location rule. Cf. Bauer, Die Forderungsabtretung im IPR (2008), p. 283 et seq.; Rudolf, Einheitsrecht für internationale Forderungsabtretungen (2006), p. 576 et seq.; Lagarde, Retour sur la loi applicable à l’opposabilité des transferts conventionnels de créances, in Droit et actualité: études offertes à Jacques Béguin (2005), p. 415 et seq.; Mäsch, Abtretung und Legalzession im Europäischen Kollisionsrecht, in Leible (ed.), Das Grünbuch zum Internationalen Vertragsrecht (2004) p. 197, at p. 203 et seq.; Magnus / Mankowski, The Green Paper on a Future Rome I Regulation – on the Road to a Renewed European Private International Law of Contracts, ZVglRWiss 103 (2004), 131, at 185 et seq.; Max Planck Institute for Foreign Private and Private International Law, Comments on the European Commission’s Green Paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a Community instrument and its modernization, RabelsZ 68 (2004) 1, at 79 et seq.

The Law of Assignment of Receivables

•

•

•

187

188

61

ment between assignor and assignee or assignor and debtor and not vulnerable to manipulation by the contracting parties to the detriment of third party interests; leads to the only result that is determinable in advance by all persons concerned in the case of future receivables, thus facilitating commercial financing transactions; provides the only pointer that is easy to use in the case of bulk assignments, since it points to a single jurisdiction for all the receivables assigned by the assignor and avoids the need to consider and examine each individual receivable;187 is capable of solving the priority dispute between two (or more) assignees of the same claim from the same assignor, when each of the assignments is governed by a different law (e.g., when each of the assignment contracts provides a different choice of law clause);188

This also applies in the case of securitisations, which always include a bulk assignment of receivables, typically from the originator to a special purpose vehicle and then an onwards bulk assignment to the investor (which might be direct or to a trustee or other person acting for the investor). Since the substantive rules relating to debtor protection and those relating to third party effects are separate bodies of law, even within the same jurisdiction, it cannot be argued, as was done by the United Kingdom delegation in the Council, that submitting third party effects issues to the law of the assignor’s location while submitting debtor protection issues to the law governing the receivable necessarily leads to higher costs for due diligence. Quite the contrary: if the law governing the receivable were also to decide priority conflicts, due diligence would have to be done with respect to the laws of all jurisdictions the laws of which govern the various receivables composing the bulk not only as to those provisions that govern the relationship with the debtor but separately also as to those provisions that govern third party effects, while under the assignor’s location rule, even for a highly diverse portfolio, only the third party effects provisions of a single jurisdiction would need to be researched and complied with. The assignor’s location rule contrasts favourably to the rule in Art. 12(1) of the Rome Convention (Art. 14(1) of the Rome I Regulation). That rule, the law governing the assignment contract, provides no answer (or, more accurately, two conflicting answers) in such a case, and provides no predictability because neither assignee knows of the existence of the other’s assignment contract. Cf. Kieninger, General Principles of the law applicable to the assignment of receivables in Europe, in Basedow / Baum / Nishitani (eds.), Japanese and European Private International Law in Comparative Perspective (2008), p. 153, at p. 158 et seq.; contra Flessner / Verhagen, Assignment in European Private International Law (2006) and Flessner, Die internationale Forderungsabtretung nach der Rom IVerordnung, IPRax 2009, 35 at 41. Nevertheless, the Dutch legislator selected that rule for proprietary aspects, see Netherlands report infra, at para. I.7.d).

62 •

•

• •

Harry C. Sigman / Eva-Maria Kieninger

provides the pointer that is most likely, in the case of the assignor’s subsequent insolvency (a crucial concern of assignees), to designate the country that will also likely be the lex fori concursus according to Art. 3(1) of the EU Insolvency Regulation;189 conforms to the reasonable expectations of creditors of the assignor, especially in jurisdictions that have a registration system for security rights in receivables190 or for both outright and security transfers of receivables;191 conforms to Art. 22 of the UN Convention (offering the potential benefit of a single private international law rule worldwide); and is less likely to be set aside on the ground of public policy than a law chosen by the parties to the transaction, thus providing a greater degree of legal certainty.

It should also be noted that the law governing the assigned receivable will often be the law of the assignor’s location, as the seller of the goods or the lender will typically sell or lend on terms selecting that law to govern the assigned debt.

bb) Corollary issues

Art. 13(3) of the proposed Rome I Regulation shows that the Commission shared this view as a matter of principle. Unfortunately, the proposed text failed to deal with a number of corollary issues: (1) the sphere of application of the assignor’s location rule, especially the need to exclude from that rule particular classes of receivables or transactions, (2) the proper boundary between the law governing the receivable and the law governing priority / third party effects, (3) the proper definition of the assignor’s location, including assignors with more than one place of business – the place of central administration, and (4) the rule in the case of a cross-border change of the assignor’s location during the period between an assignment and the priority dispute – the question of the “material time”.

189

190

191

I.e., the place of the assignee’s “central administration” (the defined meaning of the assignee’s “location” under the UN Convention) should coincide precisely with the assignee’s “centre of main interests” under the Council regulation 1346 / 2000 / EC of 29 May 2000 on insolvency proceedings (OJ 30 June 2000 L 160 / 1 et seq.). See, e.g., the England and Wales report infra, at para. III.4., on registration of charges over a company’s book debts, which is applicable if the company is registered in England or Wales or if it has a place of business there. Such broadened coverage of registration is recommended in the Legislative Guide and is found in UCC Article 9.

The Law of Assignment of Receivables

63

These issues could have been solved on the basis of the Commission’s proposal and, ideally, from the standpoint of global harmonisation, could have been solved by adopting in haec verba the solutions provided in the UN Convention.

(1)

Sphere of application of the assignor’s location rule; exceptions

It is surely correct that the assignor’s location rule is not the ideal conflicts solution for all types of transactions involving the assignment of all types of receivables. Exclusions are needed to prevent the application of the otherwise sound basic assignor’s location rule to particular transactions or particular type of receivables where such application would be inappropriate. From the standpoint of drafting the Rome I Regulation, these cases might be dealt with either as exceptions, with a different rule to govern those cases where an agreement on the substitute rule could be reached, or as exclusions, leaving it to each Member State to formulate its own substitute rule in cases where an agreement could not be reached. Either way, precise drafting is required to provide the ex ante certainty essential to the commercial community, and either way could be made consistent with the UN Convention (which does not provide substitute rules for the excluded cases). Recognition of the need for exclusion from the assignor’s location rule in particular cases is reflected in Art. 4(2) of the UN Convention, which sets forth a list of exclusions of assignments of receivables arising under or from, inter alia, transactions on a regulated exchange, financial contracts192 192

Art. 5(k) of the UN Convention defines “financial contracts” in terms that were carefully negotiated with the participation of representatives of the capital markets industry, as follows: “Any spot, forward, future, option or swap transaction involving interest rates, commodities, currencies, equities, bonds, indices or any other financial instrument, any repurchase or securities lending transaction, and any other transaction similar to any transaction referred to above entered into in financial markets and any combination of the transactions mentioned above.” Thus, the definition combines a detailed specific list with the broad term “or any other financial instrument” and the additional very broad “similar transaction” catch-all, and is surely more than sufficient adequately to exclude capital markets transactions from the reach of the assignor’s location rule. Indeed, the breadth of this catch-all is emphasised in the Legislative Guide, which indicates that the catch-all is “intended to include the full range of transactions entered into in financial markets. The term is flexible. It includes any transaction entered into in financial markets under which payment rights are determined by reference to (a) underlying asset classes or (b) quantitative measures of economic or financial risk or value associated with an occurrence or contingency. Examples

64

Harry C. Sigman / Eva-Maria Kieninger

governed by netting agreements, bank deposits and various types of transactions involving “securities or other financial assets or instruments held with an intermediary” (as to the latter category, the private international law rule would be supplied by the Hague Securities Convention193). Some of these exclusions were inserted specifically in order to escape the binding conflicts rule194 in Art. 22 of the UN Convention.195 A similar list of exceptions to the general rule, which would go beyond Art. 1(2)(d) of the Rome I Regulation, might, and should, have been drawn up for Art. 13(3) of the proposal. Ideally, the Rome I Regulation should

193

194

195

are transactions under which payment rights are determined by reference to weather statistics, freight rates, emissions allowances or economic statistics.” Moreover, any capital markets transaction not embraced within the “financial contracts governed by netting agreements” exclusion would most likely be caught in one of the other listed exclusions, e.g., Art. 4(2)(e)’s exclusion of “The transfer of security rights in, sale, loan or holding of or agreement to repurchase securities or other financial assets or instruments held with an intermediary.” Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, 2002, available at http: // www.hcch.net (1 April 2009). Cf. Goode / Kanda / Kreuzer, Explanatory Report, available at http: // www. hcch.net (1 April 2009); Einsele, Das Haager Übereinkommen über das auf bestimmte Rechte im Zusammenhang mit zwischenverwahrten Wertpapieren anzuwendende Recht, WM 2003, 2349 et seq.; Kreuzer, in Ancel / Audit / Ballarino / Rom ano (eds.), Le droit international privé: esprit et methods. Mélanges en l’honneur de Paul Lagarde (2005), p. 523 et seq.; Merkt / Rossbach, Das “Übereinkommen über das auf bestimmte Rechte in Bezug auf bei einem Zwischenverwahrer sammelverwahrte Effekten anzuwendende Recht” der Haager Konferenz für Internationales Privatrecht, ZVglRWiss 102 (2003), 33 et seq.; Reuschle, Haager Übereinkommen über die auf bestimmte Rechte in Bezug auf IntermediärVerwahrte Wertpapiere anzuwendende Rechtsordnung, IPRax 2003, 495 et seq.; Reuschle, Grenzüberschreitender Effektengiroverkehr. Die Entwicklung des europäischen und internationalen Wertpapierkollisionsrechts, RabelsZ 68 (2004), 687, at 725 et seq.; Bernasconi / Sigman, The Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary (Hague Securities Convention), Unif. L. Rev. 10 (2005), 117 et seq. The UN Convention also contains, in Chapter V, a set of autonomous conflict-oflaws rules that are, by virtue of Art. 29, made optional (i.e., a State may declare that it will not be bound by Chapter V). Chapter V has contractual conflicts rules similar to those of the Rome Convention and in Art. 30(1) contains the assignor’s location rule for priority issues identical to that set forth in Art. 22 (which latter provision is not part of Chapter V and is part of the binding provisions of the UN Convention). Cf. E. Schütze, Zession und Einheitsrecht (2005) p. 86.

The Law of Assignment of Receivables

65

include appropriate exceptions196 and accompany each with an appropriate governing conflicts rule. This would in most cases be the law governing the receivable. In the Council, there was also debate on which of the two rules, the law governing the receivable or the law of the assignor’s location, should be the general rule and which one should be the exception.197 There is a simple answer to this question, starting from the basis that the assignor’s location rule is the correct one for bulk assignments, especially those including future receivables (where the contractual foundation for the receivable is not yet laid at the time of the assignment). In practice, this is the heart of receivables finance (e.g., security transactions in whatever form and all forms of factoring), the very transactions of most importance to the vast majority of the Member States, transactions that have a broad and growing reach throughout the economy of those states. It is far more difficult, if not impossible, to define these classes of cases in a satisfactory manner, whereas – as the UN Convention demonstrates – it is perfectly possible to define those capital markets and other financial contracts transactions to which the general rule should not apply.

(2)

The proper boundary between the law governing the receivable and the law governing priority / third party effects

At the ERA seminar, some participants voiced the concern that adding a third conflicts rule to the already existing rules under Art. 12(1) and (2) of the Rome Convention rules might render the private international law rules pertaining to assignments too complex. It must, however, be borne in mind that it is the unique feature of a receivable that produces the seeming complexity. Unlike a transfer of tangibles, which involves only (i) the relationship between the transferor and transferee and (ii) third party effects (and where having these two aspects dealt with under separate rules is ac196

197

In fact, in Art. 1(2), the Rome I Regulation has a list of exclusions from the material scope of the Regulation (not limited to Art. 14). The exclusion most analogous to the UN Convention’s exclusions is in Art. 1(2)(d): “obligations arising under bills of exchange, cheques and promissory notes and other negotiable instruments to the extent that the obligations under such other negotiable instruments arise out of their negotiable character.” Cf. Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Article 13(3). Comments by the Spanish Delegation, Council Document 11393 / 07 of 30 June 2007 (fn. 167 supra), and Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Article 13(3). Comments by the United Kingdom Delegation, Council Document 11393 / 07 of 9 November 2007 (fn. 169 supra).

66

Harry C. Sigman / Eva-Maria Kieninger

cepted comfortably), when the object of the transfer is a receivable, there is necessarily added to the matter (iii) the relationship of the debtor to the assignor and assignee. The need for a rule that protects the debtor vis-à-vis assignor and assignee is apparent and unavoidable. But this potential for added complexity is not a reason to forcibly apply the debtor-protection rule to third party effects issues, where different interests are at stake.198 Moreover, since the transferor-transferee rule is essentially one of party autonomy, the parties can reduce the number of potentially applicable laws to two by selecting as the law governing their contractual obligations the law that governs either the assigned receivable or the law that governs third party effects (indeed, for sound business reasons, such a selection would be quite likely in the typical receivables financing transaction. It is, in all events, always necessary to keep sharply focussed on which relationship, and thus which set of issues, is at stake in the particular case, and the failure to do so is likely to lead to confusion and error. For example, in the course of the Council deliberations, the UK presented the hypothetical case of a single high value claim held by a Russian oligarch against a domestic bank which is assigned successively by persons of different nationalities and in various commercial circumstances.199 First and foremost, it must be noted that this is a highly unusual fact pattern – it involves a form of investment account (most likely excluded from the basic rule as a “security” or a “financial asset” likely to be excluded from the basic rule), rather than the typical operating bank account over which a charge is commonly included in the collateral package being taken by a lender, particularly when the lender is the depositary that maintains the account). Second, it would otherwise likely be excluded from the basic rule as a “bank deposit”. Thus, the hypothetical is not at all persuasive on the issue of what the basic rule should look like. Arguing from the hypothetical, the question was raised whether the “poor bank” should be obliged to inquire into the effectiveness of each assignment according to each assignor’s habitual residence. The solution to this rather improbable problem is in fact very easy: the bank is the debtor of the receivable and its relationship to any and all of the assignees (and, of course, to the assignor) is covered, exclusively, by Art. 12(2) of the Rome Convention (Art. 13(2) of the proposed Rome I Regulation and Art. 14(2) of the Rome I Regulation), the law governing the assigned receivable (which, incidentally, in the case of most 198

199

Cf. Bauer, Die Forderungsabtretung im IPR (2008), p. 274 and 284 (complexity no reason to adopt Art. 12(1) or (2) Rome Convention as governing priority conflicts). See Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Proposal from the United Kingdom – Amendments to Article 13, Council Document 6197 / 07 of 9 February 2007, available online at http: // register.consilium.europa.eu / pdf / en / 07 / st06 / st06197.en07.pdf (1 April 2009).

The Law of Assignment of Receivables

67

bank accounts, would be the law designated by a choice of law clause in the deposit agreement furnished by the depositary bank200). The debtor bank has no interest in the law of the habitual residence of any of the assignors, as it is not that law that determines whom the bank must pay in order to discharge its debt. It can rely, under Arts. 12 (2) / 13(2) / 14(2), on the law governing the assigned receivable (which does not change upon assignment of the receivable) to determine to whom it must make payment in order to obtain a discharge. As long as the bank’s debt is discharged by payment in accordance with the (unchanging) law governing its obligation under the receivable, the bank has no interest in the question which, of the assignor or any of the assignees, is ultimately entitled to retain those monies (i.e., who is the “owner”).201 Moreover, if the bank has any concern about making a mistake by paying the “wrong” party from a third party effects standpoint (i.e., one other than the one entitled, as among the competing claimants, to ultimately keep the payment), it can make use of the possibility to deposit 200

201

It should be noted that this party autonomy rule has the virtues of: (i) giving the bank both maximum debtor-protection and maximum commercial flexibility; (ii) still leaving ultimate regulatory control in the hands of the appropriate agency that regulates the depositary bank, which is free to constrain the bank’s choice to the extent deemed appropriate by the regulator); (iii) providing transparency and certainty to anyone that deals with the bank account; and (iv) being consistent with the UN Convention, which, in Art. 4(2)(f), excludes bank accounts. Expressing the private international law rule as the law agreed by the parties to govern the bank account, rather than indirectly as the law governing the account, ensures that the party autonomy rule will in fact be the rule and ensures that the selected law will be objectively visible based on the text of the account agreement rather than being derived from a legal private international law analysis. This suggestion is made primarily to provide greater certainty, as it is expected that either expression of the rule would produce the same result in most cases. It is interesting to note that under English law, the debtor may well not know which of two competing assignees, has the better entitlement to ultimately keep the payment the debtor will make. This is because, under Dearle v. Hall, fn. 99 supra, the first assignee to notify prevails, but only if that assignee lacked knowledge of the prior assignment. When the debtor receives the notices, the debtor has no information concerning the knowledge of the notifying assignee. For a thorough investigation of the complexities of English priorities rules see generally Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), Part III, and for a detailed analysis of the rule in Dearle v. Hall, see id., p. 437-445. For purposes of the present analysis, the debtor’s concern is not who has priority over the claim (and thus is entitled to keep the payment), a question answered by the law applicable to priority / third party effects, but from whom can the debtor get a discharge, a question answered by the law governing the claim.

68

Harry C. Sigman / Eva-Maria Kieninger

payment with a court or other official body (a possibility which should exist everywhere, at least in all EU Member States) and let the assignees fight for it among themselves.202 Thus, the assignor’s location rule for third party effects in no way threatens the debtor.203 The question, then, is how to draw the exact boundary between the debtor protection rule and the rule relating to third party effects / priority issues.204 Ultimately, the answer is quite simple: everything that concerns the relationship between the debtor and the parties to the assignment should be submitted to the law governing the receivable; other issues not concerning the debtor fall under Art. 13(3) of the proposed Rome I Regulation. In order to prevent any litigation on this point, the European legislator should have dropped the ambiguous word “assignability” from Art. 14(2) of the Rome I Regulation and should have adopted the following wording:205 202

203

204

205

In the same sense Stoll, Die Forderungsabtretung im internationalen Privatrecht, in Ogiegly / Popiolka / Szpunara (eds.), Rozprawy prawnicze, Ksiega pamigtkowa Profesora Maksymiliana Pazdana (2005), p. 307, at p. 318 et seq. Art. 17(8) of the UN Convention specifically preserves this option, providing that the rules for discharge set forth in Art. 17 do not affect any ground on which payment “to a competent judicial or other authority, or to a public deposit fund” discharges the debtor. The Russian oligarch hypothetical is repeated in slightly modified form in Perkins, A question of priorities: choice of law and proprietary aspects of the assignment of debts, LFMR 2008, 238 et seq. It should be noted that the UK’s frequent references to bank accounts in its opposition to the assignor’s location rule are essentially beside the point, as bank accounts are likely to have a separate private international law rule in any event. See the discussion of exceptions from the general rule at VI.3.c)bb)(1) supra. The UN Convention excludes bank accounts, the Legislative Guide proposes a special rule for bank accounts, and Article 9, in UCC § 9-304, has a special rule for deposit accounts. Furthermore, as noted above, high value fixed sum deposits at a bank (i.e., not an ordinary operating account or otherwise subject to withdrawals by the account holder / assignor) are likely to be in the form of a “security” or “financial asset” (and thus likely to be submitted to a different rule) rather than in the form of an ordinary bank account. See on this question Kieninger / E. Schütze, Die Forderungsabtretung im Internationalen Privatrecht, IPRax 2005, 200, at 206 et seq., and Kieninger / Sigman, The Rome-I Proposed Regulation and the Assignment of Receivables, EuLF 2006, 1, at 8 et seq. For a discussion of the Dutch position, see Netherlands report infra, at para. I.7.a). A similar proposal which likewise avoids the ambiguous term “assignability” has been made by Bauer, Die Forderungsabtretung im IPR (2008), at p. 305: “Das Recht, dem die zu übertragende Forderung unterliegt, bestimmt, inwieweit sich Inhalt und Umfang der Forderung durch eine Forderungsübertragung

The Law of Assignment of Receivables

69

The law governing the original contract shall determine the effectiveness, as between the assignee and the debtor, of contractual limitations on assignment of the claim and of rules of law, whether statutory or otherwise, limiting assignments of claims that are designed to protect the debtor, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor’s obligations have been discharged.

The purpose and effect of this proposed language is to make clear that this rule (the law governing the receivable) applies only to matters affecting the debtor – something already explicit in the latter three issues described and now made explicit in the first issue as well.

verändern können, insbesondere, welche Einwendungen der Schuldner auch gegenüber einem neuen Gläubiger geltend machen kann. Es bestimmt außerdem, unter welchen Voraussetzungen der Schuldner, ungeachtet der Rechtslage nach Abs. 2 [priority conflicts to be governed by the law of the assignor’s location], einen Nichtberechtigten wie einen Gläubiger behandeln kann und unter welchen Voraussetzungen er den Gläubiger nicht als Gläubiger betrachten darf.” (Authors’ English translation: “The law which governs the assigned claim determines the extent to which the content and the amount of the claim can be changed as a consequence of an assignment, in particular which defences the debtor may assert against the new creditor. Notwithstanding sec. 2 [priority conflicts to be governed by law of the assignor’s location], it also determines under which conditions the debtor will be able to regard as the creditor someone who is not entitled to the claim and under which conditions the debtor must not treat the creditor as being the creditor.”) In the same sense, Sonnenberger, Randbemerkungen zum Allgemeinen Teil eines europäisierten IPR, in Baetge / von Hein / von Hinden (eds.), Die richtige Ordnung. Festschrift für Jan Kropholler zum 70. Geburtstag (2008), p. 227 at p. 230 et seq. The authors believe that Bauer’s formulation would, as compared to the authors’ proposed language set forth in the text, provide less certainty and result in less uniformity in the course of national judicial construction as it is stated at a higher level of abstraction; this is of particular significance in the context of supra-national law which must be translated into numerous languages and applied by judges trained in different legal systems. The authors also point out that Bauer’s text lacks the virtue of adhering closely to the terminology familiar from the Rome Convention and the UN Convention. Bauer’s text does correctly limit the scope of the law governing the assigned claim to matters of concern to the debtor.

70

(3)

Harry C. Sigman / Eva-Maria Kieninger

The proper definition of the assignor’s location, particularly in the case of assignors with more than one place of business – the place of central administration

In most cases of commercial significance, the assignor will be a company or other legal person. According to Art. 19(1) of the proposed Rome I Regulation, the assignor’s location will be where the company has its central administration.206 Generally, Art. 19(2) of the proposed Rome I Regulation makes an exception when a contract is concluded in the course of operation of a branch or subsidiary or if performance of the contract is made through a branch or subsidiary. In such cases, it is not the central administration of the contracting party which defines the habitual residence, but the place of business of the branch or subsidiary. Art. 19(2) of the Rome I Regulation adopted the “branch, agency or other establishment” solution. This might be the right solution for contracts in general, including the contractual aspects of assignments (Art. 14(1) of the Rome I Regulation). It is not, however, an acceptable solution with respect to third party effects of assignments of receivables. In the context of the assignor’s location rule governing priority issues (as proposed in Art. 13(3) of the proposed Rome I Regulation), this solution could lead to the simultaneous applicability of two different laws. A simple example illustrates the problem: Suppose the assignor (acting through an employee at the assignor’s central administrative office in Member State A) assigns to X all of the assignor’s present and future receivables; assume that neither of the exceptions applies. Suppose that the same assignor (acting through an employee located at the assignor’s branch in Member State B) on the same day assigns to Y in the course of the operation of the assignor’s branch in Member State B all of the assignor’s present and future receivables generated by sales concluded by that branch. In such a case, the existence of the exception leads to uncertainty as to which law determines the priority conflict between X and Y. From the perspective of X it is the law of Member State A; from the perspective of Y it is the law of Member State B. Obviously, legal certainty is not achieved if there exist simultaneously private international law rules pointing to more than one country to provide the applicable law governing priority among multiple assignees of the same receivable by a single assignor. Thus, the existence of excep206

In the proposed Rome I Regulation, only the German and French versions use the term “central administration”, the English version uses “principal establishment”. The English language version is likely to be simply a translation error. See Kieninger / Sigman, The Rome-I Proposed Regulation and the Assignment of Receivables, EuLF 2006, 1, at 3 et seq. Not only does the English phrase diverge from the other languages, but it also differs from the “central administration” standard of the UN Convention and is less likely to correspond to the “centre of main interests” standard of the EU Insolvency Regulation.

The Law of Assignment of Receivables

71

tions to the central administration definition of habitual residence prevents achievement of the certainty sought to be provided by the assignor’s location rule. The exceptions in Art. 19(2) of the Rome I Regulation should therefore be declared inapplicable to a future third party effects assignor location rule in Art. 14.207

(4)

Change of location – the question of the “material time”

A more difficult problem is presented when the assignor changes its location from one state to another between the assignment and the priority dispute. Should the rule point to the time of the first assignment or to a later time? Art. 13(3) of the proposed Rome I Regulation gave no clear answer. The English version speaks of “material time”, and the German and French texts speak of “the assignment” without specifying which of the transactions they refer to. In our opinion, the most important point is that a reasonable solution can be found. The problem should not be overstated and should not be regarded as discrediting altogether the assignor’s location as the right connecting factor.208 Both experience and common sense suggest that a change of the assignor’s location is not a major concern and is one that can in any event be ameliorated by good supplementary rules if thought necessary. While moving a company’s statutory seat may be accomplished fairly easily, at low cost and with minimal disruption to the business, moving the actual central administration is far less cheap and easy, is likely to be far more noticeable and is highly unlikely to be done without significant business reason and solely for the purpose of altering the assignor’s location for purposes of application of this rule. In the context of securitisations, the special purpose vehicle (which is the assignee of the originator, but the assignor vis-à-vis the investor), by its very nature is highly unlikely to have a legitimate business reason to change the place of its central administra207

208

The European Commission apparently failed to understand this point in its Note to UNCITRAL (cited in fn. 171 supra), instead being fixated on a desire to make the general provisions, such as the definition of “habitual residence”, in the Rome I and Rome II Regulations “coherent”, offering no reason why those exceptions could not be made inapplicable to third party effects of assignments (which have no counterpart in the Rome II Regulation). See the discussion of “habitual residence” in Kieninger / Sigman, The Rome-I Proposed Regulation and the Assignment of Receivables, EuLF 2006, 1, at 3 et seq. Contra Mangold, Die Abtretung im europäischen Kollisionsrecht (2001), p. 195; Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Article 13(3). Comments by the United Kingdom Delegation, Council Document 11393 / 07 of 9 November 2007 (fn. 169 supra).

72

Harry C. Sigman / Eva-Maria Kieninger

tion, and in any event can be subjected to numerous restrictions that would make a post-financing change highly unlikely.209 Both solutions, the time of the first assignment or the time at which the conflict is presented, have advantages and disadvantages,210 but neither of them creates insurmountable difficulties. One of them should be chosen by the European legislator, in unambiguous words. Generally speaking, the first solution places the risk on those who become assignees or creditors of the assignor after the move of the assignor’s central administration. Their priority ranking vis-à-vis a previous assignee would be governed by the law at the former (at the time of the first assignment) habitual residence of the assignor. If, for example, the central administration of the assignor moves from a jurisdiction that does not provide for registration of a security assignment to a jurisdiction that does, the later (post-move) assignee and third creditors of the assignor will not be able to discover the prior assignment by searching in the register in the new jurisdiction. The first solution is based on the argument that an assignee that protects itself at the moment of the assignment and perfects its rights pursuant to the law applicable at that time should not have to be concerned with subsequent events. This position is supported by the fact that changes in location of central administration are usually visible, so later assignees can protect themselves by taking into account the possibility of an earlier assignment made at the time the assignor was located elsewhere. Due diligence suggests that an assignee will inquire into how long the central administration of the assignor has been in its present location. It may also be argued that this solution lessens the need for monitoring by the earlier assignee. On the other hand, the change of location will be equally visible to the earlier assignee, and in the case of a bulk assignment that includes future receivables, there will be an ongoing relationship between the assignor and the earlier assignee, so monitoring likely will not be burdensome (and might be required in jurisdictions in which the transfer of a future receivable is deemed to occur at the time the receivable comes into existence). On the other hand, it is quite customary that the rights of an executing creditor are determined by the situation at the time the execution is levied, and, similarly, the position of the insolvency administrator is usually deter209

210

For example, the organisation documents of the special purpose vehicle can prohibit change of the place of central administration without unanimous consent of the governing board, which will always include an independent member; the act of changing the place of central administration without advance notice to and consent of the investor can be made an event of default. In the absence of intentional fraud, a surreptitious or unconsented to change would be very unlikely, and would also be inhibited by the reputational damage that would be suffered by all involved. See in detail Kieninger / E. Schütze, Die Forderungsabtretung im Internationalen Privatrecht, IPRax 2005, 200, at 203 et seq.

The Law of Assignment of Receivables

73

mined as of the moment of the initiation of the proceedings (so, for example, if a party that had rights in an asset of the debtor which had lapsed prior to the commencement of the insolvency or the time of execution, the fact that those rights had existed at some earlier time would not be relevant if the rights did not subsist at the later point in time). For these reasons, monitoring is likely to be done anyway, and, in any event, it should not be a significant burden, at least in the context of ongoing advances against future receivables, where there is continuing contact between the assignor and the earlier assignee. The second solution, which regards the time at which the priority conflict is presented as decisive, places the risk on the earlier assignee that its rights might be in jeopardy if the assignor moves to another jurisdiction where different substantive priority rules exist. The earlier assignee can protect itself by monitoring the assignor’s conduct and, for example, by demanding payment upon a move of the central administration or by complying with the requirements of the law of the new location for protecting its priority position.211 The second solution resembles the situation that arises in a conflit mobile concerning tangible movables. According to the universally applicable lex rei sitae rule, security rights in tangibles will be recognised at the new situs only if they conform to the new lex rei sitae. As a result, the creditor that took a security right under the old lex situs is obliged to monitor its debtor’s conduct with respect to the collateral and, as the case may be, perfect its security right under the laws of a new situs.212 In conclusion, it is unfortunate that the Member States were unable to reach a solution for priority conflicts. Yet, it is to be hoped that, with the benefit of the study which the Commission will prepare pursuant to Art. 27(2) of the Rome I Regulation, the Council will complete Art. 14 in an unambiguous way, selecting the assignor’s location rule, with appropriate definitions, exceptions and exclusions, including making a clear determination of the relevant or material time.213 211

212

213

UCC § 9-316(a) and (b) give a secured party a four-month grace period in which to

perfect its security interest in the new jurisdiction. A similar solution is suggested in the Legislative Guide. Thus, modernisation of national substantive law might provide an effective solution based on the goals of secured transactions law. Art. 19(3) of the Rome Regulation provides: “For purposes of determining the habitual residence, the relevant point in time shall be the time of the conclusion of the contract.” This provision, of course, exists in the context of rules concerned only with matters (i) between the debtor and the parties to the assignment or (ii) between the assignor and the assignee, not the third-party effects that are here under analysis. On the latter issue, the following rule is suggested by Bauer, Die Forderungsabtretung im IPR (2008), at p. 305: “Wird der Mittelpunkt der hauptsächlichen Interessen in einen anderen Staat verlegt, hat dies auf Rechte, die zum Zeitpunkt des Wechsels des Mittelpunkts der hauptsächlichen Interessen an der Forderung begründet sind, keinen Einfluss. Diese Rechte können nicht im Widerspruch zu

74

Harry C. Sigman / Eva-Maria Kieninger der Rechtsordnung dieses Staats ausgeübt werden.” (Authors’ English translation: “The transfer of the centre of main interests to another state has no effect on the rights in the receivable that exist at the time of the change of the centre of main interests. These rights cannot be enforced in contradiction to the legal system of the destination state.”) Bauer appears to be trying to strike some sort of balance but fails to provide a usable solution. If, for example, an assignor moves its central administration from Germany to the U.S. after having assigned a receivable, Bauer’s rule would lead to the continuing applicability of German law to pre-move rights, but would nevertheless provide that the assignee cannot exercise its rights in the receivable “in contradiction to” U.S. law (under which it might not enjoy priority if it were not the first assignee to file). It seems preferable to clearly provide a governing law rule pointing to a single state’s law, e.g. the law of the state in which the assignor has its central administration, and to specify the relevant time for that determination, e.g., the time at which the priority conflict is presented. The authors believe that the rule suggested by Bauer fails to produce a clear and usable result, and, more importantly, that it overstates the principle of first in time without regard to competing legitimate concerns. In the context of rights in tangibles, the familiar lex rei sitae rule does not produce an absolute result like that proposed by Bauer – rights established under the law of one state may well be affected by a movement of the tangibles to another state. Bauer offers no explanation why such an absolute result should apply in the case of receivables.

Appendix* Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) – Article 13 Comments by the Hungarian delegation 1. We welcome the proposals put forward by the Spanish delegation on two possible options for Article 13 (3). We believe that option 1 (general rule = law of the assignor’s location, special rule = law of the assigned claim) can be the basis of a compromise solution. Option 1 can be presented clearly and in a way that provides the degree of certainty needed for this provision. It must be recognised that the aim of this provision is not primarily to assist judges ex post facto to determine which law to apply, but, instead, is to provide marketplace actors and their counsel the ability to determine in advance with certainty which law will govern the third party effects of the assignment. Receivables financing is of crucial importance to the economies of most Member States, especially vital to small and medium enterprises; this can function well, for the benefit of borrowers, only if the applicable law is determinable in advance with certainty. The concerns with respect to capital market transactions are quite well addressed by option 1, which excepts from the general rule of assignor’s location a list of capital market transactions that is not only lengthy and very broad but also has built-in flexibility by virtue of the language of the definition of “financial contracts” (which includes “any other transaction similar to any transaction referred to above entered into in financial markets”). Thus, option 1 is clearly the best compromise. 2. On the other hand, we are convinced that option 2 cannot be drafted adequately. Neither the notion of ‘receivable’, nor the concept of ‘bulk assignment’ can be defined properly. Any attempted definition of these *

These comments by the Hungarian delegation may be found as Council Document 12445 / 07 of 28 August 2007, available at http: // register.consilium.eu.int / pdf / en / 07 / st12 / st12445.en07.pdf (1 April 2009).

76

Comments by the Hungarian delegation

terms is likely to be complex, lengthy and leave considerable uncertainty. Furthermore, uncertainty as to the applicable law would arise, if a prior assignment of an individually identified claim would be followed by a subsequent bulk assignment comprising also the individually identified claim. (In that case the third party effectiveness of the assignment of the individually identified claim would be governed by the law of the assigned claim under paragraphs 2 and 3 [of option 2], but as one of the claims assigned in bulk, the third party effectiveness of the same claim would be governed by the law of the assignor’s location under paragraph 4 [of option 2].) 3. Thus, we strongly support option 1. However, we suggest some amendments to the proposed ‘option 1’ text of Article 13. 3.1. Maximum certainty would be achieved, as well as better alignment with law outside the EU if the Regulation adheres to the language used in the UN Receivables Convention. The list of exceptions in Article 13 (4) should track the language of Article 4 (2) of the UN Receivables Convention. The proposal of the Spanish delegation contains two deviations from the UN text: In (b) “financial contracts governed by netting agreements” are exempted from the general rule in Article 13 (3), but the language “except the claim owed on the termination of all outstanding claims” is missing, although it can be found in Article 4 (2) b) of the UN Receivables Convention. We disagree with the omission of these words. Once netting is accomplished, the final close-out obligation is nothing but an ordinary claim. The fact that it was calculated by a netting process is irrelevant. Therefore the closeout obligation should be brought under the general rule in Article 13 (3). The aim of the exclusion is to protect the close-out netting arrangements between the parties by allowing them to rely that a single law governs their relationships arising out of all the individual transactions subject to the netting arrangement. Once the netting has been performed, however, and a single close-out obligation exists, it is an ordinary claim. This protective purpose is perfectly accomplished by the language in Article 4 (2) b) of the UN Receivables Convention (i.e. subjecting the close-out obligation to the general rule). The second deviation from the text of the UN Receivables Convention is the omission of “foreign exchange transactions” from the list in Article 13 (4). First of all, most foreign exchange transactions would normally be excluded under Article 13 (4) b) anyway, since the definition of financial contracts includes foreign exchange transactions. But it may happen that the netting understanding between the parties to foreign exchange transactions (typically financial institutions and professional traders or other repeat customers) is only informal. It was for this reason, to be absolutely certain that the general rule would not apply to foreign exchange transac-

Appendix

77

tions even in the absence of a formal netting agreement, that the additional exclusion was provided in the UN Receivables Convention. Since specifically mentioning this exclusion from the general rule of the Regulation will have minimal effect in the real world and thus would be harmless, maintaining alignment with the UN Receivables Convention and providing this extra degree of certainty to the actors in the foreign exchange market makes the addition of these few words worthwhile. 3.2. We recommend to include three definitions in Article 13, in an additional paragraph. The inclusion of the definitions of the terms “financial contracts”, “competing claimant” and “priority” would clarify the scope of Article 13 (3)-(4). The definitions should be the same as in the UN Receivables Convention (Article 5 g) for priority, k) for financial contracts and m) for competing claimant). While including the definitions verbatim does add to the length of the Regulation, the value added in increased certainty and global alignment makes it worthwhile. 3.3. We agree with the content of the proposed Article 13 (5), although we would favour the inclusion of “contractual subrogation” in the concept of assignment. That could simplify the language of the other paragraphs, and the recurring reference to “subrogated claim” could be eliminated. We propose the following wording: “For the purposes of this Article, assignment means an outright transfer, a transfer by way of security and the creation of a pledge or other security right, as well as a contractual subrogation.”

In addition, it may be advisable to relocate this provision from the end of Article 13 to the very beginning of Article 13, into a new first paragraph, since this provision defines the scope of the whole article. (That would lead to a renumbering of the following paragraphs. See our proposed text at the end of this paper.) 3.4. Beside contractual limitations on assignment, Article 13 (2) refers also to legal limitations on assignment. We suggest to limit the scope of this paragraph to those legal limitations that are designed to protect the debtor, since the focus of Article 13 (2) is on the debtor. For example, the effectiveness, as between the assignee and the debtor, of a statutory limitation on the assignment of a claim against the government (i.e. a legal limitation designed to protect the debtor, in this case the government) should be determined by the law governing the assigned claim. On the other hand, a statutory limitation on the assignment of wages, is not designed to protect the debtor (the employer who owes the wages); it is instead designed to protect the assignor – the wage earner who is the creditor of the wage

78

Comments by the Hungarian delegation

obligation – by prohibiting him from assigning away his wages. This type of legal limitation is not designed to protect the debtor and should not be governed by Article 13 (2); rather, the effectiveness of a legal limitation designed to protect the assignor should be governed by the law which applies to the assignor’s ability to make the assignment, i.e. the law governing the contract between the assignor and the assignee under the Regulation. Thus, a blanket reference to all legal limitations being governed by a single law would be wrong; instead, legal limitations must be governed by the appropriate law based on the purpose of the limitation. The reference to legal limitations in Article 13 (2) should be limited to those designed to protect the debtor. We propose the following wording: “The law governing the assigned claim shall determine the effectiveness, as between the assignee and the debtor, of contractual limitations on assignment of the claim, legal limitations on assignment of the claim that are designed to protect the debtor, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor’s obligations have been discharged.”

3.5. We propose to include an additional paragraph in order to preserve the rights under negotiable instruments of a protected holder based on the law of the location of the instrument. Article 1 of the draft Regulation provides an exclusion for negotiable instruments, but this exclusion relates only to contractual rights and obligations. Article 13 (3) provides the assignor’s location rule for third party effects of the assignment of the underlying claim and priority issues among competing claimants, among whom would be a holder of a negotiable instrument that evidenced the claim, whose rights under the law of the location of the instrument must be protected. Therefore, the Article 1 exclusion does not accomplish this purpose. The text proposed as Article 13 (8) could, alternatively, be placed, with appropriate cross-references, into Article 1 of the Regulation. 3.6. While Article 18 may be suitable for the balance of the Regulation, it is not suitable for the purposes of Article 13 (3). This may be remedied either by (A) adding the following text either to Article 13 (3) or to Article 13 in a new paragraph, or by (B) modifying Article 18 as suggested below. A) Additional sentence to Article 13 (3) or additional paragraph to Article 13: “For purposes of this Article and notwithstanding Article 18, the assignor, whether or not a natural person, has its habitual residence at its place of business, or where its central administration is exercised, if the assignor has a place

Appendix

79

of business in more than one State, or at the physical habitual residence of the assignor, if the assignor is a natural person and has no place of business.”

or B) Amendment of Article 18: “Article 18 1. For the purposes of this Regulation, the habitual residence of a person other than a natural person is its place of business or, if it has more than one place of business, the place where its central administration is exercised. For the purposes of this Regulation other than Article 13(3), if the contract is concluded in the course of the operation of a place of business other than where the central administration is exercised, or if, under the contract, performance is the responsibility of such a place of business, that place of business shall be considered the habitual residence. 2. For the purposes of this Regulation other than Art. 13(3), if the contract is concluded in the course of the business activity of a natural person, that person’s place of business shall be considered his habitual residence; otherwise, a natural person’s habitual residence is his physical habitual residence. 3. For the purposes of Art. 13(3), the habitual residence of a natural person shall be his place of business if he has one, the place of central administration if he has more than one, or his physical habitual residence, if he has no place of business.”

In the proposed text below, we illustrate option A), i.e. addition of a new paragraph to Article 13. 3.7. Although movement of central administration from one State to another is infrequent, it may occur. To deal with it in the Regulation, providing a definitive solution now for third party effects of assignments, the Regulation might simply signal that the basic rule of assignor’s habitual residence is, in a manner similar to the traditional application of the lex rei sitae rule with respect to tangibles, to be applied by looking to where the assignor’s habitual residence is ‘now’, i.e. at the time the issue is presented. This could be accomplished easily by adding to Article 13 (3), at the end of the sentence, the phrase ‘at the time the issue is presented.’

80

Comments by the Hungarian delegation

Proposed text of Article 13 Article 13 1. For purposes of this Article, assignment means an outright transfer, a transfer by way of security and the creation of a pledge or other security right, as well as a contractual subrogation. 2. The mutual obligations of [or: The relationship between] assignor and assignee under a voluntary assignment of a claim against another person (“the debtor”) shall be governed by the law which under this Regulation applies to the contract between the assignor and assignee. 3. The law governing the assigned claim shall determine the effectiveness, as between the assignee and the debtor, of contractual limitations on assignment of the claim, legal limitations on assignment of the claim that are designed to protect the debtor, the relationship between the assignee and the debtor, the conditions under which the assignment can be invoked against the debtor and whether the debtor’s obligations have been discharged.1 4. Subject to paragraph 5, the effectiveness of an assignment against third parties and the priority of the right of the assignee in the assigned claim over the right in that claim of any competing claimant are governed by the law of the State in which the assignor has its habitual residence at the time the issue is presented. 5. The law governing the assigned claim shall determine the effectiveness of the assignment against third parties and the priority of the right of the assignee over the right of any competing claimant with respect to an assigned claim arising under or from:

1

For the sake of easier readability, this paragraph could be restructured as follows: “3. The law governing the assigned claim shall determine the following matters: (a) the effectiveness, as between the assignee and the debtor, of contractual limitations on assignment of the claim, (b) the effectiveness, as between the assignee and the debtor, of legal limitations on assignment of the claim that are designed to protect the debtor, (c) the relationship between the assignee and the debtor, (d) the conditions under which the assignment can be invoked against the debtor and (e) whether the debtor’s obligations have been discharged.”

Appendix

81

(a) transactions on a regulated exchange; (b) financial contracts governed by netting agreements, except the claim owed on the termination of all outstanding transactions; (c) foreign exchange transactions; (d) inter-bank payment systems, inter-bank payment agreements or clearance and settlement systems relating to securities or other financial assets or instruments; (e) the transfer of security rights, sale, loan or holding of or agreement to repurchase securities or other financial assets or instruments held with an intermediary; (f) bank deposits; (g) a letter of credit or independent guarantee. 6. For purposes of this Article: (a) “competing claimant” means another assignee of the same claim from the same assignor, a creditor of the assignor and the insolvency administrator of the assignor; (b) “priority” means the right of a person in preference to the right of another person and, to the extent relevant for such purpose, includes the determination whether the right is a personal or a property right, whether or not it is a security right and whether any requirements necessary to render the right effective against a competing claimant have been satisfied; (c) “financial contracts” means any spot, forward, future, option or swap transaction involving interest rates, commodities, currencies, equities, bonds, indices or any other financial instrument, any repurchase or securities lending transaction, and any other transaction similar to any transaction referred to above entered into in financial markets and any combination of the transactions mentioned above; 7. For purposes of this Article and notwithstanding Article 18, the assignor, whether or not a natural person, has its habitual residence at its place of business, or where its central administration is exercised, if the assignor has a place of business in more than one State, or at the physical habitual residence of the assignor, if the assignor is a natural person and has no place of business. 8. Nothing in this Article affects the rights of any person under the law governing negotiable instruments of the State in which the negotiable instrument is located.

The Case Studies Harry C. Sigman / Eva-Maria Kieninger I.

General remarks

For each Case, the authors are requested to describe (with Code, statutory or case references) the applicable legal rules and the documentation (including additional steps such as registration, notifications, involvement of a notary, etc.) that will be required in order to protect the interest of the assignee, whether outright, by way of security or by a pledge / security interest – protection includes priority over all subsequent competing transferees, subsequent seizing creditors and the transferor’s insolvency administrator. Please indicate any conditions to collection directly from the debtor of the assigned receivable and, in the case of secured transactions, availability to the assignee of any other remedies. The scope of these Case Studies embraces three categories of transactions, all of which involve the transfer or creation, by agreement, of a proprietary right in an assigned claim, and all of which are encompassed by the term “assignment”: (1) outright transfer of ownership of the assigned receivable (herein “outright transfer”), (2) transfer of title for purpose of providing security (herein “security transfer”) and (3) creation of a security right denominated as such (herein “pledge”). In the Cases, the terms assignment, grant, sale and transfer, all refer to transfer or creation of a proprietary right in the receivable, as contrasted with the contractual undertaking to do so. Please use the foregoing terminology consistently throughout your report and at the outset please identify the terms used in your national system with precision and relate them to the foregoing terms. If your report uses other (different or additional) terminology (e.g., block discounting, factoring), please define such terms clearly and distinguish them from the terms used in the Case Studies. In order to be consistent terminologically, please use assignor, assignee and debtor to identify the three persons involved in these transactions. If there is more than one available technique for using the receivable to perform the function of providing security for an obligation, (e.g., (1) pledge or grant of a security interest and (2) transfer by way of security or fiduciary transfer), please describe each of the possibilities in each response, carefully distinguishing between them.

84

Harry C. Sigman / Eva-Maria Kieninger

Please describe in detail the national implementation of the EU Financial Collateral Arrangements Directive in your country and its impact, if any, on each Case. If there is anything unusual or otherwise noteworthy under your national law about notification to the debtor or rules pertaining to discharge of the debtor or its right of set-off, please indicate that in your report. Receivable is used in these Cases to mean a contractual monetary claim. Variation 1 introduces possible sub-classification of such receivables and variables based on other types of claims. For each Case, please give the basic rule for receivables and then note any variations that would apply with respect to claims that are not contractual monetary claims. Assume initially that all transactions are purely domestic and that no private international law issues are presented. Cross-border elements are introduced in para. IV infra. In each Case, please indicate national interpretation of the Rome Convention and / or any other governing national private international law rule. Assume no consumers are involved in any way, so no consumer protection issues are presented. Please begin with an Introduction that presents the basic structure of your legal system as concerns the subject matter; then, respond specifically to each Case. Please deal with the variations indicated below. If a single response is applicable to all Cases, indicate that in the Introduction. Otherwise, please deal with the variations Case by Case.

II.

The Case Studies

1.

Security right over “future” receivables

A and B are negotiating a contract for A to build custom-made machines for B. It is expected that the contract will provide that payments will become due monthly, based on the progress of the work. A needs financing to enable it to buy the raw materials and hire labour to do the job. A seeks financing from a lender. Can A, before the contract with B is signed, borrow and grant to the lender a security right in the claim he will have against B? Can A do so after the contract with B has been signed, but before work has begun? Clarify any references in your national law to “future” receivables.

The Case Studies

2.

85

Sale of existing receivables

M is a merchant that regularly sells goods to its customers on credit, typically providing 90-day unsecured credit. M sells outright, on a non-recourse basis, to a financial institution (e.g., a factor), for 450.000 €, 1.000 of its receivables currently having an aggregate principal balance of 500.000 €.

3.

Security right in all existing and future receivables

M, instead of selling those receivables outright, borrows from a lender and grants a security right (in any possible structure) in “all of A’s present and future receivables” (unlimited by time or aggregate amount, and with the collateral being described in the documents in the quoted language).

4.

Sale of partial undivided interest in a portfolio of receivables

L1 is a lender that has a portfolio of loans currently having an aggregate principal balance of 10.000.000 €. It wishes to sell an undivided 40 % interest in that portfolio to a bank.

5.

Security right in receivables that are secured by real rights in goods

M1 is a merchant that regularly sells goods to its customers on credit, with the purchase price payable in monthly installments over 36 months and secured on the basis of the goods sold (either by a title retention contract or by means of a nonpossessory security right in the sold goods created in M1’s favor by its customers.) M1, like M in Case 3, borrows from a lender and grants to that lender a security right in those receivables. Please include a discussion of whether (by operation of law or otherwise) the lender gets the benefit of the security that supports the receivables, how this is accomplished, what difference it makes, if any, which form of security (title retention contracts or security agreements) supports the receivables encumbered in lender’s favor.

6.

Security right in receivables that are supported by personal guaranties

Same facts as Case 5 except that M2 is a merchant whose receivables (generated by sales of goods on credit) are not secured by any form of real

86

Harry C. Sigman / Eva-Maria Kieninger

rights but instead each receivable is supported by a personal guarantee from a third party. How does this difference affect, if at all, the response to Case 5?

7.

Security right in receivables that are supported by independent undertakings

M3 is a merchant that regularly sells goods to customers outside M3’s country and its receivables are all supported by independent undertakings (letters of credit) issued by banks (assume that M3 routinely collects directly from its customers and that the letters of credit are intended as credit support, not as a vehicle for direct payment, so M3 does not expect to “present” a letter of credit absent a default by the customer). Please include a discussion of whether (by operation of law or otherwise) the lender gets the benefit of those independent undertakings and how this is accomplished. This Case is not intended to get into “transfer” (or transferability) of the letter of credit.

8.

Contractual restrictions on assignment

In Cases 2 and 3, what is the effect, if any, of a provision in the contracts that gave rise to the receivables which prohibits, restricts or requires the prior consent of the debtor to transfer? Does it make any difference whether the factor or lender knows of the existence of such provision?

9.

Legal restrictions on assignment

Same question as Case 8, except that instead of a contractual restriction there is a legal prohibition or restriction (whether statutory or judicial) on assignment? Does it make any difference whether the purpose of that rule is to protect assignors or to protect persons obligated on receivables (debtors)? Does it make any difference whether the rule is the law of the country that is the location of the assignor, the assignee or the debtor? (Please discuss this point separately at the end of your report in the context of your presentation of the private international law presentation, with a cross-reference forward.)

The Case Studies

87

10. Publicity; priorities in general In Cases 2 and 3, how do the outright buyer and the secured lender know that M has neither sold the same receivables to another outright buyer nor granted a security interest in those receivables to another lender on the preceding day? What are the rules governing the priority of the outright buyer and the secured lender as against earlier or later in time competing claimants?

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods In Case 2, what is the priority of the outright buyer of the receivables vis-à-vis a title-retaining seller whose rights in the goods sold to generate those receivables extend (by contract or under applicable law) to those receivables?

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods In Case 3, what is the priority of the secured lender vis-à-vis a title-retaining seller whose rights in the goods sold to generate those receivables extend (by contract or under applicable law) to those receivables?

13. Notification This Case requests a complete discussion of the role of notification in each national system. What constitutes a notification (form and content)? By whom must / may it be sent? In the absence of notification, what is the effect on the debtor of its knowledge of the existence of an assignment? Of an assignment of which the debtor should have known? Is notification of the assignment to the debtor required for effectiveness of the assignment inter partes, against the debtor, against third persons? Is notification relevant to any issue other than discharge of the third debtor and cutoff of the debtor’s ability to assert against the assignee subsequently arising claims that the debtor might have against the assignor?

88

Harry C. Sigman / Eva-Maria Kieninger

14. Post-insolvency collection by buyer of receivables In Case 2, after an insolvency proceeding has commenced against M, assuming that the factor has not earlier notified the debtors of the assignment, what are the rights of factor with respect to collections from debtors – those made by the factor and those made by the insolvency administrator?

15. Post-insolvency collection by pledgee of receivables Same question as Case 14, except that it involves the secured lender in Case 3 rather than the factor?

16. Securitisation L2 is a lender that wishes to securitise a portfolio of 100.000 loans. Each loan is secured by a properly recorded / registered security right over a specific piece of land. L2 may either sell the portfolio or borrow against it, in either case dealing with a special purpose vehicle (SPV) created by the financier for the purpose of the transaction. Please include a discussion of what difference it makes, if any, whether the transaction is a sale or a loan and whether it makes any difference what type of land security right is involved in the underlying loans. Please describe any special national legislation relating to securitisation.

III. Substantive Variations 1.

Nature of claim

Discuss variables based on the nature of the claim – (1) any subcategory of receivable that might give rise to a different substantive or private international law rule (e.g., bank accounts; “professional” as used in Loi Dailly; “book debts” as defined in English law; monetary claim related to land (e.g., obligation of tenant of a building to pay rent pursuant to a lease; letters of credit and independent guarantees); (2) non-contractual monetary claims; (3) non-monetary claims. Excluded from the scope of this volume are assets classified as securities, securities accounts, assets held in securities accounts, and financial contracts governed by netting agreements (except the receivable owed on the termination of all outstanding transactions).

The Case Studies

2.

89

Nature of assignor

Discuss variables based on the nature of the assignor – corporation / company or other (sole proprietor, partnership, but not consumer)

3.

Nature of assignee

Discuss variables based on the nature of the assignee – a single assignee or a group (multiple direct assignees or a single representative assignee such as a trustee or collateral agent); bank, other licensed financial institution or other.

IV. Private international law issues Discuss variables based on the assumption that the assignee is located in your country but the assignor is located in a different country. Discuss variables based on the assumption that the assignee and assignor are located in your country but the debtor that owes the assigned receivable (account debtor / third debtor) and any collateral securing the debtor’s obligation is located in a different country. Discuss variables based on the assumption that the assigned receivable is governed by the law of a country other than that in which the assignor is located. In all references, discuss the meaning of “location” if the relevant person has more than one place of business.

Germany Julia Klauer Rakob I.

Introduction

1.

Pledge vs. security transfer

Looking at today’s international financial markets, with their gigantic volume of securitised receivables, and at the current volume of secured lending and factoring transactions, receivables are traded and collateralised to an extent hardly envisaged at the end of the 19th century when the German Civil Code (Bürgerliches Gesetzbuch) was written. The Civil Code’s authors, however, did recognise the economic value of Forderungen (the right to demand payment or other action from another person) as collateral and provided for rules to subject them to security interests. Under the Civil Code, a Forderung (including Forderungen for payment, i.e. receivables) may be used as collateral by creating a pledge (Pfandrecht) over it pursuant to §§ 1273-1296 BGB. The creation of a pledge is not subject to any form requirement or registration requirement, but notification to the debtor is required. A pledge may be created by an agreement in writing or even by oral agreement, but the pledge will not be effective unless it is notified to the debtor.1 This notification requirement made pledges over receivables unattractive in the eyes of borrowers, who were reluctant to disclose to their business partners, customers or other debtors that they had pledged the claims against them. The reason usually given for this reluctance is a concern that disclosure of encumbrances may have a negative effect on the reputation and credit of the pledgor. Whether this concern was justified in 1900 when the Civil Code entered into force and is still justified today, when debt financing (with the corresponding collateral) is the rule and not the exception, remains an open question. However, in case of a pledge over receivables, the pledgor may worry not only about its credit, but about a possible irritation or confusion of the debtor about whom to pay – and a resulting reluctance to pay at all. In transactions where large volumes of receivables are used as collateral, notice to a great number of debtors becomes a logistical burden and parties may want to avoid it for that reason alone. Legal practice therefore looked for ways to create security over receivables without the cumbersome notice requirement associated with pledges. 1

§ 1280 BGB.

92

Julia Klauer Rakob

It turned to the rules for outright transfer (Abtretung, transfer) of receivables under the Civil Code, rules originally not intended to be used for secured transactions purposes. The outright transfer of a receivable under the Civil Code (e.g., in case of a sale) is done by simple agreement between assignor and assignee.2 It requires neither a particular form nor registration, and it does not require the debtor’s consent or notification to the debtor to be effective. Under these rules, a debtor that has no knowledge of an assignment is protected and may discharge its payment obligation by payment to the assignor.3 Therefore, under certain circumstances, notification may be desirable to protect the assignee’s interests. However, notification is not – as is the case with pledges – a prerequisite for an effective transfer. Because outright transfers may be effected privately and do not have to be disclosed to the debtor or the public, the rules on outright transfer were used to create a security interest in receivables originally not envisaged by the Civil Code: the security transfer (Sicherungsabtretung, assignment for security).4 To use the outright transfer rules to create a security interest, the parties combine the outright transfer of the receivable with a fiduciary agreement (Sicherungsabrede), in which the parties agree that the assignee shall hold the assigned receivables for security purposes only. Even though the assignee holds unrestricted title to the transferred receivables, it is contractually bound not to use its legal position for purposes other than as collateral for the secured claim. The resulting Sicherungsabtretung5 (security transfer) is a fiduciary security interest, because the arrangement gives the assignor greater rights than it needs for the purposes the parties pursue with their transaction. The assignee holds the excess rights associated with its position – e.g. the right to sell or transfer the receivable to a third party or to enter into agreements with the debtor which change the amount or the due date of the receivable – in trust for the assignor, and is contractually bound to exercise its rights only in line with the provisions of the fiduciary agreement. The fiduciary agreement sets out what the assignee may and may not do before and after the assignor defaults and the security right becomes enforceable.

2 3 4

5

§ 398 BGB. § 407 sec. 1 BGB. The law of security interests in tangible movables developed in the same way: the Civil Code provided for a possessory pledge to create security over these assets. To avoid the obligatory transfer of possession, legal practise turned to the rules on transfer of title which did not require transfer of possession and thus created the transfer of title for security (Sicherungsübereignung). See Rakob, Germany, in Sigman / Kieninger (eds.), Cross-Border Security over Tangibles (2007), p. 63 et seq. The term Sicherungszession is used synonymously.

Germany

93

Both options – pledge and security transfer – are available today to create a security interest over receivables. In reality, security transfers have become the predominant form of security over receivables, leaving only niches where the pledge is still in regular use: Security over shares in companies is usually taken in the form of pledges, because with a security transfer of the shares the creditor would become the shareholder for corporate law purposes, an undesirable consequence. All receivables associated with the shares, e.g. for distribution of profits or liquidation proceeds, are usually included in the pledge agreement and not made subject to a separate security transfer. The second exception to the predominance of security transfers are bank accounts. The standard form of security to encumber the rights arising under a bank account is the pledge. However, unless the security is created in favour of the depositary bank, there is no compelling reason6 for using a pledge of the bank account rather than a security transfer. Rather, legal practise retains the traditional pledge for bank accounts because there is no compelling reason to prefer a security transfer. Notice to the bank that maintains the account usually seems appropriate anyway, and the common concerns of the borrower about the notification – negative effect on credit, possible confusion of the debtor receiving the notice of pledge – have little weight when the debtor concerned is a bank. Except for receivables associated with company shares and bank accounts as collateral, security transfer has displaced the Civil Code pledge as the common form of security over receivables. German law does generally not require that security interests be registered or otherwise notified to the public. Security transfers can be done by an agreement completely privy to the parties thereto. Pledges, as said above, require notice to the debtor, but no publicity beyond that. There are also no other requirements which pertain only to security transactions. Difficult questions regarding the proper qualification of an assignment as sale or security transaction with consequences for registration requirements or for the permissibility of the transaction altogether therefore do not arise under German law.

6

Under the Insolvency Code, the collection right for pledged receivables – i.e., not receivables subject to a security transfer – lies with the pledgee rather than the insolvency administrator and thus, no collection fee is payable to the administrator. So there is indeed some economic benefit for choosing pledges rather than security transfers. However, the preference for pledges of bank accounts antedates the introduction of the collection fee by the Insolvency Code. Therefore the absence of a fee supports the traditional preference, but is hardly the motivating factor.

94

2.

Julia Klauer Rakob

Trennungs- und Abstraktionsprinzip – obligations to create security and rights in rem

To explain the mechanisms of granting security in or transferring receivables under German law, the German Trennungs- und Abstraktionsprinzip, the “principle of separation and abstraction”,7 merits a short discussion. The Abstraktionsprinzip is a principle deeply embedded in the structure of German civil law, considered by all German lawyers to be essential and the only intellectually satisfying way to deal with the issue, and is generally dear to a German lawyer’s heart – or rather, brain. German law distinguishes strictly between contracts which create obligations and contracts which change the legal status of a particular asset – e.g. a transfer of ownership or the creation of an encumbrance. A sale, for example, under German law, is a contract which typically creates two obligations: the seller becomes obliged to transfer title to and, in the case of a tangible, possession of the sold asset to the buyer, and the buyer becomes obliged to pay the purchase price. The sales contract, however, in itself, has no effect on the ownership of the sold good. The transfer of title is a question not of contractual obligations, but of rights in rem (Sachenrecht). To fulfil the obligation created by the sale agreement, title must be transferred in a second transaction. Title to a corporeal movable asset may be transferred to someone else – be it in fulfilment of an obligation arising under a sale agreement or for any other reason – by (1) concluding a second contract by which the parties agree that title passes (Einigung) and (2) physically delivering the asset to the new owner (Übergabe).8 In everyday situations, both transactions, the obligatory part and the in rem part, are concluded with the same actions. Nobody buying a loaf of bread is aware that there are both a sales contract and a contract for the transfer of title being concluded with the person behind the counter; however, legal analysis will find both contracts present in the exchange taking place. The same principle applies with respect to the transfer of receivables: If the parties enter into a contract for the sale of certain receivables, this sale agreement alone will not affect the sellers’ position as owner of the receivables. To transfer ownership, a second agreement is necessary, the transfer of the receivables. The term Abtretung refers only to the in rem transfer as such and not the contract creating the obligation to transfer receivables. A transfer of receivables requires nothing more than the agreement that title 7

8

Principle of separation (Trennungsprinzip) means that the obligatory and the in rem parts of a transaction are two separate contracts. Principle of abstraction (Abstraktionsprinzip) means that the two contracts are independent of each other, which means that a transfer of title to a buyer may be effective, even though the sales contract was not. § 929 sentence 1 BGB.

Germany

95

now passes and will often simply be contained expressly or even implied in the contract otherwise dealing with the sale aspect of the transaction. However, under German law, these two, sale and transfer, remain separate and independent transactions. This report assumes (unless otherwise indicated) a single agreement that performs both contractual and in rem tasks simultaneously and is thus immediately effective to achieve the transfer aspect of the transaction. In slight deviation from the German terminology, this single agreement will be called “transfer” rather than reserving that term for the in rem aspect only.

3.

Pledges – Creation and Enforcement

Even though pledges over receivables have become rare in practise, this paragraph will nonetheless briefly sketch their basic features, mode of creation, enforcement and the rights they give their holders against other creditors in foreclosure or insolvency proceedings. Pledges over receivables are created, as mentioned above, by simple agreement between pledgor and pledgee. No form requirements apply, a simple written or oral agreement suffices. The agreement has to identify the receivable (present or future) which is to be pledged and indicate which obligation (again, present or future) the pledge is to secure. The existence of a secured obligation is a condition sine qua non for the creation and continuing existence of a pledge. Pledges are so-called accessory security interests, which means that they are irresolvably tied to the obligation they secure. Both present and future obligations may be secured. Should it turn out that there is no current obligation (because none ever came into existence or because all secured obligations have been irreversibly discharged) or that an envisaged future obligation that the pledge was intended to secure will definitely not come into being – e.g. because the prospective parties to a loan transaction have terminated negotiations without result and it has become clear that there never will be a loan – a pledge will not come into existence or an existing pledge will terminate by effect of law. Pursuant to §1280 BGB, the creation of an effective pledge requires that the pledgor (the original creditor of the pledged receivable) notify the debtor of the pledge. Without notice, no pledge comes into existence. The pledge may be enforced when the secured obligation falls due (Pfandreife 9). The pledgee may then collect the pledged receivable10 (pro-

9 10

§ 1282 sec. 2 BGB. § 1282 BGB.

96

Julia Klauer Rakob

vided that the receivable is due and payable11). No formalities apply, and no court involvement is required. If a pledged receivable becomes payable before the secured obligation is due, the Civil Code provides that payment must be made to the pledgee and the pledgor jointly,12 and pledgee and pledgor are obliged to cooperate.13 The parties may modify this joint payment rule by agreement.14 If the pledged receivable is caught up in garnishment proceedings initiated by a different – unsecured – creditor of the pledgor, the pledgee does not have the power to stop the enforcement. However, as pledgee of the receivable, it has a right to preferential satisfaction of the secured obligation out of the proceeds of the garnishment collection proceedings (vorzugsweise Befriedigung15). The garnishing creditor will receive only what is left after the secured obligation has been satisfied. A different principle applies in the insolvency of the pledgor. The pledgee of a receivable, even though the receivable is part of the insolvency estate, may nevertheless itself collect the receivable and is not restricted to preferential satisfaction. § 166 InsO, the rule governing the insolvency administrator’s right to liquidate the assets which form the insolvency estate, sets out that the administrator may collect receivables that are subject to a security transfer. The rule does not give it the right to collect pledged receivables.16 The sources documenting the legislative history show that the difference in treatment of receivables subject to pledges and those subject to security assignments was intentional17 and cannot be attributed to sloppy drafting or editorial error. Therefore, the power to collect remains with the pledgee and is not affected by the insolvency proceedings.

4.

Security transfers – Creation and Enforcement

To make a security transfer of a receivable, the Civil Code does not require more than a simple agreement between transferor and transferee that the 11

12 13 14 15 16

17

§§ 1275, 404 BGB: The debtor may raise the same defences against the pledgee as against the pledgor, including the defence that the pledged receivable is not (yet) due. § 1281 BGB. § 1285 sec. 1 BGB. § 1284 BGB. § 805 ZPO. Münchener Kommentar zur Insolvenzordnung (MünchKommInsO) / Lwowski / Tetzlaff, Vol. 2 (2nd edn. 2008), § 166 n. 47. Even though the legislators’ intentions are quite clear, the underlying rationale of the distinction between the two types of security is not disclosed in the report. See Entwurf einer Insolvenzordnung (Begründung), BR-Drucks. 1 / 92, p. 178; for details see discussion of Case 13, para. II.13. infra.

Germany

97

receivable shall pass to the transferee. The agreement may be in writing or concluded orally, no form requirements apply. No involvement of the debtor is necessary. A security transfer does not require the debtor’s consent (however, see below for contractual prohibitions on assignment) or any notice to the debtor. A debtor that is unaware that the receivable against it has been transferred is protected under the Civil Code. Under § 407 sec. 1 BGB, the uninformed debtor may discharge the receivable by payment to the transferor. The fiduciary agreement contractually turns an outright transfer into a security device. The fiduciary agreement sets out what rights and obligations the parties have against each other. It will usually contain provisions covering the right of the transferee to notify the debtors, time and mode of enforcement and obligations of the transferor to provide adequate information about the transferred receivables. As there are no statutory provisions governing security transfers, freedom of contract prevails and the parties – within general limits – may agree as suits their needs. Usually, in the absence of a default by the transferor on its obligations to the transferee, security transfers are not disclosed to the debtors. Standard fiduciary agreements will state when the transferee is authorised to notify the debtors of the transfer – usually upon a payment default or breach of another obligation of the transferor. Until such a default occurs, the transferor remains authorised to collect the receivables and generally deal with its debtors. When the security transfer may be enforced pursuant to the terms of the fiduciary agreement – usually upon a payment default of the transferor – the transferee may notify the debtor of the transfer and may collect the receivable. No formal steps or court involvement are required. Proceeds of collection are used to satisfy the secured obligation, and surplus, if any, must be turned over to the transferor. If the transferred receivable becomes subject to garnishment in enforcement proceedings by a different – unsecured – creditor against the transferor, the transferee may stop the enforcement pursuant to § 771 ZPO.18 Enforcement law does not distinguish between security transfers and outright transfers effected for other purposes, e.g. a sale. Both types of transferees are treated as full owners of the transferred receivable. Enforcement law looks to the form of the security transfer rather than to the economic purpose of the transaction and therefore refrains from a re-characterisation of the security transfer as “pledge or right to a preference” (Pfand- oder Vorzugsrecht), which would entitle the transferee only to preferential satisfaction under § 805 ZPO rather than to a right to stop the whole proceedings which it enjoys under § 771 ZPO.

18

Herget, in Zöller (ed.), Zivilprozeßordnung (27th edn. 2009), § 771 n. 14.

98

Julia Klauer Rakob

In the insolvency of the transferor, the transferee has a right to preferential satisfaction out of the proceeds of the assigned receivable.19 Collection of the receivable, however, is part of the insolvency administrator’s job.20 The security transferee – other than a pledgee – may not itself collect the receivable. The administrator will usually deduct 9 % of the collected amount as a statutory compensation for its collection service.21 The deducted amount will go to the estate for distribution among all creditors.22

5.

Future receivables and a revolving portfolio as collateral

German law allows the assignment of future receivables, including assignments covering a revolving portfolio of receivables – e.g., all trade receivables arising out of the assignor’s business. Bulk assignments covering a portfolio of present and future receivables are called Globalzession (global assignments). To be effective in rem and effect an assignment (whether an outright transfer, a security transfer or a pledge) of the receivable, the assignment or pledge agreement of future receivables must properly describe the receivables that are covered. Courts require that the global assignment agreement must make it possible to identify the receivables affected once they come into existence (Bestimmbarkeitsgrundsatz).23 Descriptions like “all trade receivables”, “payment claims arising from the delivery of goods and rendering of services”, “all insurance claims” are sufficient to meet this test. “50 % of the trade receivables”, however, does not suffice for the proprietary aspect of the transaction, because it remains unclear exactly which receivables are to be assigned. If only a part of the future receivables are to be assigned, commercial practise often uses descriptions like “all receivables arising against customers with names from A–K.” It is also possible – if unusual – to assign each receivable in a portfo-

19 20 21

22 23

§§ 50, 51 Nr. 1 InsO. § 166 InsO. Under § 170 sec. 1 InsO, there is a flat charge of 4 % of the proceeds as compensation for any efforts of the insolvency administrator to determine that an asset is subject to a security interest and what this right implies. The determination charge is a real flat charge; actual costs incurred are not relevant. Under § 170 sec. 2 InsO, there is an additional charge of 5 % for the efforts of liquidation of the asset, however, if the insolvency administrator or the secured party can show that actual liquidation costs were higher or lower, the enforcement charge is modified accordingly. § 170 sec. 1 InsO. BGH 25 October 1984, NJW 1985, 800, at 802; Münchener Kommentar zum Bürgerlichen Gesetzbuch (MünchKommBGB) / Roth, Vol. 2 (5th edn. 2007), § 398 n. 81-83.

Germany

99

lio up to a specified percentage.24 A partial assignment will split the original receivable into two separate receivables with equal rank.25 If the assignment agreement makes it possible to identify which receivables are to be subjected to the assignment, the assignment is effective.26 Once the receivables actually come into existence, the assignee will for practical purposes need more information about its collateral. To be able to collect the receivables, the assignee will need access to names and addresses of the debtors, amounts payable, due dates and possibly further information essential to collection. The assignment agreement will therefore usually provide that the assignor is obliged to furnish and update the relevant information about the portfolio at regular intervals. By a decision dated 29 November 2007,27 the German Federal Supreme Court (Bundesgerichtshof) has expressed its views on a recent discussion concerning the insolvency administrator’s right to avoid global assignments and other forms of global security. Whether the courts of lower instance will again challenge the highest civil court’s reasoning remains to be seen. Following a case decided by the Regional Appeal Court (Oberlandesgericht) of Karlsruhe,28 several other Regional Appeal Courts29 had deviated from long-established precedents and held that security created under a global assignment agreement falls under the avoidance rules for security rights granted without a pre-existing contractual obligation. These decisions had seriously challenged the future of global assignments in Germany and had caused considerable concern in the banking industry. Under the Regional Appeal Courts’ approach, global security over receivables coming into existence within three months before insolvency was very likely to be avoidable. As a consequence, global assignment agreements would have lost a lot of their economic benefit for the secured creditor. The Federal Supreme Court’s decision has rejected the Regional Appeal Courts’ challenges and upheld the established practise. Whether this decision by the highest German court for civil cases will put an end to the discussion remains to be seen. The background of this dispute is the following: The Insolvency Code allows the insolvency administrator to avoid transfers of assets (including 24 25 26

27

28

29

MünchKommBGB / Roth, Vol. 2 (5th edn. 2007), § 398 n. 63-66. BGH 8 December 1966, BGHZ 46, 242, at 243. BGH 25 October 1984, NJW 1985, 800, at 802; MünchKommBGB / Roth, Vol. 2 (5th edn. 2007), § 398 n. 81-83. BGH 29 November 2007, NJW 2008, 430; confirmed by BGH 17 January 2008 DZWir 2008, 253. OLG Karlsruhe 8 April 2005, NZI 2006, 103 (= ZIP 2005, 1248); see also the very critical comment by Himmelsbach / Achsnick, NZI 2006, 104. OLG Dresden 13 October 2005, WM 2006, 2095; OLG München 8 June 2006, ZIP 2006, 2277, at 2278; OLG Köln 31 August 2006, ZInsO 2007, 336; OLG Köln 24 January 2007, 2 U 50 / 05, available at http: // www.justiz.nrw.de / RB / nrwe2 / index.php (1 April 2009).

100

Julia Klauer Rakob

the granting of security interests) which have been effected before applicable hardening periods have expired.30 Different rules apply depending on whether the secured creditor had a pre-existing contractual right to demand the granting (i.e. the proprietary assignment or the creation) of the security interest (kongruente Deckung, congruent coverage31) or not (inkongruente Deckung, incongruent coverage32).33 For a security interest to be avoidable, in both situations, the rules require that (1) the transfer, i.e., the creation of the security interest, occurred within three months before the application for insolvency proceedings was filed, and (2) the insolvency debtor was illiquid (zahlungsunfähig), i.e. unable to pay its debts due at the time when the security interest was created. However, if the secured creditor had a pre-existing contractual right to be granted the security interest, there is a third condition for avoidance: the creditor must have known at the time of the creation of the security interest that the debtor was illiquid. Thus, in case of congruent cover, avoidance is only possible if, roughly speaking, the secured creditor was in bad faith regarding the solvency of the assignor. Even if the secured creditor had known of the illiquidity, actual knowledge is hard to establish in court. Therefore, the administrator’s chances for successful avoidance are limited in cases were there is a pre-existing obligation, but excellent if there is no such obligation and consequently knowledge need not be established. Until this doctrine was brought into question by the rulings of the Regional Appeal Courts, the wording contained in all standard global assignment agreements to grant security over receivables of a certain description – e.g. present and future receivables owed by all customers arising from the sale of goods – was considered precise enough34 to qualify as a pre-existing obligation for the security transfer of these receivables

30

31 32 33

34

§§ 129 et seq. InsO. See Kuder, Das Ende der Globalzession?, ZInsO 2006, 1065 et seq. § 130 InsO. § 131 InsO. If, for example, a loan agreement contains a clause that the borrower is obliged to grant a mortgage in a certain lot of real estate at a certain date or at the request of the lending bank, this contractual obligation will be considered congruent cover for the mortgage granted in fulfilment of this obligation. If the agreement contains no such clause, but the bank later demands the granting of a mortgage (possibly as a reaction of the deteriorating soundness of the borrower) and the borrower agrees, there is no pre-existing contractual obligation and therefore no congruent cover for the mortgage. The description had to meet the Bestimmbarkeitstest (see supra) for the assignment of future receivables to be effective in rem, and this degree of precision was always held to be sufficient for purposes of the avoidance rules as well.

Germany

101

once they came into existence.35 Thus, “congruent cover” was found to be present in typical global assignments, and consequently, avoidance was difficult, because the administrator had to show that the assignee knew that the assignor was illiquid. The Regional Appeal Courts challenged this accepted practise and held that the obligation was not sufficiently specific in the description of the collateral to be granted to qualify as a pre-existing obligation under the avoidance rules.36 Before these judgements were rendered, the Federal Supreme Court had already ruled that the general right to demand additional security contained in the standard general business terms of the German banking industry37 is too broadly phrased and does not qualify as pre-existing obligation under the avoidance rules.38 Under § 13 of the standard general business terms, a bank may demand the granting of “bankable security” (bankmäßige Sicherheiten), i.e. the granting of security over any asset of the debtor the bank selects and of any type of security under terms common in the banking business. The Regional Appeal Courts extended the rationale of the Federal Supreme Court’s ruling to global assignments, arguing that the assignment of future receivables contained therein likewise does not give a right to the assignment of a particular receivable, as it is unclear who the debtor and what the amount will be. This analogy, however, is far from being conclusive, and has met with substantial criticism,39 because the right to future receivables under 35

36 37

38 39

Pursuant to the majority view, the relevant time for the beginning of hardening periods is not the time when an assignment agreement over future receivables is entered into, but the time when the future receivables come into existence. BGH 18 April 1991, NJW 1991, 2144, at 2145; BGH 4 December 1997, NJW 1998, 1561, at 1562. OLG Karlsruhe 8 April 2005, ZIP 2005, 1248. See § 13 Banks’ General Business Terms (Allgemeine Geschäftsbedingungen der Banken (AGB-Banken)), to be found in Baumbach / Hopt, Handelsgesetzbuch (33rd edn. 2008): Sec. 1. Right of Bank to granting of security. The Bank may demand the granting of bankable security for all claims arising out of the banking relationship […]. Sec. 2. Change in risk. If the Bank refrained in whole or in part from requiring the granting of or reinforcing of security when the claims against the customer originated, it may later demand that the claims be secured. However, it is a precondition for such demand that facts occur or become known which justify a higher risk assessment of the claims against the customer. This may in particular be the case if […]. (Translation by the author). BGH 3 December 1998, NJW 1999, 645. Furche, Die Globalzession in der Insolvenz, WM 2007, 1305 et seq.; Piekenbrock, Die Globalzession im Visier der Deckungsanfechtung, NZI 2006, 685 et seq.; Lange / Reimann, Müssen Kreditinstitute von der Globalzession Abschied nehmen?, BKR 2006, 230 et seq.; Brandt / Günther, Kongruenz von Kreditsicherheiten, BKR 2006, 232 et seq.

102

Julia Klauer Rakob

typical global assignment agreements differs from the right to demand additional security under the banks’ general business terms in at least two significant respects. First, under a global assignment, the future receivables are already assigned, i.e., the assignment is effective in rem (and the receivables will come into existence in the hands of the secured creditor), whereas the standard general business terms only give a contractual right to demand further security and a corresponding contractual obligation to grant the additional collateral. Second, the description of the receivables in a global assignment – while admittedly not specific and individualised in the sense described above – is much more specific than the general right of banks under their standard general business terms to require the granting of “bankable security” of their own choice. In the rationale of the Federal Supreme Court’s decision, the court discusses these two important differences40 pointed out by the critics of the Regional Appeal Courts’ decisions. The Federal Supreme Court rejected the line of argument suggested by the lower courts. Following the Federal Supreme Court’s judgement, global assignments – and the same should hold true for all kinds of security arrangements over revolving future assets – are not subjected to the extended right of avoidance in insolvency as suggested by the lower courts, and will therefore remain a popular security device in German lending practise.

6.

Qualifying Receivables

Under German law, basically any receivable may be pledged or subjected to a security transfer. There is no restriction to particular types of receivables, particular types of debtors or particular types of transferors. Limited exceptions exist, however. There are prohibitions on assignment (Abtretungsverbote) which render the assignment of the receivable (be it by way of an outright transfer or for security purposes) – or a pledge41 – null and without any effect. Prohibitions on assignment can result from either law or contractual agreement. § 399 BGB prohibits the assignment of rights that would change their content if they were assigned.42 This is the case if the identity of the creditor is an essential element of the particular right. 43 40 41

42 43

BGH 29 November 2007, NJW 2008, 430, at 432, 433. § 1274 sec. 2 BGB states that a right which may not be assigned may also not be subjected to a pledge. All prohibitions on assignment, be they of legal or contractual nature, therefore apply to pledges as well. § 399 1st alternative BGB. MünchKommBGB/K. P. Berger, Vol. 3 (5th edn. 2007), § 488 n. 146; RG 7 October 1907, RGZ 66, 359 (claim for disbursement of a loan granted under a special subsidy programme under which the assignee would not have qualified); BGH 13 March 1993, NJW 1993, 2232, at 2233 (claims for release from liability for damages).

Germany

103

§ 400 BGB states that receivables that are exempt from garnishment in enforcement proceedings may not be assigned. Rules under the Code of Civil Procedure are intended to ensure that enforcement proceedings do not deprive the garnished debtor of a minimum amount of support. A certain part of a debtor’s income, therefore, is not subject to garnishment. To the extent the Code of Civil Procedure exempts certain rights and receivables from being subjected to enforcement processes, these rights also may not be assigned. Patient-physician confidentiality prevents a doctor from revealing any information about his or her patients – who they are, whether they saw the doctor and were treated and for what reason. To collect the bills the doctor issued to his or her patients or their insurers, however, all these details are essential. If the doctor may not give this information to anyone else without the patient’s authorisation, the doctor may consequently not assign the receivables generated in his or her practise. The principle of patient-physician confidentiality is protected by § 203 Criminal Code and an assignment violating the confidentiality is therefore void – i.e. without effect – under § 134 BGB,44 unless the patient waives his or her privacy rights and consents to an assignment for financing or collection purposes. Data protection regulations and banking secrecy rules gave rise to a similar analysis regarding the assignment of bank loan portfolios, in particular in light of securitisation transactions. German banks sold nonperforming loans or distressed debt or simply part of their general loan portfolios to investors. The assignment of loans makes it necessary to give the assignee information about the loans assigned – their debtors, amounts, due dates, payment status, etc., information usually protected by banking secrecy rules. After the Regional Appeal Court of Frankfurt / M. held assignments of such loan receivables to be void,45 the Federal Supreme Court now seems to have settled the matter and decided that neither data protection regulations nor banking secrecy principles qualify as statutory prohibition (gesetzliches Verbot) on assignment under § 134 BGB46 and that bank loans may therefore be assigned. The second type of prohibition on assignment is a prohibition that the parties to the contract (or other relationship) giving rise to the particular receivable have agreed upon contractually. Under the Civil Code, such a contractual prohibition on assignment renders the receivable non-assignable – any attempt to assign that receivable will have no effect on the ownership of the receivable.47 44

45 46 47

BGH 10 July 1991, NJW 1991, 2955; BGH 5 December 1995, NJW 1996, 775. See Berger, Die Abtretung ärztlicher Honorarforderungen, NJW 1995, 1584 et seq. OLG Frankfurt / M. 25 May 2004, NJW 2004, 3266. BGH 27 February 2007, NJW 2007, 2106, at 2107. § 399 2nd alternative BGB. For an exception to this rule, see § 22d sec. 4 KWG: receivables entered into a refinancing register may be assigned in spite of any

104

Julia Klauer Rakob

Many written contracts contain clauses that rights under the contract may not be assigned in whole or in part. Parties thereby protect themselves against additional work for their bookkeeping personnel who have to deal with assignment notices or against a change from their current clement creditor to a more rigorous or unpleasant one. This practise created serious financing problems for businesses whose business partners used such clauses routinely and who were not powerful enough to negotiate them away, because these clauses prevented any factoring or security assignment of the resulting receivables. These concerns lead to the introduction of § 354a HGB.48 § 354a HGB constitutes an exception from the rule in § 399 BGB that a contractual prohibition on assignment renders a right non-assignable. The exception only applies to receivables resulting from commercial transactions between parties both of whom are merchants (Kaufleute). Such commercial receivables may be assigned despite contractual restrictions; however, the debtor remains entitled to discharge the receivable by payment to its original creditor, the assignor. So, even if the debtor is aware of the assignment and was formally notified, it remains entitled, if it so chooses, to ignore the assignment and pay to the original creditor. If the original creditor is undergoing insolvency proceedings, and the debtor chooses to pay to the debtor’s insolvency administrator rather than the assignee, the assignee has a right to demand that the payment be turned over to it.49 If the payment was made before insolvency proceedings were opened, however, the assignee’s claim for a turnover of the payment is treated like any unsecured creditor’s claim50 and will only be satisfied according to the applicable – usually low – quota.

7.

Financial Collateral Directive

With the implementation of the Directive on financial collateral arrangements51 in Germany,52 the legislator seems to have created a new type of collateral: financial collateral (Finanzsicherheiten). However, it seems

48

49

50 51 52

oral or implied (konkludent) contractual agreement prohibiting such assignment. The exception does not apply to written prohibitions on assignment. Introduced by Gesetz zur Änderung des D-Markbilanzgesetzes und anderer handelsrechtlicher Bestimmungen vom 25. Juli 1994 (BGBl. I 1994, 1682). Ersatzabsonderung. See Münchener Kommentar zum Handelsgesetzbuch (MünchKommHGB) / K. Schmidt, Vol. 5 (2001), § 354a n. 27. MünchKommHGB / K. Schmidt, Vol. 5 (2001), § 354a n. 27. Directive 2002 / 47 / EC of 6 June 2002 (OJ 27 June 2002 L 168 / 43 et seq.). Gesetz zur Umsetzung der Richtlinie 2002 / 47 / EG vom 6. Juni 2002 über Finanzsicherheiten vom 5. April 2004, BGBl. I 2004, 502.

Germany

105

that the new category can be accommodated quite well in the existing system.53 One of the aims of the Directive was to facilitate the granting of security where this was perceived as beneficial for the international financial markets.54 In Germany, the implementation of the Directive did not require any changes of the rules on the granting of security rights because the German approach is already very liberal and imposes few, if any, restrictions or cumbersome requirements on the granting of security rights. Under the new law, the position enjoyed by a holder of a security right in financial collateral is in some respects better than that of the holder of a security right in assets which do not qualify as financial collateral. Most importantly, in insolvency the right of the insolvency administrator to avoid the security right is severely restricted,55 the right to realise the collateral always lies with the secured creditor rather than the administrator (and consequently, the 9 % deduction rule56 is not applicable),57 and the possibility of close-out netting is extended.58 The act implementing the Directive introduced a new category of pledges, so-called “commercial pledges” in the Civil Code. The term “commercial pledges” is wider than the definition of financial collateral, but includes financial collateral pledges. Outside of insolvency, the holder of a “commercial pledge” may deviate from some restrictions on enforcement which apply to ordinary pledges in the Civil Code: If the collateral has an established price (listed or market price), the parties may agree prior to default that the commercial pledgee may realise the pledge by way of private sale (rather than the otherwise obligatory public auction) or will become the owner of the collateral. In the latter case, the secured claim is deemed satisfied up to the amount of the market price at the day when the secured claim fell due.59 For ordinary 53

54 55

56 57

58 59

For a general discussion see Obermüller / Hartenfels, Finanzsicherheiten, BKR 2004, 440 et seq. Directive 2002 / 47 / EC (fn. 51 supra), considerations (9), (10) and (13). See the newly introduced § 130 sec. 1 sentence 2 InsO and § 147 InsO with reference to the new § 81 sec. 3 sentence 2 InsO. See Obermüller / Hartenfels, Finanzsicherheiten, BKR 2004, 440, at 445. § 170 InsO. §§ 21 sec. 2 sentence 2, 166 sec. 3 no. 3 InsO, Obermüller / Hartenfels, Finanzsicherheiten, BKR 2004, 440, at 445. § 104 sec. 2 InsO. The Civil Code does not explicitly state what happens if the market price exceeds the amount of the secured claim. There are fundamentally two options to solve the issue: either, (1) the pledgee becomes full owner of the collateral and the pledgor is entitled to demand payment of the balance; or (2) pledgor and pledgee become co-owners of the collateral with shares in proportion to their respective claims. The issue is still open. There is some support in legal writing for the coownership option, relying on the principle expressed in § 1247 sentence 2 BGB,

106

Julia Klauer Rakob

pledges, an agreement on enforcement by private sale or by transfer of ownership to the pledgee may be entered into only after default.60 The introduction of the commercial pledge into the Civil Code made it easier to enforce pledges in tangibles and is probably most relevant for pledges of securities, but does not affect the enforcement of pledges in receivables – here, the enforcement mode under the Civil Code is collection, so there was no need for further simplification. The question when collateral qualifies as financial collateral is complex. The definition in § 1 sec. 17 KWG contains extensive references to the directive itself and is therefore far from self-explanatory. In substance, the qualification as financial collateral depends on the nature of three elements: the parties involved, the collateral and the secured obligations.

8.

Substantive Variations on Case Studies

German law on assignment generally does not distinguish between claims of different nature, be they contractual or not, payment claims or nonmonetary claims. Except for the rules on legal or contractual prohibitions on assignment, discussed above, which affect different types of claims in different ways, all claims are subject to the same rules. All categories of receivables or non-contractual monetary claims may be assigned for security without any particularities. Non-monetary claims are governed by the same regime. Regarding information, collection and enforcement, terms other than those used in standard assignment agreements for payment claims may be advisable, but the governing rules are identical. Under German law, the nature of the assignor or assignee, whether individuals, partnerships, corporations, banks or other financial institutions, is irrelevant to the governing law.61 However, if security over receivables or other rights is in the form of a pledge rather than in the form of a security transfer, it is relevant wheth-

60 61

under which provision pledgor and pledgee may, under certain circumstances, become co-owners of monetary proceeds of enforcement. Co-ownership in a sum of money, however, may easily be brought to an end by simply splitting the amount proportionally. As co-owners of the original collateral, the parties remain bound to each other and again have to conduct a sale (§ 753 BGB) and share the proceeds to end their relationship with respect of the collateral. From a more pragmatic point of view, the first option seems preferable. § 1259 BGB. Under the avoidance rules in § 130 InsO, there is a privilege for certain financial security interests (margin security) – potentially over rights as collateral – granted in favour of financial institutions (Finanzsicherheiten), § 130 InsO, § 1 sec. 17 KWG. But this provision is a rare exception from the general rule that the status of debtor or creditor is irrelevant.

Germany

107

er the pledgee holds the pledge as security for obligations owed to it or holds as trustee for other creditors.62 Pledges are so-called “accessory” (akzessorisch) security interests, which means, inter alia, that they may be created only in favour of and held only by the creditor of the secured obligation. In structures typical for syndicated loan agreements or secured bonds, for example, security is usually not held by the lenders themselves (or the bondholders), but by a security trustee on behalf of the lenders. As the loans have been extended by the lenders and not the security trustee, the security trustee is not the holder of the secured obligations and may therefore not hold the pledge.63

II.

Case Studies

1.

Security right over “future” receivables

In Case 1, the prospective borrower A would like to grant security over contractual payment claims which are expected to arise under a contract that is under negotiation but not yet signed. Under German law, such a future claim may be subjected to a security transfer without legal difficulties: The test whether a future claim may be assigned is whether it may be described in a way that it can be identified once it comes into existence (Bestimmbarkeitsgrundsatz). It is not required that the debtor, the amount or indeed any details of the future receivable are already determined, as long as the description is precise enough to allow determination of which receivables are covered and which are not once they come into existence. All-embracing blanket descriptions such as “all future payment claims arising from the sale of goods or rendering of services” meet the test. A and the prospective lender may therefore enter into a security transfer agreement which describes the future claim in a way that makes it identifiable – easy to do in the present circumstances, because the future debtor of the claim and the contract it will arise under are already known – transferring the future claim to the lender. Once the contract is signed and the payment claims come into existence, they will automatically arise in the 62

63

For more detail, see Rakob, Germany, in Sigman / Kieninger (eds.), Cross-Border Security over Tangibles (2007), p. 63, at p. 98 et seq. When setting up the security structure for a transaction like a secured syndicated loan or bond involving German assets as part of the security package, it is therefore advisable to avoid pledges whenever possible. The parties may use security transfers instead, or, if this is not an option, resort to what has become known as “parallel debt structure”: the creation of an artificial payment claim held by the security trustee which then serves as the obligation secured by the pledges. For more detail, see Rakob, Germany, in Sigman / Kieninger (eds.), Cross-Border Security over Tangibles (2007), p. 63, at p. 98 et seq.

108

Julia Klauer Rakob

hands of the lender. The same analysis applies if the parties, for whatever reason, should prefer a pledge rather than a security transfer. A pledge, too, may be created in a future claim. Whether work on the work contract has begun is irrelevant under German law. It is sufficient if enough is known about the future claim to enable one to describe it in a way that makes it identifiable. Further steps that bring the claim into existence are not pre-conditions to assignment.

2.

Sale of existing receivables

M may sell its portfolio of trade receivables arising under sale agreements with its customers to a factor. The only requirement is that the agreement must identify which of M’s receivables (if M has more than the 1000 receivables M would like to sell) are assigned to the factor. There is no issue whether the sale is a disguised security transaction or similar concern, because a qualification as security transaction would not trigger any different requirements.

3.

Security right in all existing and future receivables

M may grant a security right in “all of M’s present and future receivables” without any restriction. Usually, parties will use a security transfer. This requires only a simple agreement sufficiently identifying the transferred receivables. The description of the collateral as “all present and future receivables” in the agreement is accepted as sufficient identification of the transferred receivables. The transfer agreement is usually set forth in writing, even though there is no legal requirement to do so. The transfer takes effect immediately, which is to say that when the future receivables come into existence, they are immediately owned by the assignee, without ever having existed in the hands of the transferor. It is possible, if highly unusual, for the parties to create a pledge rather than a security transfer. A pledge would require that all debtors be notified.

4.

Sale of partial undivided interest in a portfolio of receivables

If a lender wishes to sell only a portion of a portfolio of receivables, there are two available techniques. The lender may decide which receivables out of the portfolio it would like to sell and identify them in the assignment agreement. Alternatively, it may decide to sell an undivided interest in each receivable. By this technique, the receivable is split into two independent

Germany

109

receivables. Even though such partial transfers are legally possible, they are not common in practise.

5.

Security right in receivables that are secured by real rights in goods

In the Case 5 scenario, M1’s claim for the purchase price of the goods would usually be secured by a simple retention of title arrangement (Eigentumsvorbehalt). This is done by inserting a clause in the sale agreement stating that title in the sold goods shall pass to the buyer only upon full payment of the purchase price. No further actions are required to establish that arrangement. To use the receivables arising under the sale contracts as collateral for a bank loan, M1 would usually grant security over the receivables by way of a security transfer. To give the lender the benefit of the retained title in the sold goods, M1 must separately transfer its retained title to the lender by contract; the retained title to the goods does not pass to the lender by operation of law. On the other hand, under German law accessory security interests do by operation of law follow an assignment of the claim they secure. § 401 sec. 1 BGB provides that accessory security interests, i.e. real estate mortgages (Hypotheken), pledges (Pfandrechte) and suretyships (Bürgschaften), pass automatically to the assignee upon assignment of the secured claim. § 401 BGB does not apply to non-accessory security devices like retention of title, security transfer of title (Sicherungsübereignung) or security transfer of rights (Sicherungsabtretung). Courts have held that § 401 sec. 1 BGB does give the assignee a right to demand transfer of existing non-accessory security rights from the assignor.64 They have, however, not extended the transfer by operation of law rule to non-accessory security devices. It is not a realistic option for the seller of goods to use the accessory pledge as a device to secure payment of the purchase price for sold goods, because a pledge would require that the seller remain in possession of the sold goods. In those limited situations where pledges in tangible movables or rights are used, the holder of the pledge may assign the secured claim and the pledge would pass to the assignee by operation of law. A separate transfer would be neither necessary nor possible.

64

BGH 27 March 1981, BGHZ 80, 228, at 232; BGH 11 January 1990, BGHZ 110, 41,

at 43.

110

6.

Julia Klauer Rakob

Security right in receivables that are supported by personal guaranties

If an assigned claim is supported by a personal guarantee of a third party, the question whether the guarantee passes to the assignee by operation of law depends on the classification of the guarantee. If the guarantee falls within the category of accessory security interests, § 401 sec. 1 BGB provides that it will pass to the assignee by operation of law. If it is not an accessory right, the assignor would have to expressly assign the rights under the guarantee to the assignee. Absent an express assignment of the guarantee, the assignee does not have the benefit of the guarantee. The question whether a personal guarantee is accessory or not is sometimes not easy to answer: German law provides for two types of personal security, Bürgschaften65 and Garantien66. In short, Bürgschaften are accessory,67 Garantien are not. (“Guarantee” is an adequate translation for both devices. Bürgschaft is sometimes also translated as “suretyship”, to mark the difference). The essential difference between the two devices is their connection with the claim they secure. A personal security is considered a Bürgschaft if the parties intended to create a security device which exists only if and to the extent the secured claim exists. In this case, the guarantor is obliged to pay only if the secured claim came into existence and still exists. If the beneficiary of a Bürgschaft is trying to enforce the Bürgschaft, it will have to establish both the existence of the Bürgschaft and the existence of the underlying secured claim in order to succeed. The personal security is considered a Garantie, on the other hand, if the parties intended to create an absolute payment obligation, without a possible defence that the secured claim does not exist, was discharged or is otherwise subject to defences of the debtor.68 Sometimes, if the parties are aware of the two concepts and know the differences, the name chosen for their agreement gives some indication about their intentions. With less sophisticated parties, the words used are usually not considered a particularly strong indication which device they really intended to create. If the facts do not allow inferring what the parties’ intention really was, courts tend to construe the agreement as a Bürgschaft rather than as a Garantie,69 because the former device is less drastic in effect for the guarantor.

65 66

67 68 69

§ 765 BGB et seq. Garantien are creatures of contract and not governed explicitly by any provision in the Civil Code. See § 401 sec. 1 BGB. BGH 13 June 1996, NJW 1996, 2569, at 2570. BGH 8 March 1967, NJW 1967, 1020; BGH 19 September 1985, NJW 1986, 580.

Germany

7.

111

Security right in receivables that are supported by independent undertakings

If an assigned receivable is supported by a letter of credit, the assignee will not automatically receive the benefit of the security. Under German law, letters of credit are non-statutory devices and are purely creatures of contract. They are not mentioned in § 401 sec. 1 BGB, the rule which governs the passing by operation of law of accessory security rights in case of assignment of the secured claim. Letters of credit are non-accessory security devices and therefore their benefit does not pass automatically from assignor to assignee. However, the rights of a beneficiary under a letter of credit may be used as collateral and may be subjected to a security transfer just like any other claim. In case of a portfolio of receivables secured by accompanying letters of credit, the parties may include the payment claims which may arise under the letters of credit by including them in the transfer agreement.

8.

Contractual restrictions on assignment

If the contract giving rise to a receivable prohibits or restricts the assignment of the receivable, the receivable becomes non-assignable or assignable only under the conditions set out in the contract. If the contract states that a payment claim may be assigned only with the consent of the debtor, any assignment without such consent would have no effect on the debtor or the ownership of the claim. As set out in the general remarks above,70 § 354a HGB contains an important exception to this rule that contractual prohibitions on assignment have in rem effect and render receivables non-assignable; if the contract which gave rise to the receivable is a commercial transaction for both parties involved, an assignment in breach of a contractual prohibition is nonetheless effective. To qualify as a commercial transaction (Handelsgeschäft),71 both parties have to be merchants (Kaufleute)72 who concluded the contract as part of their business activities. By putting the 70 71 72

See para. I.6. supra. Defined in § 343 HGB. Defined in §§ 1-7 HGB. A merchant is a person who runs a business. A business is any operation that was set up for at least a certain period of time with the intention to realise profits. If the operation is too small to require state of the art business organisation (bookkeeping, etc.), the person running the business does not automatically qualify as merchant under the HGB rules, but may opt for merchant status by registering in the commercial register. Legal persons, e.g., incorporated entities, always qualify as merchants, regardless of the nature of their activities.

112

Julia Klauer Rakob

prohibition or restriction on assignment in the contract, the debtor tried to protect its interest in keeping the same creditor. The underlying motive therefor may be either an interest to avoid additional time and effort for the bookkeeping department that has to keep track of changes of creditors, or a preference for the particular original creditor. The debtor may wish to be able to rely on the indulgence or sympathy of the original creditor and may not like the prospect of a confrontation with, say, a professional collection agency. § 354a HGB honours the former concern, but not the latter: Under § 354a sentence 2 HGB, the debtor remains entitled to make payments to the original creditor and may instruct its bookkeeping department to simply ignore any notice of assignment they may receive. However, the debtor has to accept that the authority to decide on enforcement has shifted to the assignee as the new owner. In this respect, § 354a HGB leaves the debtor in no better position than the debtor of a pledged or transferred receivable who did not prohibit a transfer in its contract. The assignee’s knowledge of the contractual prohibition on assignment is irrelevant.

9.

Legal restrictions on assignment

§ 354a HGB, the provision stating the exception to the rule that a prohibition on assignment effectively prevents any assignment of the affected receivable, pertains only to contractual prohibitions. Statutory or judicial prohibitions (e.g. the ban on assignments of claims exempt from garnishment) are not subject to any exceptions. An assignment in breach of a legal prohibition does not have any effect. It is not relevant whether the particular prohibition aims at protecting the assignor or the debtor.

10. Publicity; priorities in general Neither outright or security transfers nor pledges of receivables are subject to any registration requirement or any other mechanism to make the transaction discoverable by the public in general or interested parties in particular. As a consequence of this approach, there is no way a factor or secured lender could achieve certainty that the receivables it is considering have not previously been assigned to someone else. Lenders and factors rely on representations that the assignor owns the receivables and that the receivables are unencumbered. There is no public debate about clandestine assignments of receivables and no apparent lobbying or push for a change in this regard. It therefore seems that the German banking and factoring industry is satisfied with the situation and does not perceive the risks of

Germany

113

fraudulent assignors or those that mistakenly make multiple assignments as a serious concern. In case the receivables which the assignor purports to transfer to an outright buyer or a secured lender have been assigned earlier, the assignor’s hands are empty and the later assignment gives the subsequent assignee no rights in the receivables. German law follows a strict first-in-time principle with respect to transfers.73 However, even though the later assignee does not hold any rights in those receivables, a bona fide debtor is protected under § 408, 407 BGB; if the debtor is unaware of the earlier assignment and consequently pays to a later assignee that does notify the debtor, the debtor’s obligation on the receivable is discharged. If an assignee looks for protection against the risk of having to pursue a later assignee that obtains payment from the debtor, notice to the debtor will destroy the debtors’ ability to discharge the debt by payment to the later assignee. For exceptions to the priority rules described in the preceding discussion, see Case 11 infra.

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Under a so-called extended retention of title arrangement (verlängerter Eigentumsvorbehalt), simple retention of title to the sold goods is combined with a security transfer of any receivables generated by a future resale of the goods. This arrangement gives the original seller a security interest in the resale receivable which it would not otherwise have under German law. If the buyer of goods under an extended retention of title arrangement sells to a factor the receivables resulting from the buyer’s resale, of the goods, the question arises which of the two transferees, the retention of title seller or the factor, prevails. The basic approach of German law to priority conflicts in general is the first-in-time rule: if a receivable has been assigned twice, the first assignment is effective, and the later one void because at the time of the second assignment, the assignor had nothing left to assign. In case of the seller-factor-conflict, however, the courts’ analysis is more complex: Under a standard extended retention of title arrangement, the resale receivables are transferred for security purposes to the original seller. In the absence of default or insolvency, the buyer remains authorised to collect the receivables. The Federal Supreme Court holds that the authorisation to collect the receivables extends to a “collection” by way of factoring. Under the factoring agreement, the buyer gives up ownership of the receivable in exchange for cash. The court reasons that, in case of a 73

It is, however, possible to create several pledges in the same collateral. A later pledge will simply take a junior rank to the earlier one, § 1209 BGB.

114

Julia Klauer Rakob

“true”, (i.e. non-recourse) factoring arrangement where the factor takes the risk that the receivables are not collectible (echtes Factoring), the retention of title seller is in no worse position than it would have been if the buyer had collected the receivable from its customer. The authorisation to collect a receivable is therefore construed to also imply an authorisation to transfer the receivable (which is at that time held by the seller, not the buyer) to a factor on a non-recourse basis. Consequently, under this analysis, the factor prevails in the conflict with the original seller. This reasoning, however, is not extended to the case where the seller / assignor borrows on the security of the receivable and gets an identical sum of cash from the lender (see Case 12 infra). It also does not extend to cases where the factor is entitled to transfer uncollectible receivables back to the seller (unechtes Factoring).

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods In the conflict between a seller of goods secured by an extended retention of title and a lender to the buyer of the goods (the lender typically being a bank) secured by a global security transfer agreement, the Federal Supreme Court again deviated from the basic first-in-time approach74 and decided in favour of the seller. The court found that a bank acts unconscionably, and thus violates § 138 BGB, when it accepts the global security transfer, because it is aware that its customer will not be able to obtain further deliveries without agreeing to retention of title clauses in their extended form, and thus induces the customer to breach its future contracts with suppliers.75 § 138 BGB states that contracts contra bonos mores, against good morals, are void. With the global security transfer agreement in favour of the bank being void, the security transfer to the title-retaining seller prevails in the seller – lender conflict. This line of argument has not convinced all critical voices, as it may easily be turned around: retention of title sellers know that their customers will not receive bank credit without global security transfers of receivables, and extended retention of title clauses will therefore oblige them to breach their contracts with financing banks – but the Federal Supreme Court was not persuaded. The underlying motivation for the Federal Supreme Courts’ holdings may be an implicit preference for the sellers of goods as an industry. Usually smaller in size, very often typical German Mittelstand, courts tend to be more sympathetic with the sellers’ concerns than with banks,

74

75

BGH 30 April 1959, BGHZ 30, 149, at 153. For a recent case, see BGH 14 July 2004, WM 2005, 378, at 379. Further references at Reinicke / Tiedtke, Kreditsicherung

(5th edn. 2006), p. 953 fn. 170. BGH 30 April 1959, BGHZ 30, 149, at 153.

Germany

115

which are perceived as powerful big businesses, well able to protect their interests themselves.

13. Notification German law does not require notification, knowledge or consent of the debtor for a transfer of receivables to be effective. The law does not distinguish between different types of parties, and the transfer is effective inter omnia. The concepts of either notification or knowledge, however, are part of certain provisions on the protection of the debtor: § 409 BGB states that a debtor may rely on a formal notification of assignment (Abtretungsanzeige), even if the assignment never took place or was not effective for other reasons. To have this effect, the notification need not be in writing, but must originate from the assignor. The assignor may authorise the assignee to notify the debtor (just as he may authorise any other person to take care of legal matters on its behalf under a power of attorney), but the assignee may not act upon its own initiative. Abtretungsanzeigen do not actually have to be read by the debtor to take effect – it is sufficient if the notification has been received by the debtor so that one may assume that it would be read under regular circumstances. Under §§ 406, 407 and 408 BGB, the relevant test is whether the debtor had knowledge (Kenntnis) of the assignment. § 406 BGB deals with set off against the assignee, the new creditor. The rule looks to the situation where the debtor is aware of the assignment, but wants to discharge its debt by setting off against it a counterclaim which it holds against its old creditor, the assignor. The rule states that the debtor may set off against its debt a counterclaim which it holds against the assignor unless the debtor had knowledge of the assignment when it acquired its counterclaim. § 407 BGB deals with discharge of the assigned receivable (by payment or set off) and transactions which have a legal effect on the assigned receivable. The debtor may discharge its debt by payment to the assignor and may validly enter into agreements affecting the receivable – e.g. a release or deferral of payment – with the assignor, unless it knew of the assignment. § 408 BGB covers double assignments. If the assignor has assigned the same receivable twice to different assignees, the debtor may discharge its debt by payment to the second assignee (who, as a consequence of the first-in-time principle, does not own the receivable), unless the debtor knew of the earlier assignment to the first assignee. In these provisions, knowledge is construed to mean actual knowledge of the assignment.76 It is not relevant how the debtor received actual knowledge. Knowledge of the circumstances of the assignment suffices. Difficulties sometimes arise when the debtor has received notification of the 76

MünchKommBGB / Roth, Vol. 2 (5th edn. 2007), § 407 n. 14 et seq.

116

Julia Klauer Rakob

assignment which is unsupported by evidence and may not be particularly credible. Reasonable doubts about the correctness of the information will usually protect the debtor from the charge that it knew of the assignment. However, a formal notification which meets the requirements of § 409 BGB is always sufficient to establish knowledge. Consequently, if the debtor receives the information about the assignment from the assignor (writing is not required), knowledge will be established. As set out above, however, a notification under § 409 BGB does not have to be read to be effective. As §§ 406-408 BGB require knowledge, not notification, an unopened letter does not seem to be able to establish the debtor’s knowledge for purposes of those three provisions. However, the receipt of a written notification will shift the burden of proof to the debtor and knowledge will be deemed to exist unless the debtor shows the contrary. Even then, the debtor’s argument that he was not aware of the content of the notification may be dismissed by the court as unconscionable if the debtor itself is responsible for its unawareness. The situation is more difficult if the information concerning the assignment originates from the assignee rather than the assignor. Usually, the debtor does not have to believe information by the assignee unless it is supported by evidence (e.g. a copy of the assignment agreement). Exceptions may apply if the assignee is deemed to be particularly credible, e.g. public authorities. The creation of a pledge of a receivable requires notification (Anzeige) to the debtor under § 1280 BGB. The same criteria apply as for the notification under § 409 BGB discussed above. Notification must be given by the pledgor (or, if given by the pledgee or a third party, it must be authorised by the pledgor), but need not be in writing or meet any other form requirements. There was some discussion among legal writers whether the rule for pledges of receivables in § 166 InsO – collection by the pledgee rather than the insolvency administrator – should not be extended to security transfers which have been notified to the debtor. The rationale for the pledgee’s right to collect given in the materials documenting the legislative history of the rule was that the identity of the pledgee and the fact that the receivable is subject to a security interest is already known to the debtor. Collection would therefore not be made any easier or simpler if undertaken by the administrator rather than the pledgee. The same reasoning seems to apply to “open”, i.e. notified, security transfers; however, courts have so far declined to make that analogy.77

77

BGH 11 July 2002, NJW 2002, 3475; BGH 20 February 2002, BGHZ 154, 72, at

76.

Germany

117

14. Post-insolvency collection by buyer of receivables For insolvency law purposes, German law considers the outright sale of receivables – whether or not notified to the debtor – no different from the sale of apples. After the receivables have been transferred to the factor, they are no longer part of the transferor’s assets and do not fall within the insolvency estate. The insolvency administrator is therefore not authorised to collect or otherwise interfere with the receivables.

15. Post-insolvency collection by pledgee of receivables Insolvency law distinguishes between a security transfer to a lender and a sale of receivables to a factor.78 If the transaction is classified as a security transfer, the receivables remain part of the insolvency estate. Under the Insolvency Code, the insolvency administrator is entitled to collect the receivables.79 The lender may demand preferential satisfaction of its secured claims out of the proceeds.80 Surplus, if any, goes to the estate and will be distributed among all insolvency creditors. The administrator will deduct 9 % of the proceeds as liquidated compensation for its efforts in realising the collateral.81 The deducted amount goes to the estate for the benefit of all creditors.

16. Securitisation German law, for historical reasons, offers two types of security interests in land for the parties to choose from: either a Hypothek82 or a Grundschuld.83 Applicable rules are similar,84 with only one major difference: Hypothek is an accessory security right,85 Grundschuld is not. Because accessory rights tend to create more problems for the secured party, as issues of the validity and enforceability of the secured obligation may burden the enforcement process, banks generally prefer Grundschulden. Borrowers typically have

78

79 80 81 82 83 84 85

With respect to this scenario, however, the distinction between echtem und unechtem Factoring (factoring without / with recourse to the transferor in case the receivables are not collectible) is not relevant. § 166 sec. 1 InsO. §§ 50, 51 no. 1 InsO. § 171 InsO. For details on the flat charge, see para. I.4. supra. §§ 1113 et seq. BGB. §§ 1191 et seq. BGB. § 1192 BGB. § 1153 BGB.

118

Julia Klauer Rakob

little say in the choice of security devices, and therefore Grundschulden have become the predominant form of real estate security in Germany. A loan portfolio secured by real estate security will therefore almost certainly be secured with Grundschulden exclusively. If L2 assigns its payment claims under the loans to a special purpose vehicle (SPV), the Grundschulden will not follow automatically, whether the claims are assigned by way of a sale or a security assignment. Either way, Grundschulden must be transferred separately to the assignee of the secured claims. Grundschulden come in two varieties, depending on what the parties chose: either as Briefgrundschulden86 (certificated mortgages), which may be transferred by handing over the mortgage certificate, without registration of the transfer in the real estate register,87 or Buchgrundschulden (book-entry mortgages), for which no certificate exists and which may be transferred only by an entry in the real estate register.88 As book-entry mortgages are cheaper to grant than certificated mortgages (there is an extra fee for the issuing of the certificate), book entry mortgages were much more common than certificated mortgages. Apparently, with respect to commercial mortgages, market practice has changed. Here, banks have successfully pushed for certificated mortgages which are much easier and cheaper to transfer and therefore better suited for securitisation. Residential mortgages, however, are still usually granted in the form of book-entry mortgages. In case of certificated mortgages, a transfer of the mortgages to the SPV or security trustee is not difficult; the mortgage certificates must be handed over to the SPV or trustee and there must be a contractual agreement that the mortgages shall pass. The securitisation of residential mortgages, usually in the form of bookentry mortgages, is much more difficult: A transfer of 100.000 mortgages would require 100.000 entries in the competent local real estate registers, a very time-consuming and costly process. As these practical difficulties render a real transfer of the mortgages unrealistic, the parties agreed that the mortgages would only be transferred upon the occurrence of certain trigger events. For the time before transfer, they tried to create a trust relationship under which the lender holds the mortgages in trust for the SPV. However, this trust solution failed for reasons of the German law of trusts, the principle of direct transfer (Unmittelbarkeitsprinzip): A trust in an asset is only insolvency remote in the insolvency of the trustee if the trustee has received the asset directly from the beneficiary of the trust, but not if the trust relationship relates to an asset which the trustee was

86 87 88

§§ 1192 sec. 1, 1116 BGB. §§ 1192 sec. 1, 1153 sec. 1, 1154 sec. 1 BGB. §§ 1192 sec. 1, 1153 sec. 1, 1154 sec. 3, 873 sec. 1 BGB.

Germany

119

holding anyway.89 In the residential mortgage securitisation scenario, the lender was supposed to hold the mortgages which were originally created in its favour in trust for the SPV (or the security trustee or the bondholders). As the consequence of the rules on trust, the mortgages would have been part of the estate in the insolvency of the lender and the beneficiary of the trust would have had no right to the mortgages or any proceeds thereof. Within this legal framework, any residential mortgage securitisation would be burdened with the insolvency risk of the originator, a German peculiarity hardly attractive to the capital markets. De lega lata, a solution seemed impossible. A recent change in German insolvency law therefore introduced a so-called “refinancing register”,90 which resolved the issue. It is possible to enter the contractual right to demand transfer of the mortgages in the refinancing register. In the insolvency of the mortgage lender, this registered right prevails and the beneficiary of the trust may demand that the insolvency administrator transfer the mortgages to the beneficiary. With this refinancing register, residential mortgage securitisations are no longer burdened with the risk of a loss of the mortgages in case of an insolvency of the lender.

III. Private international law issues 1.

Basic Approach

Art. 33 EGBGB is the relevant rule governing which law applies to the assignment of receivables. The provision is based on Art. 12 of the Rome Convention.91 The Rome Convention is not directly applicable in Germany. Rather, German legislation chose to meet the requirements of the Convention by incorporating its provisions in the EGBGB, where national private international law rules are codified. Art. 36 EGBGB states that even though the Convention does not apply within Germany, the respective provisions in the EGBGB shall be construed in accordance with the construction of the principles of the Convention in other member states. In spite of this commitment to uniform construction and application, the German understanding of the provision on assignment in the Rome Convention and the identical provision in the EGBGB differs from the interpretation given to the rule in other member states:

89 90

91

BGH 19 November 1992, NJW-RR 1993, 301. Refinanzierungsregister, §§ 22a-22o KWG. Refinancing registers are operated

by banks and are tailored to solve the mortgage transfer issue. It does not seem likely that they will acquire greater relevance beyond that purpose. OJ 9 October 1980 L 266 / 1; consolidated version OJ 31 December 2005 C 334 / 1.

120

Julia Klauer Rakob

The German understanding of the rule is a direct result of the German Trennungs- und Abstraktionsprinzip as briefly discussed in para. I.2. supra. As a consequence of this principle, the granting of security over receivables consists of two distinct and separate transactions: There will be a contract creating the assignor’s or pledgor’s obligation to grant security, and there will be a second contract which effects the desired result – the assignment of the receivables as such. This fundamental concept of obligatory contracts and contracts in rem shapes the majority views’ understanding of the private international law rules on the assignment of receivables. Art. 12 of the Rome Convention, and accordingly Art. 33 EGBGB, deals with assignment of receivables in two separate sections. Section 1 deals with obligations between assignor and assignee, and states that these obligations are governed by the law governing the contract between the two parties. This is generally understood to mean the contractual obligation to assign receivables – together with the obligation to pay the purchase price, representations on the quality of the assigned right, provisions on default and whatever else the parties may have agreed upon. This is, to a German lawyer, a contract creating obligations, and the applicable law to this contract is to be determined according to general principles relating to contractual obligations.92 The parties may choose the applicable law,93 and in the absence of such a choice, the law of the place which is the most closely connected to the transaction applies.94 In case of a sale, the place considered to have the closest connection will usually be the location of the seller.95 Section 2 states that the law governing the receivable to which the assignment relates determines questions of assignability and the relationship between the assignee and the debtor. Given the underlying structure of German law, the predominant view taken by courts96 and scholarly writings understands this second section as referring to the contract in rem, the actual transfer of ownership in the receivable by assignment. The actual assignment of the receivable is therefore not open to the parties’ choice

92 93 94 95

96

BGH 26 July 2004, NJW-RR 2005, 206, at 208. § 27 EBGBG. § 28 EGBGB. Palandt / Thorn (66th edn. 2009), (IPR) EGBGB 28 n. 8 et seq. (with further references); but see BGH 26 July 2004, NJW-RR 2005, 206 (Sale of a receivable which

was secured by a mortgage over land: the Federal Supreme Court did not apply Art. 28 sec. 2 EGBGB which would have led to the location of the seller, but instead Art. 28 sec. 5 EGBGB: the court considered the contract to be more closely connected with the state in which the immovable was located.) BGH 20 June 1990, BGHZ 111, 376, at 379; BGH 26 November 1990, NJW 1991, 1414; BGH 8 December 1998, NJW 1999, 940.

Germany

121

of the applicable law, but is always subject to the law which governs the receivable to which the assignment relates.97 This understanding of section 2 as referring to the in rem transfer of the receivable as such, however, is not undisputed.98 Some commentators argue that the question of the law applicable to the assignment as such is not addressed by Art. 33 EGBGB.99 Rather, section 2 is viewed as giving only a list of issues which are to be governed by the law governing the receivable for the protection of the debtor. Alternatively, it is argued, the assignment should be governed either by the law at the assignor’s location100 or treated pursuant to the rules in Art 33 sec. 1 EGBGB,101 which means that the parties could choose the applicable law to the assignment as such as well as to the contract of sale. But in spite of the arguments raised in academic debate, the Federal Supreme Court has so far remained unmoved and maintained its position. The question whether a receivable can be assigned is generally answered by the law governing the receivable.102 This rule applies to contractual as well as statutory prohibitions on assignment, including, e.g. the prohibition to assign claims which are exempt from garnishment under the German Civil Code. German private international law does not distinguish in this respect between prohibitions protecting the debtor or third parties. The law governing the receivable is relevant to the question of assignability in general, regardless of the nature or purpose of the respective limitation. As a rule, legal prohibitions resulting from the private law at the location of the assignor, assignee or debtor are therefore irrelevant if this is not at the same time the law governing the assigned claim. There may possibly be exceptions for prohibitions resulting from public law – e.g. like embargo legislation which bars the assignor from trading with the country of the assignee – or the option to invoke the ordre public principle to avoid results which seem unsupportable from a German basic rights perspective, but I am not aware of any case in point.

97

98

99

100

101

102

See MünchKommBGB / Martiny, Vol. 10 (4. edn. 2006), Art. 33 EGBGB n. 12, with further references. For extensive references, see Kieninger / Schütze, Die Forderungsabtretung im Internationalen Privatrecht, IPRax 2005, 200 et seq. Kieninger, Das Statut der Forderungsabtretung im Verhältnis zu Dritten, RabelsZ 62 (1998), 678 et seq. Kieninger, Das Statut der Forderungsabtretung im Verhältnis zu Dritten RabelsZ 62 (1998), 678 et seq.; Kieninger / Schütze, Die Forderungsabtretung im Internationalen Privatrecht; IPRax 2005, 200 et seq. Einsele, Das Internationale Privatrecht der Forderungszession und der Schuldnerschutz, ZVglRWiss 90 (1991), 1 et seq.; Stadler, Der Streit um das Zessionsstatut – eine endlose Geschichte?, IPRax 2000, 104 et seq. Art. 33 sec. 2 EGBGB. For details, see para. 2 infra.

122

2.

Julia Klauer Rakob

Cases

Pursuant to the predominant understanding in Germany of Art. 12 of the Rome Convention and Art. 33 sec. 1 and 2 EGBGB, the location of the parties involved in an assignment of receivables is of only limited relevance to the outcome of the Case. If the Case to be decided involves questions relating to the contract creating the obligation to assign receivables – typically a sales contract or a contract providing for the assignment of receivables as security – courts will look to the rules in Art. 27 et seq. EGBGB to determine the applicable law. Under these rules – they are again, like Art. 33 EGBGB, identical to the Rome Convention – the parties may choose the applicable law. If there is an explicit choice or if a choice may be implied from the circumstances, the location of the parties involved is irrelevant. In the absence of any choice, Art. 28 EGBGB governs. Art. 28 EGBGB looks to the law at the place which is most closely connected to the transaction. This standard analysis is undisputed with respect to contractual issues between the assignee and the assignor. It is in rem issues and the third party effects of the assignment that is the subject of controversy. Art. 28 sec. 2 EGBGB contains the assumption that, unless the entirety of circumstances suggests that a different nexus is stronger, the place with the strongest connection is the location of the party who is to effect the performance which is characteristic of the contract. In sale contracts, the characteristic performance is usually the delivery of the goods or other assets; therefore, the law at the place of the seller’s location governs. In case of a contract providing for an assignment for security, the assignor is seen to effect the performance of the characteristic obligation.103 If the Case at hand involved questions concerning the assignment itself – e.g. the question whether the receivable may be assigned at all and if so, how it is done and when it becomes effective, questions relating to the protection of the debtor and how the receivable may be discharged after assignment – Art. 33 sec. 2 EGBGB identifies the applicable law as the law that governs the assigned receivable. Which law this is must be determined according to the general private international law rules and depends mainly on the origin of the assigned receivables. If they arise under a contract, Art. 27 EGBGB seq. governs and will call for the application of the law the parties to the contract giving rise to the receivable chose or, if no choice was made, the law at the location of the party effecting the characteristic performance. If the assigned claims are tort claims or claims for unjust enrichment, the private international law rules for these matters govern. 103

Magnus, in Staudinger, Kommentar zum Bürgerlichen Gesetzbuch (13th edn. 2002), Art. 28 EGBGB n. 493.

France James Leavy I.

Introduction

While French civil law recognised receivables as property which could be the subject of an assignment (whether as security for an obligation or otherwise) or a pledge, it did not really facilitate the use of receivables for the purpose of obtaining financing. The interpretation of the relevant provisions of the Civil Code made assigning or pledging future receivables or streams of receivables very difficult, if not impossible. It was even a matter of dispute whether security could be taken over the credit balance of a bank account. In addition, the procedural requirements for perfecting, or even for creating, an assignment or pledge were onerous, sometimes to the point of absurdity. Until the recent reform of the Civil Code provisions on security interests, a bank which wished to take security over a bank account maintained by it for a client, would solemnly have the pledge agreement served by a process server (huissier) … on itself, in its capacity as “debtor” of its client’s account. This was because the courts had decided that notification by process server on the debtor was required not merely for enforceability of the pledge of a receivable against third parties, but was a condition for the existence of the pledge even between the parties to the pledge agreement.1 In 1981, a law (the so-called Loi Dailly)2 was adopted to facilitate the use of receivables for the purpose of financing. It created a simple method for a business to pledge or transfer by way of security its commercial receivables to a bank, as security for financing provided to it by that bank. Although both forms of providing security are permitted under the Loi Dailly, in practice it is the security transfer that is the predominant technique (hereinafter, unless otherwise indicated, the term “Dailly transfer” will be used to refer to both techniques). The Dailly transfer is created using a simple form (bordereau) signed by the transferor and dated by the bank. While the content of the bordereau is simple, its form must be rigidly adhered to. No registration or notification is required to either create or perfect the Dailly transfer. The benefit of the Dailly transfer is transferable by the beneficiary 1

2

CA Paris 10 October 1964, D. 1965, 125, JCP G 1964, II 13926, note J.R. (this decision interprets Art. 2075 C. civ., which has since been abrogated). Law 81-1 of 2 January 1981, now incorporated into the Monetary and Financial Code as Arts. L.313-23 to L.313-35 C. mon. fin.

124

James Leavy

bank to another bank by simple endorsement of the relevant forms. The Dailly transfer has proved very popular and is a staple of bank financing to businesses. It was later adapted for the purpose of facilitating outright assignments of receivables to securitisation vehicles.3 The Dailly device is, however, subject to some significant limitations. It cannot be used to create a general security transfer or pledge of receivables similar to those permitted in most common law jurisdictions. It can only be used as security for financing provided by the transferee or pledgee bank directly to the transferor / pledgor. Therefore, it cannot be used as part of a credit enhancement process such as providing security for a guarantor’s obligations or for the borrowings of a subsidiary of the transferor / pledgor. The position of the transferee / pledgee bank in the case of the transferor / pledgor’s insolvency can be precarious, where the transferred or pledged receivables arise from contracts involving successive performance by the transferor / pledgor (e.g. periodic deliveries of goods or performance of services payable upon delivery or performance). There is also some doubt as to whether the Dailly transfer is available to non-European bank lenders. The 2006 reform of the Civil Code provisions on security interests has significantly clarified and simplified the general rules concerning pledges of receivables but, compartmentilisation oblige, no change was made to the Civil Code provisions on assignments of receivables. However, in its proposals to overhaul the Civil Code provisions on contract and tort law (obligations), the Catala Committee4 has proposed significant changes to the provisions on assignments (both outright assignments and security assignments) of receivables. These would both ease the restrictions on the type of receivables which could be assigned (in particular, future receivables) and eliminate the requirement of service by process server. They would also specifically recognise the assignment in guarantee as an outright, though temporary, assignment. The recently adopted legislation to introduce a form of trust mechanism (fiducie) into French law,5 can be used to create a mechanism for assignment (both an outright assignment and a security assignment) of receivables in favour of a trustee (fiduciaire) as an alternative to the Civil Code assignment / pledge and, in the case of banks, as a complement to the Dailly transfer. Some see the fiducie as a method of creating, outside the confines of the Loi Dailly, security assignments of receivables which 3 4

5

Arts. L.214-43 to L.214-49 C. mon. fin. Avant-projet de Réforme du droit des obligations (Art. 1101 à 1386) du Code Civil et du droit de la prescription (Art. 2234 à 2281 du Code Civil): Rapport à Monsieur Pascal Clément, Garde des Sceaux, 22 septembre 2005. Law No. 2007-211 of 19 February 2007, JO 21 February 2007, incorporated into the Civil Code as Arts. 2011 to 2031, in particular Art. 2018-2 which was added to the Civil Code by Law No. 2008-776 of 4 August 2008, JO 5 August 2008, Art. 18 (V).

France

125

will not be recharacterised by the courts as being simply a pledge.6 This is important because a receivable which is pledged remains an asset of the pledgor (in French law terminology, it remains in the pledgor’s patrimony). An assigned receivable passes from the assignor’s patrimony to that of the assignee and is therefore not subject to being seized by creditors of the assignor or being affected by the subsequent insolvency of the assignor, except in limited circumstances such as fraud. The new Civil Code rules on pledge, the fiducie and the Dailly transfer of receivables will be discussed in more detail in the context of the Case Studies.

II.

Case Studies

1.

Security right over “future” receivables

This is the classic case of provision of security over future claims subject to varying degrees of uncertainty (the contract with B might never be signed (“Situation 1”): even if it is signed, it might not be performed (“Situation 2”). Under traditional French law, in both situations, but particularly in Situation 1, there would have been considerable doubt as to whether an assignment (whether an outright assignment or a security assignment) or pledge of the claim could be created, since in neither situation would A have a claim which is liquidated (i.e. whose amount is fixed), certain and payable. There was no absolute prohibition on assignments or pledges of claims which were not at the relevant time liquidated, certain and payable. 6

This issue has been highlighted by a recent decision of the Cour de Cassation: Cass. 19 December 2006 DIVA / Caisse Fédérale du Crédit Mutuel du Nord de la France, JCP G 2007, II 10067, note Legeais. In this case, a bank had taken an assignment of the rights of another lender, which rights were secured by an assignment of rentals payable to the borrower by its clients (but as a Civil Code assignment and not in the form of a Dailly transfer). In the insolvency of the assignor, the bank tried to enforce its assignment against the administrator. It was decided that because the assignment had been made under the Civil Code and had been specifically stated to be made by way of security, such assignment was in fact a pledge and therefore the “assigned” receivables had not ceased to be part of the insolvent entity’s assets. Unless the relevant legislation specifically provides otherwise, a security assignment of receivables is a pledge. In his article, Adelle considers that the fiduciary transfer can be used as an effective security device but considers that French law still needs a general assignment by way of security which will be treated as an assignment, and not as a pledge, since the administrative requirements of the fiducie will make it too burdensome for many transactions. Adelle “L’adoption de la fiducie a-t-elle remédié à la prohibition des cessions de créances en garantie de droit commun?”, Bank Fin. R. 2007, 48.

126

James Leavy

The courts did recognise assignment of identified receivables payable in the future (créances à terme) and assignment of conditional receivables, i.e., those which would come into existence on the occurrence of an event, if such event was not within the discretion of one of the parties to the transaction. However, assignments of receivables which might only arise at some time in the future, if they arose at all, posed a great problem for the courts, which generally did not recognise the transfer or grant of rights (including outright or security transfer or pledge) over claims which they considered too remote or uncertain. This remains the case, if A were to seek to assign its claim to the lender pursuant to the Civil Code.7 The situation would be different if the security transfer of the claim takes place under the Loi Dailly or if a pledge is granted either under that legislation or pursuant to the new Civil Code provisions. The Loi Dailly (now Art. L.313-23 et seq. C. mon. fin.) provides that security transfers or pledges may be made not only of claims which are liquidated and payable or will be liquidated and payable in the future but also of claims arising from a contract already made or to be made where the amount and exigible character of the claim have not yet been determined. In the latter case, the Dailly transferor would have to attribute a value to the receivable in the form (bordereau) creating the security transfer or pledge.8 In effect, the Loi Dailly leaves to the bank, as Dailly transferee, the risk that the claim might never mature into a receivable. However, in such case, the bank might wish to try to preserve its position under the Loi Dailly (Art. L.313-24 of the Monetary and Financial Code) which stipulates that, unless otherwise agreed, the Dailly transferor is joint and several guarantor of payment of the transferred receivables although it is not clear that this provision would be of use if the receivable never comes into existence.9 The new Civil Code rules which apply to pledges (nantissements) of receivables, expressly permit the pledge of future claims and state that the pledgee obtains its rights over the claim as soon as it exists.10 The pledge must be created in writing and it becomes not only effective between the parties but also opposable against third parties upon signature of the agreement, without any requirement of notification or any other formality.11 However, opposability of the pledge against the debtor requires notification

7

8 9 10 11

Note however that if the Catala committee‘s recommendations were accepted, it would be possible to make an outright assignment of a purely future receivable, including by way of security, provided that the deed of assignment contained information which would enable the assigned future receivable to be identified “le moment venu” (at the relevant time – whatever that might be). Art. L.313-23 C. mon. fin. Art. L.313-24 C. mon. fin. Art. 2357 C. civ. Art. 2361 C. civ.

France

127

to the debtor. Upon notification, the debtor must pay the pledgee and not the pledgor of the receivable.12 While the new Civil Code text permits the pledge of future receivables, it also requires that the pledge agreement contains sufficient information to permit the identification of the receivable, such as the identity of the debtor, place of payment, the amount or an estimation of the amount of the claim.13 The language used for this purpose is essentially identical to the corresponding language in the Loi Dailly. It therefore seems reasonable to suppose that these provisions will be interpreted in a similar manner to those of the Loi Dailly, which would mean that in both Situation 1 and Situation 2, a pledge of the future claim should be possible. Could such a future claim be the object of a security assignment to a trustee (fiducie-sûreté) under the new fiducie legislation? That legislation creates essentially a framework for such assignment and permits the parties to a fiducie arrangement a very wide scope for determining their respective rights and obligations. It permits future property or rights to be the subject-matter of a fiducie. However, on pain of nullity, the legislation requires that if the fiducie agreement concerns future property or rights, such property or rights must be déterminable.14 However, it does not (unlike the Loi Dailly or the new Civil Code provisions on pledges of receivables) set out any criteria to help in understanding the déterminable standard. Since the fiducie legislation is part of the Civil Code, there is good reason to suppose that the criteria for identifying future claims for a pledge under the Civil Code (which, as already noted, are essentially identical to those of the Loi Dailly) would be used for the purpose of a security transfer or pledge of future receivables to a trustee. If this turns out to be the case, then in both Situation 1 and Situation 2 above, A’s future claim against B could be the subject of a security transfer or pledge (fiducie-sûreté) to a trustee. The trustee (fiduciaire) would have to be a bank, an insurance company or other recognised financial institution. A very recent change to the law, adopted in July 2008, will permit lawyers (avocats) to act as trustees.

2.

Sale of existing receivables

The non-recourse sale could be made to a factor (especially where the receivables have short maturities) or they could be forfaited to a bank (for longer maturity and cross-border receivables). In France, factors (which are regulated credit institutions and, in many cases, are subsidiaries of the large commercial banks) have traditionally used contractual subrogation as 12 13 14

Art. 2362 and Art. 2363 C. civ. Art. 2356 C. civ. Art. 2018, 1° C. civ.

128

James Leavy

the legal basis for obtaining their rights over the receivables they acquire, rather than a straight assignment of receivables. This practice, which was clearly justified prior to the adoption of the Loi Dailly, continued even after the Loi Dailly provided what could be considered a credible alternative to subrogation. However, in the case of forfaiting or discounting of receivables, the Dailly transfer is used. In this case, the transfer (cession-escompte) is considered to be an outright transfer and not a security transfer i.e, if the factor or forfaiter actually collects the full face value of the transferred receivables, it is entitled to retain the entire amount collected.15

3.

Security right in all existing and future receivables

Even after the recent changes to the Civil Code, it is still not possible to make a general or universal assignment or pledge of receivables, future or present. As we have seen, whether under the Loi Dailly or the new Civil Code provisions, the receivables must be described in sufficient detail to make them identifiable even if such receivables will only exist in the future, and, indeed, might never come into existence. For the same reason, a sale of all present and future receivables to a factor would likewise not be possible in France. While the new fiducie legislation provides that a collection (ensemble) of future rights could be the subject of a security transfer to a trustee, it also requires that such future rights be déterminable, which would appear to rule out universal or general tranfers – at least if the criteria used for determinability are the same as those set out in the Loi Dailly or in the new Civil Code provisions on pledges of receivables.

4.

Sale of partial undivided interest in a portfolio of receivables

For the purposes of this Case, we will assume that the relevant loans have been fully drawn (if they were not there could be issues arising from the transfer of funding obligations – including regulatory issues arising from 15

The distinction between an outright transfer and a security transfer is illustrated by a recent decision of the Cour de Cassation, Cass. Civ. (1) 19 September 2007 Bègue et al / Lauret. While the transferee of a security transfer must return the receivable to the transferor once the underlying obligation has been performed or is no longer enforceable, in the case of a cession-escompte, the transferee acquires the receivable outright and the transferor ceases to have any rights in respect of the receivable. In the Bègue case, the court used this distinction to uphold a plaintiff’s right to sue to recover a claim which had been transferred by way of security to a bank and over which the bank had waived its rights. Since the transfer had been by way of security, such waiver was sufficient to restore the plaintiff’s rights to the receivable: no re-transfer back was necessary.

France

129

the banking “monopoly” on lending under French law). If such assumption is accepted, the assignment can be viewed simply as the assignment of a receivable or a bulk assignment of many receivables. Even in this circumstance there is controversy as to whether unmatured receivables arising from credit transactions can be assigned to entities other than recognised credit institutions. The transfer of the portfolio would in any case face two obstacles: one obstacle is essentially theoretical, the other is very practical. The theoretical obstacle concerns the legal possibility of assigning an undivided partial interest in a receivable. Art. 1689 C. civ. provides that “in respect of the assignment of a receivable, a right or an action against a third party, delivery is made between the assignor and assignee by transfer of the title” (to the receivable, right or action). Is it possible to deliver an undivided partial interest in the sense in which such delivery is required by Art. 1689 C. civ.? While the new provisions of the Civil Code on the pledge of receivables specifically permit the pledge of a fraction of a receivable, unless the receivable is indivisible (Art. 2358 C. civ.) there is no corresponding provision in the (as yet unreformed) portion of the Civil Code which covers assignments of receivables. There are a few very old cases which have upheld partial assignments of receivables under the Civil Code rules. The issue does not appear to have come before the courts in recent years, probably because the traditional Civil Code assignment of receivables is so rarely used in the context of financings. However, if the Catala committee’s recommendations were accepted, it would be possible to do an assignment of a portion of a receivable. The practical obstacle is that created by Art. 1690 C. civ., which states that the assignee of a receivable is only “seized” as against third parties when notice of the assignment has been served by process server (signification) on the debtor. Until such service, the debtor can discharge the debt by paying the assignor and the assignee would have no claim against the debtor in respect of such payment regardless of any actual knowledge of the assignment on the part of the debtor. The consequence of this rule is that the assignee bank would have to serve notice of the assignment by process server on each of the borrowers in L1’s portfolio. Therefore, even if the legal doubt surrounding the assignment of a fractional interest in a receivable is resolved, the notification requirements attaching to the bulk assignment could make the transaction impractical. Two questions might be asked at this stage. One, could the Loi Dailly mechanism not be used to simplify matters? Two, if this is not the case, how could securitisations of receivables portfolios ever be carried out in France? Let us leave the answer to the second question until we reach Case 16 (para. II.16. infra).

130

James Leavy

In respect of the first question, the answer is that the Loi Dailly mechanism could be used to transfer the portfolio of receivables, either in whole or in part, to the assignee bank – but only if the assignee bank has provided credit to the assignor bank and the assignor is making the assignment by way of security for the fulfilment of that credit obligation. It might be possible to imagine a loan being made by the assignee bank to the assignor bank lender in order to benefit from the simplified assignment of receivables, but this raises other issues such as the necessity of charging interest, the lender-assignee’s relationship with the agent or other lender banks in respect of any syndicated loans in the portfolio, the position of the assignor in respect of accounting and regulatory treatment of the loans assigned – and also in respect of the new loan obligation taken on by L1.

5.

Security right in receivables that are secured by real rights in goods

The traditional rule in French law is that the assignment of a receivable includes the “accessories” of such receivable, such as a surety (caution) or a security interest (privilege, pledge or hypothec).16 Title retention was not regarded as a security interest and was not, therefore, covered by the application of the rule that the “accessory follows the principal”. Under the old rules, the lender providing funding to the title-retaining seller would have to be contractually subrogated to the seller’s rights.17 In the case of pledges of receivables, there was no specific legal rule, similar to that applying in the case of assignments of receivables, which would have permitted the pledgees of receivables to automatically benefit from any guarantees or security interests supporting the receivable. Indeed, since the Civil Code forbade the pledgee to automatically become owner of the pledged property on default by its pledgor and required the pledgee to seek a court order if it wished to do so,18 it would have been difficult to justify a general principle that the pledgee of a receivable automatically benefited from the receivable owner’s rights, including those arising from guarantees or security interests granted to the receivable owner. The position under the Loi Dailly and following the changes to the Civil Code provisions on security interests is significantly different. Under the Loi Dailly, a security interest in receivables, whether a security transfer or a pledge, granted to the bank, automatically and without any formality being required, transfers to the bank the security interests,

16 17

18

Art. 1962 C. civ. Cass. Com. 15 March 1988 Coudray / Crédit Général Industriel, Caurette-Rey / Les Assurances du Crédit, JCP G 1989, II 21348. Art. 2078 C. civ. (now abolished).

France

131

guaranties and other accessories (including security interests on real estate) which attach to each transferred or pledged receivable.19 The new Civil Code provisions on the pledge of receivables state specifically (Art. 2359 C. civ.) that, unless otherwise agreed by the parties, the pledge extends to the accessories of the receivable. In addition, the parties can now agree that on default of the pledgor, the pledgee can become the owner of the pledged receivable (the so-called pacte commissoire), thereby facilitating the exercise of the pledgee’s rights over the accessories to such receivable. In addition, as a result of the changes to the Civil Code, title retention is now formally recognised as a security interest and the Code specifically states (Art. 2367 C. civ.) that “title so reserved is the accessory of the claim whose payment it secures”. Therefore, in the case of the assignment or pledge of a receivable secured by title retention, the benefit of such title retention passes to the assignee or pledgee of the receivable, without it being necessary to have recourse to any subrogation mechanism.

6.

Security right in receivables that are supported by personal guaranties

Discussed under para. II.5. supra.

7.

Security right in receivables that are supported by independent undertakings

This Case deals with the device known as the independent bank guarantee (often referred to in the U.S. as a “standby letter of credit”). As an alternative to, but to perform the same function as, the standby letter of credit (which apparently evolved as a means of bypassing a prohibition on the giving of guarantees by U.S. banks), France has developed the “autonomous guarantee”, usually given by a bank, whose characteristics are essentially identical to the standby letter of credit. Unusually for French law, the autonomous guarantee was a development of legal practice and court decisions and not the result of intervention by the legislator. As part of the recent reform of the law on security interests, the device of the autonomous guarantee was introduced into the Civil Code (Art. 2321 C. civ.). The “autonomous guarantee”, as its name implies, is an independent undertaking by the guarantor, given by reason of an obligation contracted by a third party, to pay a specified sum on first demand of the beneficiary or in accordance with conditions agreed with the beneficiary. 19

Art. L.313-27 C. mon. fin.

132

James Leavy

The Civil Code describes the autonomous guarantee as a “personal” security interest (sûreté personnelle), as is the case with the traditional personal guarantee or surety (caution), which would therefore seem to make it, in principle, an accessory, to a principal obligation transferable with such principal obligation. However, the Civil Code stipulates that unless otherwise agreed, the autonomous guarantee does not follow the guaranteed obligation (Art. 2359 C. civ.). There is no reason to suppose that a different rule would apply in the case of a standby letter of credit issued by French or foreign banks.

8.

Contractual restrictions on assignment

It is considered to be a basic principle of French law on the subject that all receivables are assignable unless assignment is forbidden by law or the relevant receivable is considered to be outside the domain of commerce. While some specific types of receivable, such as unpaid wages or alimony, are non-assignable, there is no legal prohibition in France on the assignment of commercial receivables. While there are provisions of the Civil Code or the Loi Dailly concerning the assignor’s legal warranty that the receivable exists (Art. 1690 C. civ.) or its joint and several guarantee of payment of the receivable (Art. L.313-24 C. mon. fin. – Loi Dailly), there are no provisions concerning any legal warranty of assignability. Since 2001, as a part of the rules against restrictive practices, the Commercial Code considers to be null and void a contractual stipulation by which a producer, merchant, distributor, industrial entity or artisan can forbid its creditor from assigning the creditor’s receivables against such entities to a third person.20 In the case of certain types of public sector contracts, there are restrictions on the extent to which receivables arising under such contracts can be the subject of an assignment or pledge,21 or the exercise of rights by the assignee22 is limited by law. A principal contractor cannot assign the portion 20 21

22

Art. L.442-6 II (c) C. com. Where a public sector purchase concerns goods or services which are provided in part by subcontractors, the principal contractor can only pledge the receivable for the portion of the goods or services supplied by it directly (Law 75-1334 of 31 December 1975, sec. 9). A similar rule is applied in the case of other contracts where subcontractors are used (Section 13-1). This rule is also applied by the courts in the case of Dailly transfers: CE 19 November 2004, JCP E 2004, 1998. Art. L.313-29-1 C. mon. fin., introduced by Order No. 2004-559 of 17 June 2004, entitles the public sector contracting entity to suspend the right of the Dailly transferee to forbid the debtor to pay the transferor and pay only the transferee. This suspension right only applies to certain types of contracts which involve investments being made by the transferor in partnership with the public sector debtor and once those investments have been made, the transferee can exercise

France

133

of its receivable against its client which corresponds to the amount payable to the subcontractors of the principal contractor. The principal contractor could, however, do so if it obtains a joint and several guarantee from its client in respect of amounts payable to subcontractors (Law 75-1334 of 31 December 1975, sec. 13-1). Even in those cases not covered by the prohibition contained in the Commercial Code, if a person agrees by contract with its debtor that it will not assign a receivable from that debtor without the debtor’s consent, it is doubtful whether an assignment made in violation of that undertaking would be ineffective, if it otherwise meets all legal requirements. While the Civil Code articles on assignments provide that the debtor’s consent (given by notarial deed) is one method by which an assignment can be made effective against third parties, including the debtor, such consent is not required if the debtor is notified of the assignment by process server. The Dailly transfer is perfected without any involvement whatsoever of the debtor. If a receivable were assigned without the debtor’s consent and in breach of a contractual undertaking given by the assignor to the debtor, the debtor might have a recourse in damages against the assignor for breach of contract, although in such case he would have to prove the amount of damage suffered by him as a result of such breach.

9.

Legal restrictions on assignment

Discussed under para. II.8. supra.

10. Publicity; priorities in general There is no notification or registration requirement with respect to Dailly transfers, nor is there any mechanism for registration of factoring or forfaiting agreements. The same is true for pledges of receivables under the Civil Code. This is an exception to the new general rule that pledges of tangible movables must be registered (Art. 2337 C. civ.) (and that pledges of intangible movables are subject to the same rules as pledges of tangible movables – Art. 2356 C. civ.). Assignments of receivables under the unmodified Civil Code rules are not registered but are simply notified by process server (huissier) to the debtor (and, as already noted, this requirement would be abolished if the Catala Committee’s recommendations for changes to the Civil Code are accepted). A security transfer to a trustee under the new Civil Code provisions on fiducie would have to be registered. The decree which will create the its rights against the public sector debtor without any set-off being raised against it.

134

James Leavy

register of fiducies has not yet been published. However, it appears that if and when it is created, it will not be a public register but rather a source of information for the tax and money-laundering authorities. The amendment to the Civil Code adopted in 2008 which sets out a specific rule for assignments of receivables in the context of a fiducie does not provide for any publication of such assignments. Therefore there is no register which a factor or lender could consult in order to determine if the relevant receivables have already been transferred or pledged or are the subject of an existing factoring arrangement. In such cases, the basic rule of priority will be that of the date of the relevant security transfer or pledge documents, since all security transfers or pledges of receivables must be evidenced in writing and such writing is sufficient to render the security transfer or pledge effective not only between the parties themselves, but also against third parties.23 When no notification to the debtor has been made, this is the principle accepted by the courts to determine priority between two Dailly transferees of the same receivable24 and between a Dailly transferee and a third-party creditor of the transferor seeking to seize funds held by the debtor25 or a factor whose claim is based on subrogation.26 If a Dailly transferee notifies the debtor and is the only such transferee to do so prior to payment by the debtor, he will take priority over any other Dailly transferee or a Civil Code assignee or a Civil Code pledgee regardless of the dates of the respective transfers, assignments or pledges. When multiple Dailly notifications are made to the debtor in respect of the same receivable prior to payment by the debtor, priority among the Dailly transferees is determined by chronological order of transfer, as evidenced by the respective bordereaux.27

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods For the purposes of these questions, it will be assumed that the conflict between the factor or security transferee / pledgee on the one hand and the title-retaining seller on the other concerns the following situation: A, the title-retaining seller, has sold goods to B. In turn, and prior to having paid 23

24 25 26

27

Art. 2362 C. civ. (Civil Code pledge), Art. L.313-27 C. mon. fin. (Dailly transfer), Art. 2018-2 C. civ. (assignment to trustee). Note that in the case of the Dailly transfer, the date is affixed to the bordereau by the transferee. Cass. Com. 5 July 1994, RTD com. 1995, 172, obs. Cabrillac. Cass. Com. 13 February 1996, Banque 1996, No. 569, 91, obs. Guillot. Cass. Com., 3 January. 1996 : JCP G 1996, II, 22682, obs. Stoufflet ; RD bancaire et bourse 1996, 118, obs. Crédot and Gérard ; RTD civ. 1997,131, obs. Mestre. Cass. Com. 12 January 1999, D. Aff. 1999, 336 ; RTD com. 1999, 479, obs. Cabrillac.

France

135

A, B sells those goods to C, who is acting in good faith. B’s receivable from C is the subject of a factoring arrangement, or is transferred to a bank under the Loi Dailly. B gets into financial difficulty. The factor or the transferee bank attempts to assert its rights over the receivable from C to B and comes into conflict with A which asserts revindication rights (based on “subrogation réelle”) over the amount payable by C to B. Prior to the reform of the Civil Code in 2006, the courts took the position that while the factor was contractually subrogated to its client (the sub-seller) in respect of its client’s claim against its sub-purchaser, the title-retaining seller’s right of revindication, either over the merchandise itself, where this was still possible, or over the proceeds of the sale of such merchandise to a sub-purchaser, enjoyed priority over both the rights of the subrogated factor and over those of the assignee bank which had taken an assignment of the sub-seller’s receivable under the Loi Dailly.28 Will the changes to the Civil Code rules on security interests affect the relative positions of the title-retaining seller and the factor or the assignee / pledgee? The fact that title retention is now considered officially to be a security interest and an “accessory” to the principal obligation evidenced by the receivable might seem, at first glance, to reduce the title-retaining seller to the rank of just another pledgee in respect of its claim against the initial buyer and weaken its rights as against the sub-buyer. However, the revised Code makes it clear (Art. 2372 C. civ.) that the title-retaining seller’s ownership right extends to the claim of its debtor against a sub-purchaser. The title-retaining seller will, thus, most likely be given priority over the factor or the pledgee / assignee of a receivable in the circumstances mentioned in this question.29 Under the Loi Dailly, and now under the new Civil Code rules on pledges of receivables (Art. 2362 C. civ.), once the debtor has been notified of the security transfer or pledge of the receivable, it must pay the transferee / pledgee and not the transferor / pledgor. If the debtor, in this case the sub-purchaser, has, following such notification, paid the Dailly transferee or the pledgee before the title-retaining seller has asserted its revindication rights, such payment effectively bars the title-retaining seller from asserting its rights to such payments against the sub-purchaser, although it could still do so against the Dailly transferee or the pledgee. Interestingly, in the case of an assignment using a fiducie, the assignment is opposable to the debtor upon being notified to it, but there is no requirement 28

29

Cass. Com. 20 June 1989, D. 1989, 431, note Perrochon; Cass. Com. 26 April 2000 UGAP / Factobail. The "accessory“ character of title retention had already been recognised by the courts in favour of a person benefiting from contractual subrogation to a receivable “secured” by title retention: Cass. Com. 15 March 1988 (2 cases), JCP G 1989, II 21348, obs. Morançais-Demester.

136

James Leavy

that upon such notification the debtor must pay only the assignee/trustee (Art. 2018-2 C. civ.).

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Discussed under para. II.11. supra.

13. Notification Except in the case of outright transfer of a receivable under the unmodified Civil Code rules (which is rarely used as a financing device and would, if used for the purpose of providing security, be characterised as a pledge and not as an assignment), notification to the debtor of a pledge or any other transfer of a receivable is not a condition of effectiveness but serves to put the debtor on notice that it must henceforward pay the transferee / pledgee and not the transferor / pledgor. In this respect, the wording of the Loi Dailly is clearer than that of the new Civil Code provisions on pledge of receivables. The Dailly transfer does not require any notification for effectiveness or for “opposability” against third parties. Notification to the debtor (which is not subject to any particular requirements as to form or content) is given simply for the purpose of having payment made directly to the Dailly transferee.30 That step is usually interpreted as an indication that the transferor / pledgor is in financial difficulty, and a certain amount of feet-dragging by trade debtors of the transferor / pledgor is then usual. The new Civil Code provisions concerning the pledge of a receivable are more ambiguous. On the one hand, the revised Code states that, in the case of the pledge of a receivable, signature of the pledge instrument is sufficient in order that the pledge be effective between the parties and be opposable against third parties (Art. 2361 C. civ.). But then it also states that in order to be opposable to the debtor, the pledge must be notified to the debtor (or the debtor must be a party to the pledge agreement) (Art. 2362 C. civ.).

30

Art. 313-28 C. mon. fin. Prior to notification and absent an agreement to the contrary, the assignee is entitled to benefit from the assignor‘s legal guarantee of payment of the receivable by the debtor (Art. L.313-24 C. mon. fin.) without having to seek payment beforehand from the debtor. However, once the debtor has been notified, the assignee cannot invoke the guarantee obligation of the assignor without having attempted to obtain payment from the debtor (a recent illustration of this rule is found in Cass. Com 18 September 2007, No. 06-13.736, comment Grimonprez, R. Lamy dr. aff. 2008, 31).

France

137

However, once the debtor is notified, it must pay only the pledgee; payment to the pledgor does not constitute payment of its debt. Since the use of receivables for financing purposes generally does not involve the financing institution taking direct payment of its debtor’s receivables as long as the debtor continues to fulfil its obligations under the financing arrangement, banks have been left scratching their heads in trying to figure out what the legislature intended. Must they notify the debtor at the time the pledge is created? If they do, can the receivable still be paid to the pledgor as long as it is not in default under the financing arrangement? In the few months since the new provisions have been in force, the practice has developed of having the pledgee notify the pledge immediately to the debtor, but telling the debtor that it should continue to pay its receivable creditor as before and stating that direct payment to the pledgee will only be required if and when the debtor is so notified subsequently by the pledgee. The legal effectiveness of this technique has yet to be tested in the courts. If the Catala committee’s draft amendments to the Civil Code provisions on assignments of receivables were accepted, notification to the debtor would not automatically require the debtor to pay only the assignee. In July 2008, Parliament adopted amendments to the Civil Code which provide that in the case of a security assignment (fiducie-sûreté) of receivables to a trustee, the assignment will be valid as against all third parties upon signature of the deed of assignment but would be opposable to the debtor only on notification to it. Such notification will not result in the debtor being obliged to pay the trustee. France, therefore, has four separate rules on the requirements and consequences of notification to the debtor in respect of assignments of receivables: • Dailly transfers: notification to debtor not required for effectiveness against it; upon notification, debtor must pay the Dailly transferee. • Civil Code (modified) pledge of receivables: notification to debtor required for effectiveness against it; upon notification debtor must pay pledgee. • Civil Code (unmodified) transfer of receivables: notification to debtor is required for effectiveness against all third parties, including the debtor; notification does not automatically result in the debtor being obliged to pay the transferee. This rule also applies to assignments of receivables in respect of contracts or other obligations to which the legal provisions on global netting apply (Art. L.211-38 C. mon. fin.). • Security assignment to a trustee: notification to debtor is required for effectiveness against it but debtor is not thereby required to pay the trustee.

138

James Leavy

In the case of Dailly transfer (as in the case of the Civil Code pledge), notification to the debtor results in the debtor being required to pay the transferee / pledgee and renders ineffective any payments made to the transferor / pledgor following such notification for the purpose of discharging the liability of the debtor in respect of the relevant receivable. Notification of the assignment (whether outright or by way of security) or pledge does not in itself affect the right of the debtor to raise certain defenses to payment of the receivable which arise from the debtor’s relationship with the assignor / pledgor. In the case of non-performance by the assignor / pledgor of the obligation giving rise to the assigned receivable31 or in the case of set-off on the basis of claims between the debtor and the assignor / pledgor which are connected to the receivable itself, such defenses can be raised even where the facts giving rise to such defenses occur following notification.32 Courts will consider that claims are connected when the claims arise out of the same contract or when they come from different contracts stemming from a master agreement or when the contracts are part of a single commercial transaction. Nonetheless, these defenses would be lost if the debtor explicitly accepts the assignment or pledge. However, where the debtor invokes legal set-off as a defense in respect of claims against the assignor / pledgor which are not connected to the receivable itself, such set-off is limited to claims against the assignor / pledgor which had become reciprocal, liquidated, certain and exigible prior to the date ascribed on the bordereau33 or to the notification of the assignment / pledge.34 We have already noted that as an exception to the more general rule, notification to the debtor by bailiff is required to render a Civil Code assignment of receivables effective against the debtor and other third parties. Alternatively, the assignment can be made effective if the debtor accepts it by notarial deed. What happens if the debtor knows of the assignment but has neither been served notice by bailiff nor has it accepted the assignment by notarial deed? The courts have held that knowledge by itself is not enough to oblige the debtor to respect the assignment. However, if by its conduct the debtor has clearly (unequivocally) accepted or acquiesced in the assignment, courts have held that the debtor is bound by the assignment.35 31

32

33 34 35

Cass. Com. 9 February 1993: Bull.Civ. 1993, IV, n°51, RTD com 1995, 347, obs. Cabrillac and Tessier. For example, Cass. Com. 15 June 1993, D. 1993, 495, note Larroumet; Cass. Com. 8 February 1994, D. 1994, IR 64, JCP G 1995, II 22455, note Ammar. Cass. Com. 24 September 2002, LPA 11 February 2003, 17, obs. Tchotourian. Cass. Com. 6 October 1998, RTD com. 1999, 184, obs. Cabrillac. Cass. ass. plén. 14 February 1975, D. 1975, 349, Gaz. Pal. 1975, 1342, note Brault; Cass. Civ. (3) 14 December 1994, Bull. Civ. III No. 212 (note: these cases concern assignments of either the right to lease or rentals under a lease – in both

France

139

14. Post-insolvency collection by buyer of receivables For the purposes of these Cases, we will assume that there is no issue related to the avoidability of the factoring arrangement or the security transfer / pledge of receivables by reason of the time at which such transactions were entered into, i.e., there is no issue of fraudulent preference or, in the French terminology, the transaction is not attackable as having been made during the suspect period. If the receivables are subject to a Dailly transfer, the courts have held that the key issue is when the relevant receivables come into existence. If the receivable was liquidated, certain and payable prior to the date on which the court placed M. in insolvency protection, then the receivable belongs to the Dailly transferee. That would still be the case if the receivable became certain and / or payable after the intervention of court protection for the insolvent assignor, provided it could be shown that the receivable came into existence prior to such intervention. However, if the receivable came into existence only after the intervention of court protection, then the insolvency administrator was considered to have better title to the receivable than the Dailly transferee. This had been held to be the case where the transfer agreement covers receivables under a specific contract and the contract under which the receivable arose was made prior to court protection being imposed on the transferor, if the contract is one of “successive performance”. In such case, performance of the contract involves a succession of acts (deliveries of goods, performance of services) and the corresponding receivables are considered to come into existence only as and when performance takes place under the contract.36 The position of the pledgee of a receivable, even after the recent changes to the Civil Code, would not appear to be different in any significant respect from that of the Dailly transferee. The Civil Code provides that where a pledge is granted over a future receivable, the rights of the pledgee in the receivable arise as from the creation (naissance) of the receivable (Art. 2357 C. civ.). The code does not say when a receivable is created but at a minimum it would probably have to meet the criteria for identification as set out in the code itself. Since, in the case of successive performance contracts made by a person that becomes insolvent before full performance, the judicial administrator can discontinue performance and thus prevent the receivable from being created, he should be able to prevail over the pledgee, as he prevails over the Dailly transferee in respect of receivables arising from successive performance contracts.

36

cases, subject to the same notification requirements, under Art. 1690 C. civ., as assignments of commercial receivables). Cass. Com. 26 April 2000 Westpac Bank, NG Corporation / Socpresse, Bull. Civ. IV No. 84, RTD com. 2000, 994, obs. Cabrillac.

140

James Leavy

Note that where the pledge covers the balance of an account (including, therefore, a bank account), the Civil Code provides that the pledgee’s rights, in the case of the pledgor’s insolvency, extend to the credit balance of the pledged account as it exists on the date on which court intervention is ordered (Art. 2360 C. civ.). If this rule were applied by analogy to receivables arising under a successive performance contract, then the pledgee would be preferred to the administrator only in respect of receivables which had come into existence on the date on which court intervention took place, even if the contract and the pledge of receivables in respect of such contract had been made prior to the pledgor’s insolvency. Since the Loi Dailly specifically provides for the possibility of transferring receivables under a contract which has not yet been signed (Case 1, para. II.1. supra), it might be wondered why the Dailly transfer should be defeated as described in the previous paragraph where the contract which provided for creation of the receivable was already signed prior to the imposition of court protection. This position of the court is explained by some commentators37 by reference to the position of the court-appointed administrator with respect to continuing contracts (contrats en cours) of the insolvent entity. In such case, the administrator has discretion in deciding whether the insolvent company should continue to perform such contracts. It is therefore a matter for the administrator’s discretion whether the insolvent company (i.e. the assignor of the receivables) would continue to generate the receivables which could be transferred as security. In preferring the administrator to the transferee bank, the courts are implying that the generation of receivables during insolvency should inure to the benefit of the insolvent transferor and the administration of the insolvency rather than the particular creditor. In 2003, the Loi Dailly was amended to provide that the transfer is effective between the parties and is opposable to third parties on the date placed on the form (bordereau), without regard to the date on which the receivable comes into existence, is due or is payable. This change, together with court decisions of 200438 and 200539, was perceived by some commentators as having reversed the legal position concerning the respective rights of the Dailly transferee and the insolvency administrator in the case of receivables arising out of successive performance contracts40 but other commentators doubt that this is the case.41 37

38 39 40

41

In particular, the comments of Cabrillac referred to in fn. 34 supra and also Larroumet, D. 2000, 717. Cass Com. 7 December 2004 CRAM Aquitaine / Labat Merle. Cass Com. 22 November 2005 Mallet and X / BTP, D. 2005, 3081, note Delpech. E.g. Lienhard, D. 2005, 77; Parolai / Lacroix, Les créances futures ont de l’avenir!, Les Echos 5 January 2006, p. 22. Guillot, RB 2005, 83, comment on decision of 7 December 2004, fn. 38 supra.

France

141

Although some court decisions seem to have adopted a more nuanced approach to the conflict between assignee and administrator, at least to the extent of giving the Dailly transferee priority over the administrator in respect of transferred receivables which had become payable, or at least certain, prior to the intervention of court-supervised administration, it is probably the case that there has been no significant change to the position as described above. In the few cases where a preference is expressed in favour of certain types of financial contracts (such as the “netting out” of positions under swaps and derivatives contracts or in respect of arrangements covered by French legislation implementing the EU Financial Collateral Directive) over the general insolvency legislation, this has been done by specific legislative intervention and not as the result of the adoption by the courts of any principle which would favour giving full effect to financial arrangements made prior to the intervention of court protection. However, as will be noted in the comments on Case 16 (para. II.16., infra), very recent changes to the law on securitisations may provide the courts with a basis for giving the Dailly assignee more favourable treatment than it has enjoyed until now. The position of the factor is essentially the same as that of the Dailly transferee although the legal basis for it is not quite the same. As already noted, in France factors have generally operated on the basis of being contractually subrogated to the rights of their clients in respect of receivables which they have factored. In addition, the factoring agreement usually provides that the factor and its client will operate a current account (compte courant) between them. This current account permits the parties to treat all of their respective credits and debits with each other as part of a single account which can be netted periodically. In some cases, the agreement provides that the current account will include not only amounts payable by the client to the factor under its own agreement but also amounts payable by the client to other persons where such persons have made factoring arrangements with the same factor. The courts have upheld the factor’s rights against the judicial administrator of the insolvent client in respect of all amounts which have been properly debited to the current account prior to the intervention of court protection even where payment of such amounts had not been made at such time.42 The factor is entitled to enter into the current account as a credit to it (a debit for its client) the future payables from its client as soon as such payables arise (or at least as soon as they have become certain) even though they may not yet be immediately payable. That entry is sufficient to give the factor better title than the judicial administrator to the receivable when due. If the payable comes into existence only after court intervention takes place, then the judicial administrator will be preferred to the factor, since it is within the judicial administrator’s power to prevent such payable from existing, by exercising his right to refuse performance of continuing contracts. 42

Cass. Com. 1 March 2005, JCP E 2005, 952, note Scholastique.

142

James Leavy

15. Post-insolvency collection by pledgee of receivables Discussed under para. II.14. supra.

16. Securitisation As mentioned in the discussion of Case 4, given the cumbersome requirements attaching to assignments of receivables (at least outside the context of the Loi Dailly and the very specific circumstances covered by the French legislation implementing the EU Financial Collateral Directive), it might well be wondered how it is possible to securitise receivables in France? The answer is that special legislation was required for the purpose: legislation which is in many respects an adaptation of the Loi Dailly mechanism for the purposes of securitisation. That legislation, which was initially adopted in 1988 (Law 88-1201 of 23 December 1988), is now Arts. L.21442-1 to 214-49-14 C. mon. fin. and was subject to extensive revision by the recent Ordonnance 2008-556 of 13 June 2008. The legislation provides for the use of specific securitisation vehicles, which can be either an incorporated entity (société de titrisation) or an unincorporated fonds commun de titrisation (CFT). The CFT is a co-ownership (co-propriété) between the holders of the participation interests (parts) in the CFT. The CFT does not have legal personality. The securitisation entity receives the receivables to be securitised through a mechanism which is essentially identical to the Loi Dailly mechanism based on the outright transfer of the securitised receivables to the securitisation entity. The assignment requires only a form which lists the receivables and is signed and dated. This is sufficient to perfect the assignment against all third parties “regardless of the date on which the receivable comes into existence, is due or becomes payable”.43 The actual collection of the assigned receivables is left in the hands of the assignor pursuant to the terms of an agreement made with the management company of the securitisation entity.44 As in the case of the Dailly transfer, delivery of the assignment form to the securitisation entity automatically serves to transfer the benefit of all security interests, guarantees and accessories supporting or securing each receivable, including hypothecary security (i.e. security over land), without the requirement of any other formalities.45 In all of this, the position of the securitisation entity is essentially the same as that of the transferee bank under the Loi Dailly. However, the securitisation entity has an advantage in that it is entitled upon enforcement of the supporting or security right to 43 44 45

Art. L.214-43 C. mon. fin. Art. L.214-46 C. mon. fin. Art. L.214-43 C. mon. fin.

France

143

obtain possession or even ownership of the assets which are subject to that right. The Dailly transferee can only exercise those remedies which inhere in the supporting or security right. The securitisation entity has what might seem like a further and very significant advantage over the transferee bank under the Loi Dailly in that the legislation governing securitisation provides that the assignment of receivables to the CFT is bankruptcy-proof. That provision, which was introduced in 2005, contained an exception for receivables which come into existence after the imposition of court-administered protection, if such receivables result from executory contracts and the value of such contracts is not determined.46 The 2005 text essentially restated, and froze, the position adopted by the courts in connection with Dailly transfers. However, the amendments of June 2008 removed the exception concerning executory contracts, with the evident intention of making all assignments to securitisation entities essentially insolvency proof. Since so much of the law concerning assignment of receivables to securitisation entities is inspired by the Dailly mechanism, it might be wondered, and the courts might well be asked, if the insolvency advantages granted securitisation entities are not also available to the Dailly assignee. However, recent changes to the insolvency legislation have left the position of the Dailly assignee essentially unchanged. The trustee who benefits from an assignment of receivables under an executory contract is in the same position as the Dailly assignee.

III. Effect of the EU Financial Collateral Arrangements Directive The 2002 EU Financial Collateral Arrangements Directive (“Collateral Directive”) was transposed into French law in 2005 by way of amendments to the Monetary and Financial Code.47 The Collateral Directive required member states to provide a simplified and bankruptcy-proof mechanism for providing security in transactions involving a financial obligation where none of the parties is a natural person and at least one of the parties is a financial institution. The mechanism should cover security where the collateral consists of instruments (titres) or money. The French implementing legislation has two specific characteristics which are relevant to security over commercial receivables. The first characteristic is that it permits the simplified and bankruptcy-proof security interest to cover receivables (créances) contracts,48 thus going beyond what 46 47

48

Art. L.214-43 C. mon. fin. Arts. L.211-35 to L.211-40 C. mon. fin.; Praicheux, La transposition en droit français de la directive européenne sur les contrats de garantie financière, Bank Fin. R. 2005, 56. The concept of assignment of a contract has not traditionally been recognised in French law. It is not clear why the legislation on the Collateral Directive in-

144

James Leavy

the Collateral Directive requires.49 However, the second characteristic is that pursuant to “opt-out” provisions of the Collateral Directive itself, France provides that such security (i.e. a simplified and bankruptcy-proof assignment of receivables) can only be granted when i) all the parties to the underlying transaction are financial institutions, or ii) if one of the parties to the underlying transaction is not a financial institution, the underlying transaction consists of the payment by one party to another of financial instruments50 (which term does not include money (espèces)).51 This latter restriction is generally considered to have the effect of preventing the creation of simplified and bankruptcy-proof assignments or pledges of commercial receivables since the underlying financing contract will in almost all cases be based on payment of money to the financing entity. France has chosen to apply the Collateral Directive essentially as a device for controlling systemic risk in the financial markets arising from problems with contracts between market professionals, such as “repos” or financial derivatives, involving security being taken over cash or financial instruments. The Collateral Directive is not used in France as a method for introducing bankruptcy-proof assignments or pledges or receivables in the context of typical financing transactions.

IV. Private international law issues French law has traditionally had difficulties with classifying incorporeal movables, such as receivables, in the context of its private international law rules, since the principle of the lex rei sitae is difficult to apply where the res has no physical existence. In the case of assignments of receivables having an international character, the courts had also to consider the private international law principles applicable to contracts, taking into account the domiciles of the parties and the law applicable both to the assignment agreement itself and to the relationship between the assignor and the debtor. Prior to the 1980 Rome Convention, the following principles could be said to have been applicable to “international” assignments of receivables: • the relationship between assignor and assignee is determined by the law governing the assignment itself (either the law stated in the assignment agreement or, in the absence of such statement, the law which the ap-

49 50 51

troduces such a significant change, especially since it was not required by the terms of the Directive itself. Art. L.431-7-3 C. mon. fin. Art. L.211-36 C. mon. fin. The definition of “financial instruments” is given in Art. L.211-1 C. mon. fin.

France

•

•

145

plication of French conflicts principles would designate as the applicable law) (“law of the assignment”); the relationship between the assignee and the debtor is governed by the law which governs the receivable itself, i.e., the law pursuant to whose rules the receivable was created (either the law stated in the agreement pursuant to which the receivable is created or, in the absence of such statement, the law which the application of French conflicts principles would designate as the applicable law) (“law of the receivable”); in any case, the applicable law in respect of any publicity or other requirements for enforceability of an assignment against a debtor is the law of the debtor’s domicile.52

The Rome Convention has in effect removed the last of those traditional principles and made enforceability of the assignment against the debtor a matter which is governed by the law of the receivable – a principle which does not necessarily produce a certain result if there is no explicit “law of the receivable”. As is well known, the Rome Convention does not deal with the opposability of an assignment to third parties, other than the debtor. The rule in French law appears to be that, at least where there are no specific legislative provisions to the contrary, the law of the debtor’s domicile governs the effects and the conditions of opposability of an assignment with respect to third parties.53 The French courts have not had much opportunity to examine how the Rome Convention applies to assignments of receivables.54 For reasons already explained, assignments under the Civil Code are rarely used in financing transactions. In the case of Dailly assignments, amendments introduced into the Monetary and Financial Code in 2003 provide that the transfer of the assignment form (bordereau) to the assignee bank makes the assignment effective against all parties “whatever the law applicable to the receivables and the law of the debtor’s country of residence”.55 The same principle applies to assignments made to a securitisation entity in the context of a securitisation transaction.56 This in effect makes the law

52

53 54

55 56

Art. 3 C. civ.; CA Paris 11 February 1969, D. 1970, 522, note Larroumet; CA Paris 27 September 1984, JDI 1985, 664, note Diener. CA Paris, 26 March 1986, D. 1986, 374 2°, note Vasseur. There is a decision of the Court of Appeal of Chambéry, rendered in 2001, which applied Art. 12 of the Rome Convention and determined that since, in accordance with the terms of French conflicts principles, the assigned receivable at issue was governed by Swiss law, it was Swiss law which determined the requirements for rendering such assignment effective against a French debtor (CA Chambéry 2001 Banque cantonale du Valais / sarl Leitner France, JCP E 2001 pan. No. 39). Art. L.313-27 C. mon. fin. Art. L.214-43 C. mon. fin.

146

James Leavy

of the assignment also the law of the receivable, at least for purposes of effectiveness. The legislation implementing the Collateral Directive in France also provides a specific conflicts rule in connection with security granted pursuant to the terms of that legislation: any security granted over financial instruments represented by an entry in an account (inscription en compte) is subject to the law of the location of the account to which the financial instruments are transferred in guarantee or over which security is granted.57 As already mentioned, the legal definition of “financial instruments” in the Monetary and Financial Code does not include cash. Security given over commercial receivables (whether by assignment or pledge) does not come within the scope of the French legislation implementing the Collateral Directive. To the non-specialist, the provisions of the Rome Convention, as well as those of the Rome I-Regulation, concerning the law applicable to the different aspects of an international assignment of receivables in themselves create difficulties in interpretation. The superimposition in France of specific conflicts rules such as those referred to above in the case of Dailly assignments and assignments to securitisation entities, while clearly intended to facilitate the use of the security devices to which they refer, does not necessarily serve to clarify the position. If a court outside France were called upon to interpret or enforce a security interest subject to the specific conflict rules mentioned above, it is not clear that it would necessarily apply those rules. This is particularly the case with respect to the conflicts rule for Dailly assignments and securitisations which, to the non-specialist, does not appear to be consistent with either the Rome Convention or the Rome I-Regulation.58 It has been suggested that perhaps the entire Loi Dailly should be considered as a loi de police, which would result in its provisions overriding the Rome Convention. Alternatively, if it is considered that the Loi Dailly conflicts rule does not apply to “opposability” to the debtor but only in respect of effectiveness against (other) third parties, then perhaps the Loi Dailly and the Rome Convention could be reconciled. The difficulty is that the Loi Dailly has consistently been interpreted in such a way that the debtor is treated simply as one of the general category of “third parties”. In this regard, the Loi Dailly approach is different from that of the Civil Code in the new provisions concerning pledges of receivables and (probably) to the rule applicable to a security assignment to a trustee. 57 58

Art. L.211-39 C. mon. fin. Not only to the non-specialist: cf. remarks by Lagarde, Retour sur la loi applicable à l’opposabilité des transferts conventionnels de créances, in Droit et actualité – Etudes offertes à Jacques Béguin (2005), p. 416, at p. 428 et seq.

England and Wales Michael Bridge I.

Introduction

1.

Basic Features of English Law – common law and equity

The division in English law between common law and equity has had a profound effect upon the law of assignment and secured transactions. The common law did not recognise the transferability of intangible property, except in those cases where it acquired a documentary expression (for example, a bill of lading and a negotiable instrument). Any attempt to transfer debts was seen as offensive to the rules against champerty and maintenance, which prohibited trafficking in rights of litigation.1 This was because the assignee was regarded as collecting, and where necessary suing, on behalf of the assignor. The attitude of the common law left a gap for equity to fill, which it duly did. It was mainly the refusal of the common law to treat intangible items as transferable property that led equity, in the 19th century, to assume the role of creating a modern law of security. This it did to great effect, particularly in the way that it dealt with revolving and future items of property. The creation of the floating charge was dependent upon the automatic introduction into the charge2 of new property acquired by a debtor company without the 1

2

Maintenance is lending support to litigation where the person supporting it has no legitimate practical interest in the outcome. Champerty (which derives its name from a divided field) is maintenance coupled with taking a share of the proceeds. These were treated not just as illegal transactions but as common law crimes until 1967 (the Criminal Law Act). The charge is the generic type of security interest that best typifies English law in commercial matters. It corresponds broadly to a non-possessory pledge in the civil law. There are no limits to the types of asset that can be encumbered by a charge, which differs from a mortgage in that it is a type of encumbrance over, rather than a security transfer of, property: Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207. For the general purposes of this book, however, a charge can be regarded as a security transfer, just as a mortgage can be regarded as a different type of security transfer. The difference between mortgage and charge is largely eliminated in commercial instruments and, for important statutory purposes, charge and mortgage are treated alike: sec. 205(1) (xvi) Law of Property Act 1925 (mortgage includes a charge) and sec. 861(5)

148

Michael Bridge

need for any fresh act of proprietary transfer as soon as the property came into existence, that is, as soon as it was acquired by the company. The initial purported transfer of that property, when the charge was granted, was sufficient for a series of automatic transfers to take place as soon as future property came into existence.3 The present grant of something that could not yet be granted – future property – was treated as a promise to grant and, acting on the conscience of the promisor and drawing an analogy with the doctrine of specific performance, courts of equity gave automatic effect to that promise.4 The position here was also expressive of a famous equitable maxim: “Equity looks on that as done which ought to be done.” This maxim has been immensely powerful in the development of equitable principles of security. The entire law of equitable mortgages is based upon it. A contract to grant a security is on this basis as good as a security. Another equitable maxim is that “equity follows the law”, the law here being the common law. This meant that equity recognised the form of common law entitlements and prohibitions. Consequently, if an assignee wished to sue for payment of an assigned debt, the assignor had to be joined in the action as a co-plaintiff. A recalcitrant assignor could nevertheless be joined as a co-defendant. In 1873, the machinery of statutory assignment was introduced.5 In stated circumstances, the assignee can sue the debtor directly without joining the assignor to the action.6 This statutory assignment is sometimes, misleadingly, referred to as legal assignment.7 The reason that this is misleading is that the statute only introduced simplified machinery for suing to recover unpaid debts. The rules of equity remained

3 4 5

6

7

Companies Act 2006 (charge includes a mortgage). References in this chapter are to the Companies Act 2006, though its provisions relating to company charges are not expected to come into force until October 2009. Apart from the case of charges granted by oversea companies, discussed below, the provisions of the 2006 Act are a remodelled but otherwise unaltered version of the provisions in the Companies Act 1985. Tailby v Official Receiver (1888) 13 App Cas 523. Ibid. Now to be found in sec. 136 of the Law of Property Act 1925. In the field of security, there is little if any significance in the distinction between equitable assignment and statutory assignment. Statutory assignment requires, inter alia, that the assignment be in writing “under the hand of the assignor” (which means it must be signed by the assignor). The requirement of the assignor’s signature in sec. 136 of the Law of Property Act 1925 is dispensed with in those cases where the financial collateral regulations apply: Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226, regulation 4(3). See for example Pfeiffer (E) Weinkellerei-Weineinkauf GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150. See also Compaq Computers Ltd v Abercorn Group Ltd [1991] BCC 484.

England and Wales

149

very much in force, notably the rule that an assignee takes subject to those equities and defences that the debtor could have asserted against the assignor. There is no room for any rule that a bona fide purchaser of the debt without notice takes free of any previous equitable entitlement. Moreover, an equitable assignment is equally as effective in the assignor’s insolvency as a statutory assignment.8 One of the great strengths of equitable assignment is its remarkable simplicity and flexibility. All that is required for the assignment to be effective in equity is that the debt be identified and that present words of transfer be uttered. The words need not take any particular form; anything that sufficiently expresses a present transfer is sufficient.9 The assignment is effective in equity without writing, though a sub-assignment of a debt would have to be in writing since writing is the general rule for the transfer of “subsisting” equitable interests.10 The equitable assignment of the debt itself creates the equitable interest at the point of transfer, but the subassignment transfers that equitable interest already created. If the words of the purported assignment are uttered as promissory, or treated as promissory (which they have to be in the case of future property),11 then the assignee must comply with the contractual doctrine of consideration.12 This is because no assignment has yet been concluded. If words of promise can be and are avoided, then a gratuitous assignment is just as effective as an executed gift. There is no requirement of actual or symbolic delivery for an effective assignment of intangible property.

2.

Types of transactions

The rules of assignment in English law apply to two very different types of assignment.13 The first is an outright transfer, by which the transferor surrenders irrevocably its interest in the assets that are being assigned. In the 8 9 10

11 12 13

Gorringe v India Rubber etc Works (1886) 34 Ch D 128. Wm Brandt’s Sons & Co v Dunlop Rubber Co Ltd [1905] AC 454. Sec. 53(1)(c) Law of Property Act 1925, which is disapplied in relation to a financial collateral arrangement: Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226, regulation 4(2). See supra. Re Ellenborough [1903] 1 Ch 697; Re McArdle [1951] Ch 669. An example of a rule of general application to all types of assignment is the rule dealing with priority of assignments: Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 1 WLR 1140. The expansive application of the assignment rules in English law would persuade an English lawyer to conclude that Art. 12 of the Rome Convention (see infra) applies to both types of assignment. Art. 14 of the Rome I Regulation, which will supersede the Convention when it comes into force, makes this explicit in para. (3).

150

Michael Bridge

case of receivables, for example, this type of assignment amounts to a sale or discounting of the receivables. The second is the security assignment, which can exist in two forms. The first form is a mortgage, where a transfer of the mortgaged asset takes place with a provision for its retransfer to the mortgagor in the event that the stipulated condition, namely, repayment of the loan, takes place. The other form of security assignment arises where assets are made the subject of a charge. This form of security assignment cannot be said to be a transfer, for the reasons that a charge in English law is not a transfer of proprietary rights in the charged assets.14 Rather, it is an encumbrance, lifted from the assets when the obligation secured by the charge is performed. Until the time comes for a charge to be enforced upon the chargor’s default, the assignment is held in suspense. A security assignment taking the form of a charge is described in practice and legislation as an assignment by way of charge and it will be referred to in these terms in this report, so far as it is necessary to differentiate between mortgages and charges. Assignments by way of charge are, in the field of receivables, much more common than mortgage transfers. In English law, security over receivables, indeed non-possessory security over any assets, is not described as a pledge. A pledge in English law is exclusively a possessory form of security and its purpose did not have to be distorted to accommodate non-possessory security for the reason that English law abandoned its hostility to non-possessory security a long time ago. A charge on a fund belonging to someone else, such as insurance proceeds realised when insured property is destroyed, has been described as a “partial assignment”,15 but “conditional assignment” is probably a better way to describe the matter, the condition in question being default by the assignor on the secured obligation.16 Whereas a security assignment in the form of a charge cannot be a statutory assignment under sec. 136 of the Law of Property Act 1925, a mortgage transfer can be.17 Moreover, a mortgage transfer is a present and not a conditional assignment: the conditional element in the transaction is not the transfer but the retransfer to 14 15

16

17

Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207. Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 1 WLR, 1140, at 1144, relying upon Durham Bros v Robertson [1898] 1 QB 765, at 769. This approach assists in understanding those cases where an assignment by way of charge is loosely stated not to be an assignment: Burlinson v Hall (1884) 12 QBD 347. For a detailed discussion of the position, see Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), para. 4.24. In the case of a floating charge that crystallises, it is said that an assignment takes place upon crystallisation: Rother Iron Works Ltd v Canterbury Precision Engineers Ltd [1971] QB 1, at 3 et seq.; NW Robbie Ltd v Witney Warehouse Ltd [1963] 1 WLR 1324, at 1327 et seq. Hughes v Pump House Hotel Co [1902] 2 KB 190.

England and Wales

151

the mortgagor, which is dependent upon repayment of the mortgage debt and interest.18

3.

Writing, notice and registration

Apart from the case of land, English law displays an informal approach to contracts and assignments in the field of security. As explained below, an assignment of receivables can be made by purely informal means, whether it is an outright transfer, a mortgage transfer or an assignment by way of charge. An assignment is also fully effective without notice of the assignment having to be given to the debtor, though there are practical reasons, relating for example to priorities and discharge of indebtedness, for assignees in many cases to give notice to the debtor. It is not the practice for such notice to be given for security assignments, whether mortgage transfers or assignments by way of charge. Registration, however, is a common requirement in the case of receivables. All security assignments, where the assignor is a company, have to be registered in the national register maintained by the Registrar of Companies. Outright transfers of receivables, not by way of security, do not have to be registered where the transferor is a company. For individuals, security assignments have to be entered in a local bills of sale register, which makes them more difficult to search than security assignments granted by companies. Outright transfers by individuals, taking the form of a general assignment of receivables, also have to be entered in the appropriate local bills of sale register.

4.

Financial Collateral Directive

The Financial Collateral Arrangements Directive19 has been transposed in the United Kingdom in the form of Regulations.20 The Directive itself allows Member States to opt out of the Directive where one of the parties to a financial collateral arrangement is “a person other than a natural person, including unincorporated firms and partnerships”21 and the other person is a named entity such as a central bank, investment firm, insurance undertaking, credit institution or financial institution. The UK decided not to opt out in this case, with the result that the transposing regulations have a very broad reach indeed. They are quite capable of catching lending and

18 19 20 21

Ibid. Directive 2002 / 47 / EC of 6 June 2002 (OJ 27 June 2002 L 168 / 43 et seq.). Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226. Art. 1(3) of the Financial Collateral Directive.

152

Michael Bridge

financial leasing transactions, between a bank or finance house22 and a company, that are not investment, capital market or money market transactions. The effect of this broad reach may be less than first impressions would suggest. With certain exceptions,23 English insolvency law allows secured creditors and title retainers to exercise their proprietary rights outside the formal processes of insolvency law. In addition, the writing and other requirements that have to be fulfilled in order to create a security interest or to acquire or reserve title are not very demanding. A further and more difficult issue concerns the application of the Regulations to floating charges. A security financial collateral arrangement is defined as requiring collateral to be "in the possession or under the control” of the collateral taker.24 Possession poses no difficulties in, for example, the case of documentary intangibles such as bearer bonds. But there is no definition of control in the Regulations, though control does appear to contemplate the equivalent of dispossession in the case of financial collateral not taking the form of a documentary intangible.25 When dealing with the reform of the law of security interests in England, the Law Commission had occasion to discuss the scope and meaning of control26 but it came to the conclusion that it could not define control for the purpose of the Financial Collateral Directive27 and concerned itself instead with other matters, such as the ordering of priorities amongst competing creditors. On one view a collateral taker with a floating charge would not have control 22

23

24

25 26

27

Falling within the definition of a financial institution or a credit institution incorporated by reference in Directive 2002 / 47 / EC from Directive 2000 / 12 / EC on Credit Institutions. For example, the moratorium on the enforcement of security and title rights when a company is in administration: Insolvency Act 1986, Schedule B1, para. 43 (as added by the Enterprise Act 2002). Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226, regulation 3. See the discussion of control in Law Commission, Report on Company Security Interests, LAW COM No. 296, 2005, Part 5, available online at http: // www.bailii.org / ew / other / EWLC / 2005 / 296.html (1 April 2009) and Law Commission, Company Security Interests, Consultation Paper No. 176, 2004, Part 4, available online at http: // www.bailii.org / ew / other / EWLC / 2004 / 176(4).html (1 April 2009). Recital 10 of the Financial Collateral Directive. It discussed at some length the difference between what it called “negative control” and “positive control”, both amounting in its judgement to dispossession. The essential difference between the two forms of control was the ability to prevent a debtor from disposing of collateral (negative control) and the ability to have an intermediary (a bank for example) follow the secured creditor’s instructions: paras. 5.46 et seq. of the Report (fn. 24, supra). Para. 5.44 of the Report (fn. 24, supra). It did so with considerable regret: para. 5.61.

England and Wales

153

over charged assets and would thus not be exempted by the Regulations from the registration requirements of the Companies Act. This is because the hallmark of a floating charge is the ability of the chargor to continue dealing with the charged assets in the ordinary course of business without the need to resort to the chargee for permission to deal on a recurring basis. On the other hand, the Regulations disapply certain statutory provisions dealing only with floating charges,28 which would hardly be necessary unless floating charges were capable of coming within the definition of a security financial collateral arrangement. The better view is that floating charges are capable of complying with the requirement of control, though there is scope for an argument that some degree of monitoring of the charged assets, falling short of the standard required for a charge to be a fixed charge, is nevertheless necessary. Even so, it can be expected that precautionary compliance with company charge registration requirements would be effected by a creditor with a floating charge.

II.

Case Studies

1.

Security right over “future” receivables

The starting point here is whether an assignment of a future claim can occur when the claim has not yet come into existence. This is the position where the A-B contract has not yet been concluded. The leading authorities here are Australian,29 which draw a difficult distinction between future property and a present right to future performance.30 Future property cannot be assigned for the simple reason that there is nothing to assign. Consequently, rights under a contract not yet concluded cannot be assigned.31 A present right to future performance can however be assigned. The distinction between an assignment of future property and the assignment of a present right to future performance can be seen in the case of an assignment of the interest arising in the future under a loan. If the loan can be repaid by the debtor before interest starts to run, an assignment of the interest is the assignment of future property.32 If the loan is a 28

29

30 31

32

See Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226, regulation 10 (disapplying sec. 245 of the Insolvency Act 1986 and sec. 196 of the Companies Act 1985). Principally, Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 (High Court); Shepherd v Federal Commissioner of Taxation (1965) 113 CLR 385 (High Court). See Tolhurst, The Assignment of Contractual Rights (2006), p. 139 et seq. Pfeiffer (E) Weinkellerei-Weineinkauf GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150, at 161. Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, 21: “I regard interest which may accrue in the future upon an existing loan repayable without

154

Michael Bridge

term loan, so that there is a present but inchoate right of the creditor to the interest that will arise in the future, then this is the case of an assignment of a present right to future performance.33 Consequently, there is a difference between an assignment of a claim under a contract not yet made and an assignment under a contract not yet performed by the assignor. In the latter case, the assignor does have a right to performance by the debtor, albeit a contingent one, dependent upon contractual performance by the assignor itself. An assignment can therefore occur even if the sum assigned is not yet payable. Indeed, it may occur if the sum is not yet due. Even though property not yet in existence may only purportedly and not actually be assigned, the purported assignment is still significant. The transaction is not treated as void. Instead, it is treated as giving rise to a contractual promise to assign, which, if made for consideration, brings about an automatic assignment of the property as soon as it comes into existence.34 For the purpose of registration of company charges, the position is somewhat different. If there is a contract to grant a charge (or a mortgage) in the future,35 or a contract to grant a charge upon the occurrence of a contingency,36 neither transaction will give rise to the duty to register. The grant of a charge is deferred by the intention of the grantor to the future date or contingency. This does not however mean that a purported present charge over future assets is not registrable. The starting point is that the Companies Act 2006 requires registration of book debts (not of accounts receivable).37 This requirement is disapplied in the case of “a security financial collateral arrangement or any charge created or otherwise arising under a security financial collateral arrangement”.38 Since, however, a charge over book debts will as a matter of practice necessarily be a floating charge, this raises doubts about whether the requisite element of control is present in a

33

34 35 36 37 38

notice as having the character of a right to come into existence rather than of a right already in existence (Menzies J).” See the way that Shepherd v Federal Commissioner of Taxation (1965) 113 CLR 385 distinguished the earlier case of Norman v Federal Commissioner of Taxation (1963) 109 CLR 9. For example, Kitto J at 396: “[T]he loan agreement [in Norman] … left the borrower free to decide whether … a [loan] relationship should exist, in the relevant year. It gave the lender no right in any possible event to insist upon there being a loan in existence in that year.” Tailby v Official Receiver (1888) 13 App Cas 523. Williams v Burlington Investments Ltd (1977) 121 Sol Jo 424. Re Gregory Love & Co [1916] 1 Ch 203. Sec. 860(7)(f). Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226, regulation 4(4).

England and Wales

155

floating charge, so as to exempt that charge from the registration requirement. For reasons given above, however, the better view is that control is present or, with suitable drafting at least, can be present in the case of a floating charge. Book debts are those debts that are entered in the well-kept books of a company in the ordinary course of business.39 In Paul & Frank v Discount Bank (Overseas),40 this was Pennycuick J’s summary of the earlier judgment of Buckley J in Independent Automatic Sales v Knowles & Foster: 41 “[I]f a charge … covers future debts, in the sense of debts under a future contract which, when that contract comes to be made, will constitute book debts … I see no reason at all why [section 860(7)(f)] should not be fairly applicable to the charge …”

In Paul & Frank itself, however, Pennycuick J ruled that a charge over an insurance policy, payable in various events such as the insolvency of an overseas buyer, was not registrable as a book debt. Moreover, the relevant date for the purpose of determining whether a book debt was registrable was the date when the charge was created. The distinction between the two cases lies between what is future and what is contingent. A contingent debt will not be entered in the books of a company because it is not a prudential act to do so. Provided, however, that a charge applies to future debts that, when they do come into existence will not be contingent, in the sense of being dependent upon outside agencies or events over which the assignor has no control, then a purported present charge will be registrable as a book debt even though no true assignment by way of charge can yet take place.42 As for where to draw the distinction for present purposes between what is future and what is contingent, much will depend upon the precise terms and subject matter of the instrument of charge. As one judge put it: “I get the firm impression that the assignment was looking to the money when it became due as the subject of the charge rather than the contingent contractual right.”43 It should also be emphasised that a single act of registration will cover all book debts answering the description contained in the charge, which is a particularly useful matter when it comes to revolving assets. 39

40 41 42

43

Shipley v Marshall (1863) 14 CB (NS) 566; Independent Automatic Sales v Knowles & Foster [1962] 1 WLR 974. [1967] Ch 348 363. [1962] 1 WLR 974. See Calnan, Taking Security: Law and Practice (2006), p. 172 et seq. A prudent lender will nevertheless, when taking security over a class of revolving assets and registering that security, make sure that there is at least one asset belonging to the class when taking the security. Re Brush Aggregates Ltd [1983] BCLC 320.

156

Michael Bridge

There are no special rules here for individuals as opposed to companies. Nor are there special rules in respect of the type of debt or contract giving rise to the debt. “Book debts” are significant in English law in two respects. First, there is the question whether an assignment, properly interpreted, of “book debts” includes a bank balance.44 Secondly, as seen above, there is the question whether a charge over certain debts is registrable as a charge over book debts in accordance with sec. 860 of the Companies Act 2006. An issue of construction is raised in both cases, but in the first case it is the intention of the legislator that is being examined, while in the second it is the intention of the parties to the security instrument. It cannot be assumed that the two intentions are the same.

2.

Sale of existing receivables

This is a common transaction in English law, easy to implement. If the sale complies with the writing requirements of sec. 136 of the Law of Property Act 1925, the factor45 could, if it wished (it will probably prefer to invoke recourse provisions in the master agreement, or turn to a retention fund), take proceedings directly against a defaulting debtor. There is no need for notice to be given to any of the debtors to complete an equitable assignment (though this would be necessary for a statutory assignment under sec. 136 of the Law of Property Act 1925).46 The accounts might be collected

44

45

46

See Re Brightlife Ltd [1987] Ch 200; Re a Company (No. 005009 of 1987), ex p Copp [1989] BCLC 13. The current activities of a factor are far removed from those who practised as factors (selling agents) in earlier times. Factors are often subsidiaries of the major clearing banks. Apart from various ancillary activities, the core of their business is the purchase of trade debts that arise in the ordinary course of the creditor’s business. There are many ways in which this may be done, but a critical distinction that is useful to bear in mind is that between facultative agreements and whole turnover agreements. Under a facultative agreement, the creditor is bound to offer all of its trade debts to the factor but the factor has a choice of which to accept. Under a whole turnover agreement, however, the assignment of each and every one of those trade debts (or a defined sub-category) takes effect in equity as soon as they come into existence. See generally Ruddy / Mills / Davidson, Salinger on Factoring (4th edn. 2006). Even if they were applicable (factoring appears to be neither a security financial collateral arrangement nor a title financial collateral arrangement), the Financial Collateral Arrangements (No. 2) Regulations do not dispense with the requirement of notice to the debtor: SI 2003 No. 3226, regulation 4(3). In any case, the factor might wish to give notice to protect its priority position against other assignees.

England and Wales

157

by the assignor (indirect collection) or they might by notice to the debtors be made payable to the factor (direct collection). So long as the sale is a genuine sale and not a disguised charge,47 it is not treated as a company charge and therefore does not have to be registered under sec. 860 of the Companies Act 2006.48 The characterisation of a transaction as a sale (or discounting) of book debts is no doubt assisted by the presence of a non-recourse provision, but a genuine sale can take place even if the assignor remains liable on a recourse basis.49 As a seller of book debts, the assignor from whom the assignee may seek recourse may be seen as warranting the quality of the book debts. There will be a master agreement between the factor and the assignor. The agreement might provide for the factor to purchase bundles of accounts at intervals, subject to the factor’s right to decline individual accounts (facultative factoring), or it might require the factor to accept all accounts (whole turnover factoring). There is no significance to be attached in English law to the number or amounts of the accounts except in so far as this goes to the question whether or not there is a “general assignment” of book debts by a noncorporate. These have to be registered as bills of sale50 if they are not to be avoided by the assignor’s trustee in bankruptcy.51 A general assignment does not include an assignment of specified debts or of debts already due at the date of the assignment,52 so the registration requirement in effect applies to whole turnover factoring rather than facultative factoring.

3.

Security right in all existing and future receivables

This transaction is registrable in the case of a company assignor either as a charge (which for statutory purposes includes a mortgage)53 of book debts54 or as a floating charge.55 The floating charge head of registration catches all types of asset and not just those that fit the definition of a book debt. If

47

48 49 50

51

52 53 54 55

On which see Olds Discount Co Ltd v John Playfair Ltd [1938] 3 All ER 275; Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209; Lloyds & Scottish Finance Ltd v Cyril Lord Carpet Sales Ltd (1979) [1992] BCLC 609. See infra for the case of a non-corporate assignor. See the transaction in Re Charge Card Services Ltd [1987] Ch 150. The Bills of Sale Act 1878 (Amendment) Act 1882 otherwise applies only in the case of tangible personalty: sec. 344 of the Insolvency Act 1986. Bankruptcy deals with insolvent individuals and liquidation (or winding-up) with insolvent companies. Sub sec. 344(3)(b) of the Insolvency Act 1986. Sec. 861(5) of the Companies Act 2006. Sec. 860(7)(f) of the Companies Act 2006. Sec. 860(7)(g) of the Companies Act 2006.

158

Michael Bridge

the assignor is a non-corporate, the registration requirement applies equally to sales and charges.56 The general description of the receivables will not pose a problem in English law as a matter of contract since a contractual provision capable of becoming certain over time is treated as certain now (id certum est quod certum reddi potest). There is, furthermore, no requirement that such a contract be in, or evidenced in, writing. Nor is general description an issue for the purpose of registration since only “short particulars of the property charged” need to be sent to the Registrar of Companies.57 A security assignment of receivables does not come within sec. 136 of the Law of Property Act 1925 if it takes the form of a charge.58 Section 136 can apply to a mortgage transfer,59 but, since there is little if any advantage in bringing a transaction within the section, contracting parties are unlikely to go to the trouble of creating a mortgage.

4.

Sale of partial undivided interest in a portfolio of receivables

The assignment of part of a debt cannot be effected under sec. 136 of the Law of Property Act 1925 but only in equity. There remains but one debt and not as many debts as there are partial assignments. “A debt cannot be recovered piecemeal at law.”60 Nevertheless, it is sometimes asserted that an assignment of part of a debt can only take effect in equity as a charge over that debt.61 If this is correct, then the notion of a charge, as is sometimes the case with a trust, is being used instrumentally to protect the assignee and not to recognise a genuine security interest. Consequently, there would be no need to register a charge over book debts under sec. 860 of the Companies Act 2006 just because each one of a number of debts is only partly assigned.62 The assignee bank does not get a security but “an equitable claim on the fund”.63 The bank will therefore be recognised in equity as a co-owner of the fund,64 in this case the portfolio of loans. The portion

56 57 58 59 60

61

62 63 64

Sec. 344(3)(a) of the Insolvency Act 1986. Sec. 869(4)(d) of the Companies Act 2006. Durham Bros v Robertson [1898] 1 QB 765. Hughes v Pump House Hotel Co [1902] 2 KB 190. Tolhurst, The Assignment of Contractual Rights (2006), p. 91 (citing Windeyer J in Norman v Federal Commissioner of Taxation (1962) 109 CLR 9, at 29). Palmer v Carey [1926] AC 703, at 706; Rodick v Gandell (1852) 1 De GM & G 763, at 777 et seq. Ashby Warner & Co Ltd v Simmons [1936] 2 All ER 697. Ashby Warner & Co Ltd v Simmons [1936] 2 All ER 697, at 704 (Greer LJ). Tolhurst, The Assignment of Contractual Rights (2006), p. 95.

England and Wales

159

of each debt retained by L1, the assignor, should therefore not be cumulatively regarded as its equity of redemption in the portfolio of loans.65 The above discussion assumes there is no difficulty in identifying the subject matter of the assignment. If the intention is to assign 40 % of each debt in the fund, then the assignment would operate by way of charge as stated in the previous paragraph. If, however, the assignment is of an unascertained group of debts in the fund whose value amounts to 40 % of the whole, then the assignment should fail for want of certainty. The former transaction is unlikely in practice and the latter is an example of professional negligence if the purpose of the arrangement is to effect a partial assignment of the debts. A participation arrangement, by which a third party assumes part of the risk of default by the debtor, is a different matter because in such a case there is no assignment and relations constituted between debtor and third party. The third party sits behind the creditor.

5.

Security right in receivables that are secured by real rights in goods

As presented, this is just another case of assignment by way of charge of future book debts. It is registrable under sec. 860 of the Companies Act 2006, unless exempted under the Financial Collateral Arrangements (No. 2) Regulations 2003, which is dependent upon the lender being a credit or financial institution and control being exercised by the lender.66 The latter event is unlikely. As for what happens to the rights of the assignor in the goods, this will be dealt with as a matter of title-retention because this will almost certainly be the way that the supply of goods in practice will be structured. The form of title retention will probably be hire purchase or conditional sale. The difference between the two is that, in the case of the former, the hirer becomes the owner of the goods only when exercising an option to purchase (usually for a nominal amount) that takes effect only when the last hire instalment has been paid, whereas a conditional buyer automatically becomes the owner of the goods when the last instalment of the price has been paid. There are essentially two ways in which M1 can obtain finance from the “lender”.67 First, M1 may, in an agency capacity,68 introduce the customer 65

66 67

68

Cf. the different transaction in Re Kent & Sussex Sawmills Ltd [1946] 2 All ER 638, at 641. See earlier discussion. Inverted commas, because M1 is not party to any loan contract in these circumstances. There is a precedent of the master agreement between a dealer and a financier in Goode, Commercial Law (3rd edn. 2004), p. 753-780.

160

Michael Bridge

to the lender, so that the hire purchase or conditional sale agreement is concluded directly between the lender and the customers of M1. There is then no question of book debts being sold to or charged in favour of the lender. When a customer is introduced to the lender and proves an acceptable credit risk, M1 will sell the goods to the lender, which then will simultaneously resell them on conditional sale terms or bail them on hire purchase terms to the customer. The sale is necessary if the lender is to comply with its title obligations to the customers under the hire purchase or conditional sale contract.69 Secondly, M1 may conclude the relevant contract directly with the customers before assigning to the “lender”,70 or rather a factor, the book debts generated by these transactions. In this case, the first point to note is that M1’s proprietary rights in the goods will not pass as a matter of law to the factor. The contract with the factor is a sale of the book debts. It is not a sale or transfer of M1’s rights in the goods. It is common nevertheless for the master factoring agreement between M1 and the factor to include a provision by which the latter may call upon M1 by notice to transfer the underlying goods to the factor.71 Although the customer would become the owner,72 or be entitled to call for ownership, only after all the instalments have been paid,73 the rights of the factor as assignee are subject to equities and defences available to the debtor against the assignor, M1. If M1 defaults on the proprietary transfer, this might give rise to a restitutionary right that could be exercised against the assignee. Hence, it is prudent for the factor to have such an express clause in the contract, as well as the usual recourse provisions. It is highly unlikely that M1 will avail itself of a mortgage or charge in its dealings with customers. This would introduce a registration requirement, under bills of sale legislation for non-corporates,74 that does not exist 69

70 71

72 73

74

The lender’s obligations in respect of title are to be found in sec. 8 of the Supply of Goods (Implied Terms) Act 1973 (hire purchase) and in sec. 12 of the Sale of Goods Act 1979 (conditional sale). For the fitness and quality obligations of the lender, see sec. 10 of the 1973 Act (hire purchase) and sec. 14 of the 1979 Act (conditional sale). Inverted commas again if there is an outright sale of the receivables. See the precedent in Goode, Commercial Law (3rd edn. 2004), p. 781-797. According to cl. 8.4: “We shall have the right by oral or written notice to you to have transferred to us the ownership of any Goods…which are the subject of a Contract of Sale and of which the ownership has not passed to the Debtor. You will deal with those Goods as required by us.” A Contract of Sale is defined as “a contract for the supply of goods or services or for hiring by you” (cl. 27.2). Under a conditional sale. In the case of hire purchase, under the option to purchase that becomes exercisable once all the hire instalments have been paid. Bills of Sale Act 1878 (Amendment) Act 1882.

England and Wales

161

in the case of title-based schemes like hire purchase. If nevertheless M1 did use a mortgage or charge in its dealings with customers, the above analysis of the relationship between M1 and the factor would remain the same. If, instead of dealing with a factor, M1 charges or mortgages its book debts in favour of a bank, then again no ownership rights in the underlying goods will as a matter of law pass to the chargee bank. The goods are in no way the proceeds of the book debts. It would of course be open to the bank to stipulate also for a charge over the underlying goods (subject to the rights of the customers) as well as a charge over the book debts. This would be done by means of a floating charge sweeping up all of M1’s assets that are not the subject of fixed charges.75 There is also other language in a standard bank debenture that might at first sight seem relevant, for example, the charging provision that follows the charge over book debts and refers to “any Rights accruing to, derived from or connected with [the book debts] (including insurances and proceeds of Disposal and of insurances)”. It would be stretching the language of the debenture, however, to have this provision extend to the goods that generate the book debts.

6.

Security right in receivables that are supported by personal guarantees

It would be unlikely for M1 to rely just upon a personal guarantee and not upon a title device or a charge. If however M1 did, the question is whether the guarantee is assigned to the financier along with the relevant debt. Two questions arise here. The first is whether the guarantee is automatically assigned by operation of law when the receivables are assigned. The rule is that no such automatic assignment takes place, whether the assignment is outright or by way of charge.76 The second question is whether the guarantee may be assigned by the assignor to the assignee along with the receivables. As with so many questions, however, the starting point must always be the construction of the particular guarantee. If the guarantee is 75

76

It is not feasible to have stock-in-trade etc. the subject of a fixed charge: cf. Re Spectrum Ltd [2005] 2 AC 680. The position was formerly different, before certain statutory changes took effect, for a transfer of an interest in land. In Kumar v Dunning [1989] 1 QB 198, there was an assignment of the reversion of a lease which was held also to pass automatically the benefit of a surety’s covenant guaranteeing performance by the tenant of its covenants. The surety’s covenant touched and concerned the land so as to fall with the rule dealing with positive covenants running with the land. This rule was held by an Australian court not to apply to a tenant’s covenant to pay rent because this covenant did not touch and concern the land: Consolidated Trust Co v Naylar (1936) 55 CLR 423. This example illustrates the exceptional nature of a guarantee being transferred by operation of law.

162

Michael Bridge

expressed to be assignable, there is no reason to deny the wishes of creditor and guarantor. Guarantees are in practice often drafted so as to be assignable, as where they are given to a creditor and its “assigns”. If the guarantee is silent on the matter of assignment, and does not contain a no-assignment clause, the position is that the guarantee should be assignable as a matter of law. The reasons are as follows. No personal considerations enter into the performance by the guarantor towards a particular creditor in the event of the debtor’s default. The assignment does not change the underlying risk in relation to the guaranteed debt,77 nor does it change the identities of the parties to the original contract of loan. Moreover, it is a “basic principle that the debt owed by a guarantor, upon default by the principal debtor, is and remains the same debt as that owing by the principal debtor”.78 All of this points to the rule that personal obligations may not be assigned as having no application in this case.

7.

Security right in receivables that are supported by independent undertakings

The position in this Case should be the same as for the guarantees in Case 6, para. II.6. supra. Whether the credit support is framed as a standby letter of credit, or as a first demand performance bond or a demand guarantee, should make no difference, since these instruments operate essentially according to the same rules. In the modern law of suretyship, the difference between primary and secondary liability has been eroded. An English court is likely to say that the giver of an independent undertaking should take care to invoke a no-assignment clause if it wishes to prevent its undertaking from being transferred. Such a conclusion is rendered more likely by the awareness in financial circles of no-assignment clauses.

8.

Contractual restrictions on assignment

The starting point is that the factor’s or lender’s knowledge or ignorance of the no-assignment clause is irrelevant in English law. Another important point to note is the importance of construction: a no-assignment clause will first be examined on its terms to see what it does and does not seek to prohibit. It has been settled at the highest level that a no-assignment clause in an underlying contract is effective as between debtor and assignee, so that 77

78

If it did, this would discharge the guarantor unless the guarantee permitted the creditor to vary the risk. See Holme v Brunskill (1878) 3 QBD 495. Hutchens v Deauville Investments Pty Ltd (1986) 68 ALR 367 (High Court), para. 11.

England and Wales

163

no contractual rights enforceable by the assignee against the debtor are transferred to the assignee.79 The effect of that prohibition on the relations between assignor and assignee, however, is a different matter. In the leading case,80 Lord Browne-Wilkinson stated that the prohibition should “normally” be construed as applicable only to the relations between debtor and assignee.81 It is hard to see why the statement should even be qualified by the word “normally”. An assignment that fails owing to the existence of a no-assignment clause should in principle give rise to a trust of the proceeds of the debt in the hands of the assignor.82 The debtor has no legitimate interest in preventing this and, even if the contract giving rise to the debt could be construed as aiming to prevent proprietary effect as between assignor and assignee, the debtor would have only an action against the assignor for breach of contract. It is difficult to imagine circumstances in which an injunction would issue to prevent the assignment having some proprietary effect as between assignor and assignee.83 So far as a debtor would in the practical world have no interest in intervening in the relations of assignor and assignee, the problem is a false one. A fortiori, if the transaction between assignor and assignee relates only to the fruits (or proceeds) of the debt in the hands of the assignor, then effect should be given to it as between assignor and assignee.84 Despite the care with which the court in Linden Gardens Trust marked out a role for the no-assignment clause, that court’s position has largely been circumvented by subsequent developments. In Don King Productions Inc v Warren,85 an inability to assign a debt was stated not to prevent a party from declaring itself trustee of rights under a contract for the benefit of a third party. This trust arose from an undertaking in a partnership agree-

79

80 81

82 83

84 85

Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85. The clause in this case prevented the assignment of a building contract and was interpreted as forbidding also the assignment of amounts falling due under that contract. See also Helstan Securities Ltd v Hertfordshire CC [1978] 3 All ER 262. Linden Gardens Trust, fn. 79 supra. Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, at 108, discussing the difficult case of Tom Shaw & Co v Moss Empires Ltd (1908) 25 TLR 190. Re Turcan (1888) 40 Ch D 5. See also Goode, Legal Problems of Credit and Security (3rd edn. 2003), p. 107 et seq., where the author goes so far as to say: “A purported prohibition on the assignment of the collected proceeds would, it is thought, be contrary to public policy as an unacceptable restraint on alienation.” Re Turcan (1888) 40 Ch D 5. [2000] Ch 291 (Lightman J and the Court of Appeal).

164

Michael Bridge

ment to hold certain benefits (contracts with boxers)86 as partnership assets. A similar trust might not implausibly be spelt out of a failed assignment. The ruling in Don King is odd because a declaration of trust of contractual rights (permissible) is closely akin to an assignment of contractual rights that fails because of a prohibition clause.87 The effect of a trust of contractual rights, moreover, would be to require the trustee to perform contractual obligations precedent to the accrual of such rights, for example, contractual renewal options.88 The recognition of a trust where an assignment would not be recognised might bring about the very thing that the debtor tries to avoid, namely, dealing with someone other than the original obligee. For example, where a trustee is unwilling to gather in the trust estate, the beneficiary may, under the so-called Vandepitte procedure, act so as to enforce the trust directly.89 In Don King Productions Inc v Warren, however, Lightman J was prepared to curtail the application of trust principles that ought not to be applied in commercial situations where they had no place.90 Lightman J was also of the view that the rule in Saunders v Vautier 91 would not be applied to allow the beneficiary to wind up the trust if, as in the present case, the trustee had outstanding obligations to perform by collecting payment of the debt or debts in question. More recently, the Court of Appeal in Barbados Trust Co Ltd v Bank of Zambia 92 has indicated in terms that are less than abundantly clear that the Vandepitte procedure might still be available to the beneficiary in some cases, notwithstanding the no-assignment clause. Whether the Vandepitte procedure is available or not, the trust assets will still be part of the beneficiary’s estate and thus available to an attaching creditor of the beneficiary. No-assignment clauses have also been attacked from a different direction. In Foamcrete (UK) Ltd v Thrust Engineering Ltd,93 the Court of Appeal expressed the view that a no-assignment clause in a joint venture agreement would if enforced deprive of effect, in relation to the payment 86

87

88 89 90 91

92 93

Apart from the no-assignment clause, these contracts were unassignable because the right to performance of a contract of a personal character cannot be assigned unless the contract itself permits it. Barbados Trust Co Ltd v Bank of Zambia [2007] EWCA Civ 148, para. 111 (Rix LJ). See the criticisms of Tettenborn, LMCLQ 1998, 498 and LMCLQ 1999, 353 on the enforcement of trusts of contractual rights despite a no-assignment clause. See Marshall (1999) 12 Insolv Int 1. Vandepitte v Preferred Accident Corp of New York [1933] AC 70. [2000] Ch 291, 321. See also Morritt LJ in the Court of Appeal at 335 et seq. (1841) Cr & Ph 240. This rule allows a trust to be wound up if all the beneficiaries consent to this, so that the full legal title to the assets passes to those beneficiaries. [2007] EWCA Civ 148. [2002] BCC 221.

England and Wales

165

obligation, fixed and floating charges contained in a debenture created two years prior to that joint venture agreement. In permitting enforcement of the charges, the court relied on authority to the effect that the chargee of future debts acquired a beneficial interest in those debts,94 but failed to note that such debts must first come into existence before an interest in them can be acquired. The court also added that the chargee was relying upon the charge itself and not upon any assignment subsequently given in breach of the no-assignment clause. In the court’s view, Linden Gardens Trust should be confined to the latter case. The court observed too that giving effect to a no-assignment clause over a prior debenture would remove assets from the reach of a charge over future assets without the chargee’s consent. These observations were not necessary for the decision in this case and their correctness is open to some doubt. The recognition in English law that a chargee has an inchoate right in future debts is the mainspring of this decision. A point not taken in this case, though it may be taken at a future date, is that a no-assignment clause prohibiting transfers does not on its true construction catch a charge for the reason, stated above, that a charge is not a transfer.

9.

Legal restrictions on assignment

This question cannot readily be answered in the abstract. English law imposes few impediments to assignment. If there is a rule of public policy preventing an assignment (for example, because as an assignment of a bare right of action it is champertous95), then it replicates the effect of a no-assignment clause and goes further in preventing the assignment from taking effect between assignor and assignee. An English court would not move to infer a trust of rights of litigation where an assignment of rights of litigation would be void as contrary to public policy. A no-assignment clause replicates the rule that contractual rights of a personal character may not be assigned (though it is highly unlikely that a right to receive payment would be classified as a right of a personal character). If a trust is recognised in relation to rights the subject of a no-assignment clause, there is every reason to recognise it equally in the case of personal contractual rights.

94 95

Re Margart Pty Ltd [1985] BCLC 314, 318. A debt is assignable even if liability is disputed by the debtor: see Camdex International Ltd v Bank of Zambia [1996] 3 All ER 431. What constitutes a mere right of action is not straightforward, especially in the case of the assignment of unliquidated claims.

166

Michael Bridge

Apart from mere rights of action, a wife’s claim to maintenance may not be assigned,96 and, whilst generally wages may be assigned, this is not permitted if it deprives an employee of his sole means of support.97 There are also numerous statutory prohibitions dealing with pensions. An assignment of rights will also be void to the extent that it infringes sec. 127 of the Insolvency Act 1986, which prohibits the disposition of company property after the commencement of winding-up proceedings.98 The court has an open-ended discretion to allow particular dispositions which it will exercise taking account of the interests of the creditors of the company assignor. Apart from this discretion, the assignment will not be permitted to take effect between the company assignor and the assignee.

10. Publicity; priorities in general In the case of a factoring agreement, the purchase rights of the factor, which are not charges, do not require registration. Consequently, there is no means in the nature of public notice by which a competing factor or secured creditor can discover the existence of a previous sale of the book debts.99 If the previous transaction gave rise to a charge over book debts, this could be discovered from the register of company charges. Nevertheless, since advance registration is not permissible,100 and since 21 days are allowed for registration,101 with seniority dating from the sale or charge and not from the date of registration, there is a blind spot on the register, which can mislead subsequent assignees. A sale of the debts on the previous day would therefore be invisible. Priority between competing assignments, whether they are outright or by way of charge, is determined 96

97

98

99

100 101

Watkins v Watkins [1896] P 222 (displaying a Victorian assumption that a wife deprived of maintenance and similar payments would be destitute). King v Michael Faraday & Partners Ltd [1939] 2 KB 753. But a public officer may not assign his salary at all: Liverpool Corp v Wright (1859) 28 LJ Ch 868. Under the Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226, regulation 10, sec. 127 of the Insolvency Act 1986 does not apply “(a) to any property or security interest subject to a disposition or created or otherwise arising under a financial collateral arrangement; or (b) to prevent a close-out netting provision taking effect in accordance with its terms.” The position, as seen above, is different in the case of general assignments by individuals (sec. 344 of the Insolvency Act 1986), though there is no central register of such assignments. See the wording of sec. 870(1)(a) of the Companies Act 2006. And the Registrar’s staff can take several days after receipt of the registrable particulars to effect the registration, since the process involves an often laborious comparison of the particulars of charge with the accompanying instrument of charge.

England and Wales

167

by the order in which they are notified to the debtor, except that a later assignee with notice of an earlier assignment may not advance its priority in this way.102

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods The seller might claim an interest in book debts, or in their money proceeds, either because the seller has taken an extended reservation of title clause, or because the seller seeks to trace the goods supplied into their proceeds. In the former case, whether the seller employs the language of trust or agency, English courts have routinely recharacterised the seller’s extended clause as giving rise to a registrable charge over book debts.103 In the latter case, despite an initial decision favouring a seller’s right to trace into money proceeds,104 subsequent decisions have concluded that the seller has no right to trace in the absence of a fiduciary relationship with the buyer and that the relationship of the seller and buyer, even if the buyer holds the goods as bailee of the seller, does not give rise to a fiduciary relationship.105 Even if there was a retention clause expressing the buyer to be a “fiduciary”, this would be held to give rise only to a registrable charge over book debts.106 There remains to consider the ordering of priority between the seller and the factor. In Pfeiffer Weinkellerei-Weineinkauf GmbH v Arbuthnot Factors Ltd,107 a priority conflict arose between a seller with an extended reservation of title clause and a factor. The factor had taken a statutory assignment under sec. 136 of the Law of Property Act 1925 but, although this was stated to be a legal interest, it nevertheless did not on that account override

102 103

104

105

106 107

Dearle v Hall (1828) 3 Russ 1; Ward v Duncombe [1893] AC 369. Pfeiffer (E) Weinkellerei-Weineinkauf GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150; Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484; Tatung (UK) Ltd v Galex Telesure Ltd (1988) 5 BCC 325; Re Peachdart Ltd [1984] Ch 131. Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. Pfeiffer (E) Weinkellerei-Weineinkauf GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150 (Romalpa decided on its “special facts”); Re Andrabell [1984] 3 All ER 407; Compaq Computer Ltd v Abercorn Group Ltd [1991] BCC 484; Tatung (UK) Ltd v Galex Telesure Ltd (1988) 5 BCC 325. See Re Bond Worth Ltd [1980] Ch 228; Re Peachdart Ltd [1984] Ch 131. [1988] 1 WLR 150.

168

Michael Bridge

earlier equitable interests.108 The rule in Dearle v Hall109 applied so that the factor, being the first to notify the debtors of its assignment, and having no notice of the seller’s earlier equitable interest, was entitled to priority in respect of the book debts. It is highly unlikely that the seller benefiting from an extended reservation of title clause would register it as a charge over book debts. Although an unregistered charge is void against certain classes of person, such as liquidators and administrators of the company chargor, that list does not include purchasers of the company’s property.110 The factor succeeded in this case, but not because the seller had failed to register its charge. The question whether the factor would have had constructive notice if the seller had registered its charge111 also did not arise,112 though there is a cogent, and in my view correct, argument that those who may not challenge a charge for non-registration should not be expected to examine the register for the purpose of the constructive notice rule. If, despite the established view, it were to be held that a seller of goods had a right arising by operation of law to trace into the proceeds of goods in the hands of the buyer, the question would then arise as to the settlement of a priority dispute between that seller and a factor. Although the argument has been pressed that the rule in Dearle v Hall does not apply to this type of priority conflict,113 and that a tracing right defeats a later assignment,114 the better view is that the rule in Dearle v Hall does apply.115 The position, however, is not settled.

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods With one exception, the position of a chargee of the book debts would be the same as a factor. The rule in Dearle v Hall applies also where one or other of the competing interests is a charge.116 The chargee bank, however, 108

109 110 111 112

113

114 115 116

The distinction between an equitable assignment and a legal assignment subject to existing equities is, apart from the process of enforcing an assignment, a distinction without a difference. (1828) 3 Russ 1. Sec. 874 of the Companies Act 2006. Under the common law rule in Wilson v Kelland [1910] 2 Ch 306. The rule in Dearle v Hall (1828) 3 Russ 1 favours only those second assignees who do not have notice of the existence of a first assignment. McLauchlan, Priorities – Equitable Tracing and the Assignment of Book Debts, LQR 96 (1980), 90. Ibid. See Goode, Commercial Law (3rd edn. 2004), p. 752. Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 1 WLR 1140.

England and Wales

169

is unlikely to notify debtors of the charge so in practical terms will not be able to invoke the rule in Dearle v Hall so as to defeat on that account an earlier seller of the goods. The exception to the previous Case is that, if the seller fails to register an extended reservation of title clause as a charge, the bank will defeat the seller on the ground that it is a creditor against which, under sec. 874 of the Companies Act 2006, the seller’s charge is void. We have also seen that the weight of authority is also against the existence of a seller having the right to trace so as to establish an alternative route to the proceeds that does not involve the taking of a charge.

13. Notification The notification of an assignment to the debtor is a necessary part of establishing a statutory assignment under sec. 136 of the Law of Property Act 1925, so as to take advantage of the simpler method of enforcement of the debt laid down by that section.117 As stated above, it is not needed to complete an effective transfer in equity of the property in the debt.118 It is sometimes stated, nevertheless, that notice is required to “perfect the title” of the assignee,119 but this is misleading so far as it suggests that an assignment in equity has no present proprietary effect until notice is given to the debtor.120 As for the notice of assignment itself, in so far as it amounts to a direction to the debtor to pay the assignee, English courts have in the past taken a strict view of the words necessary to constitute such a direction. An example drawn from the case law121 is the following, stamped on the seller’s invoice: “To facilitate our accountancy and banking arrangements, it has been agreed that this invoice be transferred to and payment in London funds should be made to [X.]” This “extremely vague and obscure language”, chosen because the seller did not wish to reveal that it carried on its business with “borrowed money”, did not amount to the necessary direction to pay X, the assignee. The wording was insufficient because it did not make it plain to the debtor that it would be “rendered liable to pay 117

118 119

120

121

This causes problems in those cases where a corporate assignor has been wound up: Warner Bros Records Inc v Rollgreen Ltd [1976] QB 430. The assignee in that case was unable unilaterally to exercise an option in a recording contract to extend the term of a music recording agreement. Gorringe v India Rubber etc Works (1886) 34 Ch D 128. Warner Bros Records Inc v Rollgreen Ltd [1976] QB 430, 442 (Denning MR), citing Turner LJ in Stocks v Dobson (1853) 4 De GM & G 11, at 15 and 16. See Tolhurst, The Assignment of Contractual Rights (2006), p. 73-83. See the criticism of the language of perfection by Lord Macnaghten in Ward v Duncombe [1893] AC 369, 392-93. James Talcott Ltd v John Lewis and Co Ltd [1940] 3 All ER 592.

170

Michael Bridge

the money over again if [it] disregarded the notice”. It could have been read as a request by the creditor to the debtor to pay the named third party as agent for the creditor.122 There is in general no particular requirement as to form or wording for an effective notice served on the debtor,123 except that, for the purposes of the statutory assignment in sec. 136 of the Law of Property Act 1925, there has to be an “express notice in writing”. It is noteworthy that this requirement is not disapplied in the case of financial collateral arrangements.124 There is some case law, sparse and difficult, on the contents of the sec. 136 notice. So, for example, a notice giving the wrong date of an assignment has been held invalid,125 yet a notice that does not state the date of the assignment has been authoritatively stated to be valid.126 Consequently, although there is not a strict requirement as to the contents of the notice, an inaccurate notice will be struck down. In the case of an equitable assignment, these strict rules are alleviated so that a notice apprising the debtor of the fact of an assignment should be sufficient.127 Given the various purposes served by notice, the possibility of an implied notice being sufficient cannot be contemplated in English law. A notice compliant with the requirements of equitable assignment ought to suffice for the purpose of establishing the order of priority between competing assignments, since, whether the assignment is an equitable or a statutory one, the rule of priority is the same.128 Apart from the particular requirements of sec. 136, an English court is unlikely to differentiate the requirements of a valid notice according to the purpose served by that notice. The requisite notice may be served either by the assignor or by the assignee. If the notice is served by the assignor, it has been held in England that the assignee should also be notified of the assignment if this has not already happened.129 Since in principle an assignment does not need the 122

123 124

125

126

127 128

129

A modern court might not impose such a strict standard: see Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 1 WLR 1140. Dennery Gasquet and Metcalfe v Conklin [1913] 3 KB 177. See Financial Collateral Arrangements (No. 2) Regulations 2003, SI 2003 No. 3226, regulation 4(3). Stanley v English Fibres Industries Ltd (1899) 68 LJQB 839; WF Harrison & Co Ltd v Burke [1956] 2 All ER 169 Dennery Gasquet and Metcalfe v Conklin [1913] 3 KB 177, 180; Van Lynn Developments Ltd v Pelias Construction Co Ltd [1969] 1 QB 107. Whittingstall v King (1882) 46 LT 520. Pfeiffer (E) Weinkellerei-Weineinkauf GmbH v Arbuthnot Factors Ltd [1988] 1 WLR 150. Curran v Newpark Cinemas Ltd [1951] 1 All ER 295. For the different Australian view, see Grey v Australian Motorists & General Insurance Co Pty Ltd [1976] 1 NSWLR 6.

England and Wales

171

consent of the assignee,130 this notification requirement serves a different purpose than notice to the debtor. It is constitutive of the assignment itself. Unless and until such notification to the assignee occurs, there is no assignment.

14. Post-insolvency collection by buyer of receivables There are two aspects to this. First, may the factor give notice of the assignment to debtors and instruct them to make direct payment? Secondly, what are the factor’s rights to any proceeds of those debts in the hands of the insolvency administrator? Although these questions are particularly pertinent to whole turnover factoring, they will affect facultative factoring too so far as the factor has accepted particular debts and these debts have not yet been paid at the date of commencement of the assignor’s insolvency proceedings. As regards a facultative factoring agreement, the insolvency administrator of the assignor will consider disclaiming it, under powers contained in the Insolvency Act 1986,131 or continuing to perform it. A winding-up or bankruptcy order will not affect the factor’s ownership of debts if these have vested in the factor prior to the commencement of the winding-up or bankruptcy. In the case of facultative factoring, these will have been offered to and accepted by the factor. In the case of whole turnover factoring, they will automatically have become the property of the factor as soon as they came into existence, without the need for any further act or appropriation on the part of the assignor.132 Furthermore, debts subject to a whole turnover agreement and coming into existence after the commencement of the winding-up or bankruptcy automatically vest in the factor. If the factor has not already invoiced debtors, or caused debtors to be invoiced, directly, the factor will exercise an irrevocable power of attorney133 contained in the factoring agreement to do so on behalf of the 130 131 132

133

Standing v Bowring (1885) 31 Ch D 282. Sec. 178 and 315. Tailby v Official Receiver (1888) 13 App Cas 523; Re Lind [1915] Ch 345. According to Swinfen Eady LJ in the latter case at 360: “It is clear … that an assignment for value of future property actually binds the property itself directly it is acquired – automatically on the happening of the event, and without any further act on the part of the assignor – and does not merely rest in, and amount to, a right in contract, giving rise to an action. The assignor, having received the consideration, becomes in equity, on the happening of the event, trustee for the assignee of the property devolving upon or acquired by him, and which he had previously sold and been paid for.” Irrevocable under sec. 4(1) Powers of Attorney Act 1971: “(1) Where a power of attorney is expressed to be irrevocable and is given to secure – (a) a proprietary interest of the donee of the power; or (b) the performance of an obligation owed

172

Michael Bridge

assignor. The proceeds of the debts will therefore not come into the hands of the insolvency administrator of the assignor. Even if the factor has no power of attorney, the factor is entitled, like any assignee, to direct debtors to make payment directly to him. If debtors pay the assignor despite having been directed to pay the factor, then payment does not discharge the debt, which continues to be owed to the factor.134 An assignor who receives payment in these circumstances holds the payment on a constructive trust for the assignee.135 An insolvency administrator is in no better position than the assignor since he stands in the shoes of the assignor.136

15. Post-insolvency collection by pledgee of receivables The position is the same for a secured lender as for a factor, except that the secured lender who takes a charge will need to take steps to have the charge enforced upon the default of the chargor. The classical remedy for a chargee is to apply to the court for the appointment of a receiver, who would collect the various debts and pay down the charge. Nevertheless, in any well-drawn instrument, especially one where a bank takes a series of charges dealing with assets other than book debts and other receivables, the bank will have broad powers to appoint an administrator out of court,137 in the name of the chargor, further to an irrevocable power of attorney. It should also be emphasised that the onset of bankruptcy or liquidation does not prevent the chargee bank from enforcing its security, as the following passage from Re Lind demonstrates: “It was urged by the appellants that … with regard to debts and liabilities provable in bankruptcy, all liability of the assignor of every kind, under the mortgages …, was provable; and that as the debts created by the mortgage deeds were extinguished by the bankruptcy, the contract relating to the future property, which was merely ancillary to and for the purpose of securing the debt, was also discharged. The answer is that the mortgagees … elected to rely upon their

134 135 136 137

to the donee, then, so long as the donee has that interest or the obligation remains undischarged, the power shall not be revoked – (i) by the donor without the consent of the donee; or (ii) by the death, incapacity or bankruptcy of the donor or, if the donor is a body corporate, by its winding up or dissolution.” See above discussion. International Factors Ltd v Rodriguez [1979] QB 351. Madell v Thomas [1891] 1 QB 230 (Kay LJ). For the test concerning the breadth of the chargee’s security (which must include a floating charge) necessary to permit the chargee to make an appointment out of court, see Schedule B1 to the Insolvency Act 1986, added by Enterprise Act 2002, para. 14 (“the whole or substantially the whole of the company’s property”).

England and Wales

173

security, and not to prove, and therefore as mortgagees they stand outside the bankruptcy; and, moreover, that any contract contained in those deeds for vesting the future property in the mortgagees was ancillary not to the debt, but to the mortgage by which the debt was secured …” 138

That security, moreover, was in important respects treated as having existed from the time of the binding promise to assign, as another passage from the same case shows: “[T]ime after time it has been laid down, perhaps not always in the same words, that directly the property comes into existence the assignment fastens on it and without any actus interveniens the property is regarded in equity as the property of the assignee … [E]quity regarded an assignment for value of future acquired property as containing an enforceable security as against the property assigned quite independent of the personal obligation of the assignor arising out of his imported covenant to assign. It is true that the security was not enforceable until the property came into existence, but nevertheless the security was there, the assignor was the bare trustee of the assignee to receive and hold the property for him when it came into existence (emphasis added).”139

16. Securitisation The mortgage backed securities market in the UK has been in existence for at least the last 20 years and in that time has been growing at a significant rate, though recent developments encapsulated in the so-called “credit crunch” appear to have caused the market to shrink. The typical structure involves the sale of mortgage loans by a mortgagee to an SPV (special purpose vehicle) which then issues mortgage backed security notes to investing institutions. The SPV will normally be owned by the “originator” (that is, the mortgagor), but this does not have to be the case. The originator may continue to participate as collector of principal and interest under the various mortgages, but need not do so. If the originator were to go into a winding-up, the assets (receivables and security rights) would not be swept up into the originator’s estate. If there is widespread default by mortgagors (for example, as a result of sub-prime lending), there will be no recourse by the note holders against the originator. Land in England is either registered or unregistered (there is occurring a gradual migration to a system of registered land). A legal mortgage over unregistered land is effected by deed and takes the form of a charge by

138 139

[1915] Ch 345, at 360 et seq. (Swinfen Eady LJ). [1915] Ch 345, at 373-74 et seq. (Bankes LJ).

174

Michael Bridge

way of legal mortgage.140 A legal mortgage of registered land must be created by way of registered charge141 and is executed by means of a deed.142 (The distinction between mortgage and charge has therefore for practical purposes been dispensed with in the case of land.) These are the methods by which home ownership is financed in England. Apart from legal mortgages, equitable mortgages, liable to be overreached by purchasers of the legal estate, can still be created. The equitable mortgage by deposit of title deeds, which since 1989 has had to be accompanied by a written instrument,143 has fallen into disuse and in any case does not work in the case of registered land because of the absence of title deeds. Other forms of equitable mortgage, though equally liable to be overreached, are still just as effective in the mortgagor’s insolvency as a legal mortgage. If a mortgagee wishes to sell its interest in the land to a third party, it is entitled to do so without obtaining the mortgagor’s consent.144 A legal transferee of the mortgage is entitled to collect all payments due under the mortgage.145 If the mortgage relates to unregistered land, the legal transfer can be carried out by means of a deed executed by the mortgagee.146 A protected first legal mortgage of unregistered land gives rise to a requirement of first registration of title to the land at the Land Registry.147 In the case of registered land, the transferee must apply to be registered as the new proprietor of the charge in order to protect its rights from overreaching.148 Nevertheless, in the case of 100.000 mortgages as the subject of a mortgage-backed securitisation, these registration requirements are wholly impracticable. Instead, the mortgagee grants an equitable mortgage of its rights in those home mortgages to the SPV, which in turn assigns its rights by way of security to a security trustee. The equitable mortgage granted to the SPV will be reinforced by warranty protection from the mortgagee. A mortgagee seeking finance need not go through the process of securitisation and sale. It may instead raise a loan and grant a charge over its receivables in the usual way. It may also grant a sub-charge or sub140

141 142

143 144 145 146 147 148

Sec. 87(1) of the Law of Property Act 1925. There is another permissible way of creating a legal mortgage, now obsolete, namely, a lease for a term of years absolute (it used to be typically 3.000 years) with a cesser on redemption (that is, an automatic reversion to the lesser on an agreed event, namely, the discharge of the mortgage loan and interest): ibid. Sec. 27(2)(f) and sec. 132(1) of the Land Registration Act 2002. Sec. 25(1) of the Land Registration Act 2002; Land Registration Rules 2003, rule 103, Schedule 1. Sec. 2 of the Law of Property (Miscellaneous Provisions) Act 1989. See Gray / Gray, Elements of Land Law (4th edn. 2005), para. 8.259. Ibid. Sec. 114(1) of the Law of Property Act 1925. Sec. 4(1)(g) and sec. 6(2)(a) of the Land Registration Act 2002. Land Registration Act 2002, Schedule 2, para. 10.

England and Wales

175

mortgage of the land by way of security. In the case of registered land, the sub-chargee has to be entered in the register as the proprietor of the subcharge.149 For unregistered land, a deed appears to be required for a submortgage or sub-charge.150 Again, an equitable mortgage will in practice be used to avoid the inconvenience of multiple registrations.

III. Private international law issues There are various issues to be considered, including the law applicable to assignments of receivables, priorities between competing assignments, the law applicable to the registration of charges over book debts, the law that determines whether a charge is a fixed or a floating charge and other questions of recharacterisation, the law governing capacity to grant security, and the law that applies to the transfer of interests in land. There is not sufficient case law to give firm conclusions on all these matters.

1.

Assignments of Receivables

Whilst issues arising out of a contract of assignment are settled according to the law applicable to that contract,151 the relations between debtor and assignee are governed by the law applicable to the contract between debtor and assignor giving rise to the receivable,152 as are questions of assignability (which will include no-assignment clauses).153 This same law will determine when an assignment is complete.154 Since it lays down a system of universal and not local conflicts rules, the Rome Convention on the Law Applicable to Contractual Obligations 1980 is indifferent to the particular location of assignor, assignee and debtor. In English law, outright transfers, 149 150

151

152 153 154

Land Registration Act 2002, Schedule 2, para. 11. Sec. 114(1) of the Law of Property Act 1925 (which deals with the “transfer” of mortgages “or the benefit thereof”). Under Art. 12 of the Rome Convention on the law Applicable to Contractual Obligations of 19 June 1980 (OJ 9 October 1980 L 266 / 1 et seq.; consolidated version OJ 31 December 2005 C 334 / 1), scheduled to the Contracts (Applicable Law) Act 1990, this is the law chosen by the parties (Art. 3) or the law of the residence or place of business of the characteristic performer (Art. 4) (who will be the assignor). As “the law governing the right to which the assignment relates”. Art. 12(2) of the Rome Convention. Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC [2001] QB 825 (assignment effective in English law as an equitable assignment, without formal notice being served by a French huissier). See further Beale / Bridge / Gullifer / Lomnicka, The Law of Personal Property Security (2007), chapter 20.

176

Michael Bridge

mortgage transfers and assignment by way of charge of receivables are substantially assimilated.155 A consequence of that is that an English court would see no reason to confine Art. 12 of the Rome Convention to outright assignments and to prevent its application to security transactions. It is easy enough to say that the law applicable to the underlying transaction determines whether an assignment is complete, but there remain formidable difficulties in determining what that means in contractual or proprietary terms. At the very least, a complete assignment is one that permits the assignee to claim payment of a debt or other money claim from the debtor. That result can be justified in contractual terms. A straightforward reading of the text of Art. 12 of the Rome Convention, however, provides no support for an ascription of proprietary effect to an assignment. Art. 12(1) deals only with the mutual obligations of assignor and assignee, a formula that ought to be effective to repel attempts to invest the provision with proprietary effect. Art. 12(2), focused exclusively on the relations between debtor and assignee, involves no reference to third parties of the sort that could point to proprietary effect. Furthermore, the authoritative GiulianoLagarde Report156 states, though not with particular reference to Art. 12, that the Rome Convention does not deal with proprietary matters.157 At an interim stage in the proceedings, the text of the Rome Regulation I, designed to supersede the Rome Convention, did contain a provision designed to deal explicitly with proprietary effect. That provision has now been deleted. The final version of the Rome I Regulation158, Art. 14, does not alter the text of Art. 12 of the Rome Convention in any significant respect except to make clear that the provision applies to security assignments. The abandoned proposal to introduce a provision with explicit proprietary effect might give some comfort to those who argue that the current Art. 12 has no proprietary effect, but it is unlikely that an English court would accede to such a retrospective reading of the present text of Art. 12 if called upon to do so. The same could be said for the Art. 14 of the Rome I Regulation.159 The leading English case on Art. 12, Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC,160 concerned a marine insurance policy issued by French insurers and competing claims by the assignee of the policy and 155

156 157

158 159

160

See Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995] 1 WLR 1140. OJ 31 October 1980 C 282 / 1 et seq. But see Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC [2001] QB 825, para. 45 where Mance LJ states that Art. 12(2) displays “no hint … of any intention to distinguish between contractual and proprietary aspects of assignment”. OJ 4 July 2008 L 177 / 6 et seq. The UK has, after consultation, formally announced its decision to opt in to the Rome I Regulation. Fn. 157 supra.

England and Wales

177

cargo claimants, who had provisional French attachment orders. The assignment of the policy, executed by deed and governed by English law, was made to a bank. The Court of Appeal declined to treat the matter as involving a clear-cut choice between classifying the matter as purely contractual or as involving validity “against third parties”. The court instead stated a preference for a more “nuanced analysis”. It concluded that an assignment took effect between assignor and assignee as a “contractual issue to be determined by the law governing the obligation assigned”; it was not appropriate, as a preliminary issue, to determine whether there had been an effective passing of the property in the subject matter of the assignment.161 The question to be determined here was whether “the obligor must pay the assignee rather than the assignor”.162 In reaching this conclusion, the court was evidently assisted by its conclusion that no assignment had taken place in favour of the cargo claimants as a result of the French attachment, so no issue of competing assignments, whether involving voluntary or involuntary assignments, arose. The court’s approach, moreover, did not have to take account of the more testing conditions of a contest between the assignee bank and an assignor’s insolvency creditors. A particular difficulty that would have arisen here is that personal bankruptcy does entail a universal assignment of the bankrupt’s assets to a trustee-in-bankruptcy, whereas a corporate liquidator operates by means of statutory powers, though having the ability to apply to the court for a transfer of property rights. Supposing, nevertheless, that a contest did arise between two assignments, it cannot with complete confidence be concluded that an English court would find the answer in Art. 12 of the Rome Convention, though it is likely that the court would seek to do so.

2.

Assignment and public policy

Apart from the control exercised by the applicable law, English law would also recognise the claims of other laws with a public policy interest in a transaction.163 First, a forum State may under the Rome Convention 1980 apply its own public policy in respect of proceedings before it.164 Secondly, where all the “elements” of a contract, apart from the applicable law clause, point to the law of a single State, the non-derogable, mandatory rules of

161

162

163 164

The court considered and rejected at para. 45 an argument to this effect by Struycken, The Proprietary Aspects of International Assignment of Debts and the Rome Convention, Art. 12, LMCLQ 1998, 345, at 354. Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC [2001] QB 825, para. 34. See the discussion of public policy and assignment in Case 9, para. II.9. supra. Art. 16.

178

Michael Bridge

that State must be respected by the forum State.165 Thirdly, although the United Kingdom entered a reservation against Art. 7(1), which permits the forum State to recognise the mandatory provisions of a closely-connected State, there are other, similar rules of English law that seem to have survived the Rome Convention. These are the rule that, where English law is the applicable law, a contract will not be enforced if it is unlawful by the law of the place of performance of the contract,166 and the rule that, as a matter of public policy, contracts will be held void if they involve the doing of an act in a foreign friendly State which violates the law of that State.167

3.

Priority

The court in Raiffeisen, when concluding that Art. 12 determined the effect of the assignment as against the debtor, distinguished an old decision of the same court where there was a priority conflict between voluntary and involuntary assignees of the same debt (uncalled share capital). The involuntary assignee was an unsecured creditor of the assignor, who had arrested the debt in Scottish proceedings. In that case,168 the court applied the law of the situs of the debt to decide which assignee had priority, treating the debt as situate in the country of the debtor’s residence. The response of the court in Raiffeisen was that the cargo claimants in the present proceedings were not assignees of the insurance policy, so the earlier case had no relevance. The court displayed no enthusiasm for applying the law of the situs to priority disputes.

4.

Registration

The Companies Act 2006 requires registration in the case of floating charges and charges over book debts. The legislation applies to companies registered in England and Wales,169 no matter where the assets are situated. In the case of foreign companies with an established place of business in England, the legislation used to apply as well too.170 This gave rise to real problems where a company with an established place of business, or which might be said to have an established place of business, had not registered 165 166 167 168 169

170

Art. 3(3). Ralli Bros v Cia Naviera Sota y Aznar [1920] 2 KB 287. Regazzoni v KC Sethia (1944) Ltd [1958] AC 301. Re Queensland Mercantile and Agency Co [1892] 1 Ch 219. For the sake of brevity, hereinafter England. The position governing individuals and bills of sale legislation is unclear. Section 344 of the Companies Act 2006, as seen above, applies to general assignments of book debts. Sec. 409 of the Companies Act 1985.

England and Wales

179

as an oversea171 company under the Companies Act. It was the practice of the Registrar not to enter charges granted by such companies on the register (how could the oversea company be identified without an identifying number?) but to maintain instead an inaccessible Slavenburg index (named after the company that in litigation raised this problem).172 All the legislation required was that details of charges be sent to the Registrar; it did not actually require registration to take place. It is expected that secondary legislation will be passed to deal with the problem of the overseas company, and that it will not reproduce the position arrived at under the Companies Act 1985, but the outcome of a recent consultation on the subject has not yet been determined. A further issue arising out of registration concerns the characterisation of a charge. To the extent that the Companies Act requires registration only of certain charges, it should be a matter for English law, applying the Companies Act 2006, to determine whether a charge is a fixed or floating charge or a charge over book debts.173 So, if a company is registered in England, the meaning of “book debts” will be a matter for English law. So too will the question whether such a company has granted a fixed charge over shares (not registrable) or a floating charge (registrable).

5.

Capacity to grant security

This is treated in English law as a matter for the law of the place of incorporation in the case of companies. A point to note is that capacity for present purposes is likely to be understood in a wide sense. The leading case on this point is Re Anchor Line (Henderson Brothers) Ltd,174 which concerned a floating charge granted by an English company over property in Scotland at a time when Scots law did not recognise the floating charge. The charge was upheld as valid on the ground that the company was registered in England. The explanation for a decision that, at first sight, seems to run counter to the normal rules of private international law lies in the way the English law of security derives from equity. At the root of cases dealing with security over future property lie notions of contract and personal enforcement.175 Equity acts in personam. What could be more appropriate, therefore, than to apply the law that governs the personality of the company granting the charge? 171

172

173 174 175

In the Companies Act 1985, “oversea company”; in the Companies Act 2006, “overseas company“. NV Slavenburg’s Bank v Intercontinental Natural Resources Ltd [1980] 1 WLR 1076. See generally Re Weldtech Ltd [1991] BCC 16. [1937] Ch 483. Tailby v Official Receiver (1888) 13 App Cas 523.

180

6.

Michael Bridge

Recharacterisation issues

Apart from special legislation,176 it would appear to be the case that it is the law governing the proprietary transfer that determines whether, for example, an assignment of receivables is an outright transfer or an assignment by way of charge, or whether a charge is a fixed or a floating charge. In the case of receivables, that law is the law governing the creation of the right under Art. 12 of the Rome Convention. Nevertheless, this hardly seems satisfactory. Why should the law applicable to a contract giving rise to a book debt determine whether the debt is the subject of a fixed charge? The better approach is to ask why it is important to characterise the charge. One reason is registration. Another concerns the rights of preferential creditors upon the assignor’s insolvency. In this case, it may be argued that this is a matter for the law governing the main proceedings, in accordance with Art. 4(2)(m) of the Insolvency Regulation. This provision concerns “the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all creditors”. If it is thought that this proposition stretches too far the language of that provision, the likelihood is that an English court would see it as a matter of English law for an English court interpreting English legislation.177

7.

Land

If any rule of private international law is a fixed one, it is that issues concerning the transfer of land are subject to the lex situs.178 Even here, however, there is scope for the maxim that equity acts in personam,179 which would be significant if a promise to grant a legal mortgage could be treated as a present equitable mortgage. 176 177

178 179

The best example is sec. 860 of the Companies Act 2006, discussed supra. Namely, sec. 176A and sec. 386 of and Schedule 6 to the Insolvency Act 1986. Cf. Re Paramount Airways Ltd [1993] Ch 223. Bank of Africa v Cohen [1909] 2 Ch 129. See Millett J in Macmillan Inc v Bishopsgate Investment Trust Plc (No 3) [1995] 1 WLR 978, interpreting Norris v Chambres (1861) 29 Beav 246.

Netherlands Sander Timmerman* / Michael Veder I.

Introduction

By way of introduction to the issues addressed in the Case Studies, this part of the paper presents the basic structure of Netherlands law with respect to security over receivables. First, we address certain general aspects of the transfer or encumbrance of assets under Netherlands law and, in general terms, deal with the outright transfer (overdracht or cessie) of receivables, the prohibition of security transfer (cessie tot zekerheid) of receivables and the creation of a right of pledge (pandrecht) over receivables.1 Then, we briefly discuss the impact of the assignment of receivables on the debtor’s ability to invoke a right of set-off or assert defences or counterclaims against the assignor (cedent) / pledgor (pandgever) and the position of the assignee (cessionaris) / pledgee (pandhouder) in the insolvency of the assignor.2 Next, we address the implementation in Netherlands law of the Financial Collateral Directive, insofar as relevant to the assignment of receivables. Finally, we discuss the approach of current Netherlands private international law regarding the assignment of receivables.

1.

Transfer and encumbrance of assets under Netherlands law – general remarks

Pursuant to the general rule of Netherlands property law embodied in Art. 3:84 para. 3 of the Dutch Civil Code (Burgerlijk Wetboek), the transfer or encumbrance of receivables requires delivery (levering) by a person who * 1

2

This contribution was written in a personal capacity and the views expressed herein do not necessarily reflect the views of the Dutch Central Bank. In accordance with the uniform terminology as set out in the Introduction to this book, in this paper the term “transfer” will be used to refer to both an outright transfer and a security transfer (but, as explained below, security transfers are prohibited, except for Financial Collateral), the term (creation of a) “security right” will be used to refer to both a security transfer and a pledge and the term “assignment” will be used to refer to all three types of transactions. In accordance with the uniform terminology as set out in the Introduction to this book, in this paper the terms “assignor” and “assignee” will be used to also refer to a “pledgor” and a “pledgee” respectively, unless indicated otherwise.

182

Sander Timmermann/Michael Veder

has the right to dispose of the asset (beschikkingsbevoegde) pursuant to a valid title (often, but not necessarily, a contractual obligation).3 Only assets that are transferable (overdraagbaar) can be transferred or encumbered with a right of pledge.4 Pursuant to Art. 3:83 BW receivables are transferable, unless this is precluded by law or by the nature of the right. The transferability of receivables can also be excluded by an agreement to that effect between obligor and obligee (Art. 3:83 para. 2 BW).5 With respect to the available methods of assignment of receivables under Dutch law (i.e. assignment with or without notification to the debtor, see para. I.2. and I.3. infra), it is relevant whether the assigned receivable is an existing or a future receivable. Existing receivables (whether or not due and payable and whether contingent or not) can be assigned with or without notification to the debtor. Under Netherlands law, the transfer and pledge of future assets, including the assignment of future receivables (cessie / verpanding bij voorbaat) is generally permitted.6 The assignment of future receivables is effected by observing all formalities prescribed by law with respect to the assignment of existing receivables. The actual assignment will only become effective at the time any such “future” receivable becomes an “existing” receivable, provided, always, that the assignor is entitled to dispose of such receivable at such time.7 The assignment of such receivables will then be automatic and requires no further action. As will be discussed hereafter (para. I.2. and I.3. infra), restrictions apply with respect to the assignment of future receivables without notification to the (prospective) debtor of the receivable: only future receivables that arise directly from a legal relationship existing at the time of the assignment can be assigned without notification to the debtor. For example, claims for future lease instalments arising from a lease contract existing at the time of the assignment (these are characterised

3

4

5 6 7

Art. 3:84 BW, which refers to transfer of assets, also applies to the encumbrance of assets pursuant to Art. 3:98 BW. Art. 3:228 BW. The requirement that assets must be transferable is relevant for the possibility of foreclosure on the pledged assets. There is some debate in legal writing whether Art. 3:228 BW prohibits the creation of a right of pledge on a receivable that cannot be transferred (for example, as a result of a nonassignment clause) as enforcement of the pledge will generally be effected by collection of the receivable from the debtor, not by sale, see (with further references) Verhagen / Rongen, Cessie, Preadviezen uitgebracht voor de Vereniging voor Burgerlijk Recht (2000), ch. 7. See further Cases 8 and 9, para. II.8. and II.9. infra. Art. 3:97 BW. An assignor may, for example, have lost the power to dispose of an asset as a result of bankruptcy (faillissement) or suspension of payments (surseance van betaling).

Netherlands

183

under Dutch law as future claims8) can be assigned without notification to the debtor. However, claims for future lease instalments arising from a lease contract that is yet to be concluded at the time of the assignment cannot be assigned without notification to the (prospective) debtor.

2.

Outright transfer of receivables

Under Dutch law, an outright transfer of receivables can be effected by either of two methods. First, pursuant to Art. 3:94 para. 1 BW, receivables may be delivered by means of a written (private or notarial) deed of assignment (akte) and notification given by the assignor or the assignee to the debtor. However, the requirement that an outright transfer of receivables could be effected only with notification of the debtor was regarded as a serious impediment to the proper functioning of the finance practice (securitisations, bulk assignments, etc.). Second, since 1 October 2004, it is also possible to deliver receivables either by the execution of a deed of transfer in the form of an authentic deed, generally a notarial deed, or by the recording of a (non-authentic) deed of transfer with the competent tax authority (Belastingdienst / Registratie en successie), but, in either case, without notification to the debtor.9 With the introduction of the possibility of an outright transfer without the requirement of notification of the debtor, the Dutch legislator sought to meet the logistical, financial and commercial objections that can be associated with notification, in particular in cases where a large number of receivables is transferred (e.g. securitisations, factoring). However, this second method is possible only with respect to (1) receivables that already exist at the time of the delivery or (2) future receivables that arise directly from a legal relationship which already exists at that time.10 Further, pursuant to Art. 3:94 para. 3 BW, an undisclosed transfer of receivables (whether existing or future) may not be opposed to the debtor until the assignor or assignee has notified the debtor.11 8

HR 30 January 1987 WUH / Emmerig, NJ 1987, 530.

9

It is not necessary that the original deed be registered. Registration of a faxed copy of the deed of transfer suffices (see, with respect to an undisclosed pledge, HR 29 June 2001, NJ 2001, 662). The transfer will be effective from the moment that the deed of transfer has been submitted to the tax authorities for registration. When the deed is actually registered in the register – something which will depend on administrative processes – is irrelevant (see, with respect to an undisclosed pledge, HR 14 October 1995, NJ 1995, 447). Art. 3:94 para. 3 BW. A similar restriction applies with respect to the pledging of future receivables, see para. I.3.b infra. See the discussion of Case 13, para. II.13. infra.

10

11

184

Sander Timmermann/Michael Veder

The deed of assignment must sufficiently identify the receivables that are assigned.12 In accordance with established legal precedent, it is not necessary for the deed of assignment to contain specifics (such as the name of the debtor, the amount of the debt, invoice numbers or client numbers) of the receivables concerned. A description that enables determination of the receivables that have been assigned on the basis of, for example, the assignor’s books and records will suffice.13 By the assignment of a receivable, the assignee also acquires the rights accessory thereto, such as rights of pledge and mortgage, rights arising under suretyship (borgtocht) and priority rights and the right to enforce executory judgments, orders and deeds relating to the claim and rights accessory thereto.14 Accessory rights include the right of the assignor to contractual interest, to a penalty or to a forfeited penalty sum for non-compliance, except to the extent the interest was due or the penalty forfeited for noncompliance was already forfeit at the time of assignment. In case of an undisclosed assignment it is unclear at which moment the assignee acquires and / or becomes entitled to enforce such accessory rights, i.e. already before or only after notification of the assignment to the debtor.15 Assignment of a receivable in principle does not affect the debtor’s right to assert against the assignee defences that it could have invoked vis-à-vis the assignor. This rule does not apply when the debtor and the assignor have agreed that the debtor could invoke only one or more specified defences against the assignor, or where the debtor has waived all defences. Furthermore, if the debtor created the appearance that a certain defence does not exist and the assignee relied and was reasonably entitled to rely on that appearance, the debtor would not be permitted to invoke that defence against the assignee.16

12 13

14 15

16

Art. 3:84 para. 2 BW. See, inter alia, HR 14 October 1994 Spaarbank Rivierenland / Gispen q.q., NJ 1995, 447; HR 20 June 1997 Wagemakers q.q. / Rabobank Roosendaal, NJ 1998, 362; HR 19 September 1997 Verhagen q.q. / INB II, NJ 1998, 689; HR 19 December 1997 Zuidgeest / Furness, NJ 1998, 690; HR 29 June 2001 Meijs q.q. / Bank of Tokyo, JOR 2001, 220; HR 20 September 2002 ING / Muller q.q., JOR 2002 / 210 and HR 20 September 2002 Mulder q.q. / Rabobank, JOR 2002 / 211. Art. 6:142 BW. See Van der Weijden, Overgang en uitoefening van nevenrechten bij stille cessie, WPNR 2007, 6716, p. 574 et seq. See Art. 3:36 BW.

Netherlands

3.

Security over receivables

a)

Security transfer

185

Pursuant to Art. 3:84 para. 3 BW, a juridical act intended to transfer property for purposes of security or which does not have the purpose of vesting title in the acquirer after transfer, does not constitute valid title for transfer of that property. This means that, in principle, parties that wish to use receivables as security for credit cannot do so by way of assigning the receivable to, for example, a lender as security for repayment of a loan, but must create a right of pledge over the receivable for the benefit of that lender. In this respect, reference is made to the limited scope given to Art. 3:84 para. 3 of the BW by the Dutch Supreme Court in the Sogelease case.17 In the Sogelease case, the Dutch Supreme Court held that ´an agreement which in the case of an event of default limits the rights of the party to whom the property is transferred to the right to realise the transferred property in order to have recourse to the proceeds thereof, while this party is also under the obligation to pass on any surplus value to the counterparty, does not constitute a valid legal ground pursuant to Art. 3:84 para. 3 BW: in such a case, the parties should establish a (non-disclosed) right of pledge or a right of mortgage´. However, a “true transfer”18 is not in violation of Art. 3:84 para. 3 BW even if such transfer has also been entered into for security purposes (in addition to other purposes). Art. 3:84 para. 3 BW does not prohibit a security transfer in the context of transactions that constitute Financial Collateral Arrangements within the meaning of Art. 7:51 et seq. BW (implementing the Financial Collateral Directive in Netherlands law).19

b)

Right of pledge

A right of pledge is an accessory right (afhankelijk recht) that secures the performance of one or more existing or future payment obligations. If the secured obligations, whether existing or future, cease to exist or will no longer come into existence (e.g. because the relationship between the

17

18

19

HR 19 May 1995, NJ 1996, 119; on this case see Keijzer, Financial collateral ar-

rangements: the European collateral directive considered from a property and insolvency law perspective (2006), p. 135-152. I.e. an outright transfer were the transferee only needs to dissolve the agreement in order to dispose of the property freely and is not under any obligation to pay any surplus value to the transferor. See hereafter para. I.6. infra.

186

Sander Timmermann/Michael Veder

pledgor and the pledgee had been terminated), the right of pledge automatically ceases to encumber the assets on which it was granted.20 Under Netherlands law, a pledge over receivables may be created by either of two methods: pledge with notification (openbaar pand or disclosed pledge) and pledge without notification (stil pand or undisclosed pledge). A disclosed pledge is created by: (1) a written deed of pledge and (2) notification of the execution of the deed of pledge to the debtor of the pledged claim by either the pledgor or the pledgee. In practice, this method of creation of a pledge is reserved for specific types of receivables, such as cash deposited in bank accounts, intercompany loans and insurance receivables. Generally, the pledgor will not agree to make a disclosed pledge in respect of other receivables, such as trade receivables, as the pledgor would prefer to avoid that its trade debtors become aware of the pledge. An undisclosed pledge can be created only by: (1) the execution of a deed of pledge in the form of an authentic deed, generally a notarial deed, or (2) the recording of a non-authentic deed of pledge with the competent tax authority (Belastingdienst / Registratie en successie). The registers maintained by the tax authorities are not available for inspection by the public generally or other creditors of the assignor.21 The pledge need not be communicated to the debtor; consequently, the debtor will still consider the pledgor to be the person entitled to collect the receivable. In the case of an undisclosed pledge, the pledgee is authorised to notify the debtor about the pledge if the pledgor is in default or if the pledgee has good reason to believe that such a default will occur. In addition, the pledgor and pledgee may agree on other circumstances or events which will permit notification to the debtor.22 With respect to an undisclosed pledge of future receivables, Netherlands law contains the additional requirement that the pledged future receivables must arise directly from a legal relationship that exists at the time of the pledge.23 The deed of pledge must sufficiently identify the receivables that are pledged, under the same rules as apply to the outright transfer of receivables (see para. I.2. supra). 20

21 22

23

A temporary zero balance in a revolving credit arrangement will not lead to termination of the right of pledge if the right of pledge has been created as security for all (existing and future) claims that may arise out of that arrangement. See also Case 10, para. II.10. infra. In practice, it is not uncommon that the deed of pledge confers on the pledgee the power to effect notification at any time it deems appropriate. See para. I.1. supra. It is, however, possible to create a contractual obligation to pledge future claims that arise out of not yet existing relationships; to perform this obligation and effectuate the pledge, the formalities required therefor must be completed when those legal relationships become “existing” legal relationships.

Netherlands

187

Once the debtor has been notified of the execution of the deed of pledge, only the pledgee has the right to demand payment of the pledged receivable24 and the debtor is not discharged by paying the pledgor as its creditor. The pledgor may demand payment only with the approval of the pledgee or with authorisation of the competent court. If a pledged receivable is not due and payable, but, under the terms and conditions of the receivable, the pledgor (i.e. the creditor of the receivable) had the right to declare the receivable due and payable (if the pledge had not been granted), the pledgee rather than the pledgor is entitled to exercise that right.25 Payment by the debtor to the pledgor before the pledge has been notified will lead to discharge of the debt and extinguishment of the pledge. The pledgee does not acquire any proprietary rights in respect of the proceeds of claims collected by the pledgor.26 Upon collection of a pledged receivable by the pledgee, the right of pledge encumbering the claim attaches to the proceeds collected.27 The pledgee is entitled to have recourse against the collected proceeds without giving prior notice of such recourse, as soon as the secured claim becomes due. The pledgee must take such recourse if the pledgor so demands and if the latter has the right to settle the claim in the pledged currency. The most common form of enforcing a right of pledge on receivables is through collection of the pledged receivable by the pledgee. However, it may happen that collection of the pledged receivable is not (yet) possible, for example in case of long-term mortgages. In that case, the pledgee may enforce the pledge by selling the (portfolio of) pledged receivable(s). This assumes, of course, that the pledgor is in default (verzuim) under the secured obligations. A pledgee has a right of summary execution (parate executie), which means that it does not need a court decision confirming that the pledgor is in default in order to proceed with the foreclosure. Although Dutch law starts from the assumption that foreclosure sales are done by way of a public auction, in practice, the pledgee would sell receivables by way of a private sale.28 24 25

26

27 28

Art. 3:246 para. 1 BW. See Art. 3:246 para. 2 BW. If a receivable is encumbered with more than one right of pledge, the powers referred to in this paragraph are vested exclusively in the pledgee with the highest ranking right of pledge (Art. 3:246 para. 3 BW). See HR 17 February 1995 Mulder q.q. / CLBN, NJ 1996, 471 and HR 12 July 2002 Rabo Soest-Baarn / Knol q.q., JOR 2002, 180. Art. 3:246 para. 5 BW. As regards the realisation of collateral, the pledgee may sell the collateral in a public sale pursuant to local customs and applicable standard terms and conditions (Art. 3:250 para. 1 BW). If the collateral consists of property which is traded on a market or exchange, such as bearer shares of listed companies, a realisation sale may also take place on such market or exchange through a qualified broker

188

4.

Sander Timmermann/Michael Veder

Outright transfer / pledge and set-off

The debtor’s right of set-off may be affected by outright transfer of, or the creation of a right of pledge over, the receivable. Pursuant to Art. 6:127 BW,29 the debtor has a right of set-off when (1) it has a claim for performance of an obligation which corresponds to its obligation to its creditor (this will be the case if both claims concern monetary obligations in the same currency), and (2) it is entitled to settle the obligation and enforce satisfaction of the claim. When the receivable is transferred, the debtor is faced with the situation that it has a claim against the assignor but a debt to the assignee. The conditions for set-off as set out in Art. 6:127 BW are then no longer met. Pursuant to Art. 6:130 BW, the debtor may nevertheless offset against its debt to the assignee a claim against the assignor, provided that the claim (1) arises from the same juridical (legal) relationship30 as the assigned claim, or (2) had already vested in the debtor and had become exigible (due) prior to the assignment. The effects of an outright transfer without notification to the debtor on the debtor’s right of set-off are not entirely clear. The parliamentary history of Art. 3:94 para. 3 BW suggests that an undisclosed transfer must be treated in the same manner as an undisclosed right of pledge in this

29

30

(Art. 3:250 BW). Alternatively, the pledgee may sell the collateral in a manner determined by an order of the temporary relief judge (voorzieningenrechter) of the competent district court in the Netherlands (Art. 3:251 para. 1 BW). At the request of the pledgee, the judge may rule that (part of) the collateral may be sold to (and therefore remain with) the pledgee in consideration of a price to be determined in his decision (Art. 3:251 para. 1 BW). The pledgee and pledgor may agree to a private sale or any other solution without involvement of the court, provided such agreement is reached after the occurrence of an event of default (Art. 3:251 para. 2 BW). Under Netherlands law, any indication that such “agreement” was made by the pledgor and pledgee before the occurrence of an event of default (e.g., a consent executed by the pledgor “in blank” at the time of the vesting of the security right), will make such agreement invalid. Art. 6:127 BW concerns a statutory right of set-off. Parties may make different contractual arrangements regarding set-off. On set-off under Netherlands law, see, extensively, Faber, Verrekening (2005). Whether in a particular case the debtor‘s claim against and debt to the assignor / pledgor arise from the same juridical relationship must be determined in accordance with all relevant circumstances of the case (HR 21 January 2000 Stet / Braaksma, JOR 2000, 116). The Supreme Court has not given clear criteria in this respect but only an indication of the circumstances that must be taken into account. In any case, it is not required that the claim and the debt arise from the same contract (although that will be sufficient).

Netherlands

189

respect (see below).31 Pursuant to Art. 3:94 para. 3 BW, as interpreted in the parliamentary history, the debtor can, as long as it has not been notified of the assignment, only invoke a right of set-off in respect of claims that he may have against the assignor. If the assignment is notified to the debtor, the debtor must from that moment on pay the assigned receivable to the assignee and the debtor will only be able to invoke a right of set-off in respect of a counterclaim against the assignee. The debtor may in that case, however, also compensate the assigned receivable with a claim against the assignor if the conditions of Art. 6:130 BW (as set out above) are met. The same rules re offset apply when the receivable is encumbered with a right of pledge that is notified to the debtor. In that case, the debtor is no longer entitled to settle the receivable by payment to the pledgor. The debtor must pay to the pledgee. Also in that case the requirements of Art. 6:127 BW are no longer met. Nevertheless, the debtor may compensate its debt, which is payable to the pledgee, with a claim against the pledgor, provided such counterclaim arises from the same juridical (legal) relationship as the pledged claim or had already vested in the debtor and had become exigible (due) prior to the pledge. In case of receivables encumbered with a right of pledge that has not been notified to the debtor, the rules re offset discussed above only apply once the debtor has been notified. Prior to notification the debtor may offset against its debt to the pledgor any counterclaims it has against the pledgor (provided that the conditions of Art. 6:127 BW are met).

5.

Insolvency of the assignor

As a result of insolvency (bankruptcy (faillissement) or suspension of payments (surseance van betaling)) the assignor loses the right to dispose of its assets (in case of suspension of payments, without the consent of the administrator). An assignee will only have acquired proprietary rights in respect of a particular receivable if all requirements for a valid assignment of that receivable (e.g. notification to the debtor or recording of the deed with the tax authorities) have been met prior to the insolvency. Insofar as the assignment of receivables included an assignment of future receivables, the assignor will not acquire rights in receivables that come into existence after the date of bankruptcy32 or suspension of payments.33 Furthermore, the assignment of receivables may under certain circumstances be challenged by the liquidator in bankruptcy on the basis of the rules on the Actio Pauliana34 (not further discussed in this paper). 31 32 33 34

See further on this issue Faber, Verrekening (2005), p. 45. Art. 35 Fw. HR 15 March 1991 Veenendaal q.q. / Hogeslag, NJ 1992, 605. Arts. 42, 43, 45 and 47 Fw.

190

Sander Timmermann/Michael Veder

In case of an outright transfer of receivables that was validly effected prior to the insolvency of the transferor, the receivables are not part of the insolvent estate (boedel) of the transferor and the transferee may exercise its rights as creditor of the receivable against the debtor. The pledgee has a strong position in the insolvency of the pledgor. Pursuant to Art. 57 of the Dutch Bankruptcy Act (Faillissementswet), a pledgee may exercise its rights as if there were no bankruptcy. The same applies to suspension of payments. The liquidator in bankruptcy may, however, determine a reasonable period within which the pledgee must exercise its rights.35 If the pledgee has not exercised its rights within this period, the liquidator may claim the collateral and sell it, without prejudice to the right of the pledgee to the proceeds. However, in that case the pledgee will be dealt with as a privileged (but unsecured) creditor and will receive a distribution on the proceeds in accordance with the ranking of his claim through the list of liquidating dividends. This means that the pledgee will have to share in the general costs of the bankruptcy proceedings. In case of an undisclosed right of pledge, the pledgee may effect notification of the pledge to the debtor after the date of bankruptcy or suspension of payments, with the consequence that the debtor must then pay the debt to the pledgee (and not the pledgor or its liquidator). A temporary stay (afkoelingsperiode) ordered by the court on the basis of Art. 63a Fw (bankruptcy) or Art. 241a (suspension of payments) Fw does not impair the pledgee’s power to notify the debtor.36 If the pledgee has not yet notified the debtor of the pledge, the liquidator has the power to collect the pledged receivables. Payments made to the liquidator in the bankruptcy of the pledgor before the debtor has been notified of the pledge lead to a discharge of the debtor and extinguishment of the right of pledge. The pledgee does not acquire a right of pledge over the proceeds of the pledged receivable. However, the pledgee will have a high priority, i.e. the priority attached to a right of pledge, in the distribution of the proceeds, but he will have to share in the general costs of the bankruptcy. In case the debtor, prior to notification of the pledge, makes payment of the pledged receivable into a bank account maintained by the pledgor with the pledgee (bank), the pledgee will be able to set-off against its debt to the pledgor (arising from having credited the pledgor’s account) the pledgee’s claim (under the credit facility) against the pledgor.37

35

36 37

Art. 58 Fw. The supervisory judge (rechter-commissaris) may extend the period once or more on the application of the pledgee. This may be relevant in a situation where the liquidator wants to sell the assets of the bankrupt debtor (including receivables) as a going concern and the pledgee does not take any action. Art. 63b Fw. HR 17 February 1995 Mulder q.q. / CLBN, NJ 1996, 471.

Netherlands

191

It follows from a recent decision of the Dutch Supreme Court38 that, although the liquidator has the power to collect the receivables until the debtors have been notified, the liquidator is not at liberty to “frustrate” the right of the pledgee to notify the debtors of the pledge by sending out payment requests to the debtors indicating that payment should be made into the bank account maintained by the estate. The Supreme Court has decided that in general, in respect of professional pledgees like banks, the liquidator should observe a reasonable period of 14 days before sending out such payment requests to the debtors. The liquidator is under no obligation to “warn” the pledgee that he will send out payment requests. The court stresses that it is desirable that the liquidator and the pledgee reach an understanding on the settlement of pledged receivables in order to avoid unrest among the debtors. It is up to the bank to get in touch with the liquidator on this point. The liquidator is not obliged to take the initiative.

6.

Implementation of the Financial Collateral Directive

a)

Introduction

On 20 January 2006 the Financial Collateral Arrangements Act (the “Implementation Act”) came into force in the Netherlands in order to implement the Directive on financial collateral arrangements (the “Collateral Directive”).39 Pursuant to the Implementation Act, Arts. 51 through 56 have been added to Book 7 of the Dutch Civil Code and several provisions have been added to the Dutch Bankruptcy Act.40 The most important of these provisions will be discussed below. The implementation of the Collateral Directive in the Dutch Civil Code has been criticised by legal authors.41 In particular, it has been observed that the Implementation Act does not tie in with the Dutch system of property law and security rights and gives rise to uncertainty on many points. 38 39 40

41

HR 22 June 2007 ING / Verdonk q.q, JOR 2007, 222. Directive 2002 / 47 / EC of 6 June 2002 (OJ 27 June 2002 L 168 / 43 et seq.).

Arts. 14, 63d, 63e, 212b, 216, 241d, 241e and 309a Fw were either added or amended. See, inter alia, Keijser, De implementatie van de Europese Richtlijn betreffende financiëlezekerheidsovereenkomsten, WPNR 2004, 6592, p. 761 et seq.; Verstijlen, 'Van feo naar fzo (via Brussel) – Over het wetsvoorstel inzake de financiëlezekerheidsovereenkomst en het spanningsveld tussen Europees en nationaal goederenrecht', Ondernemingsrecht 2005-3, p. 65 et seq.; Snijders, Wetgever, heb mededogen met ons Burgerlijk Wetboek, ook bij financiëlezekerheidsovereenkomsten, NTBR 2005, nr. 3, p. 91 et seq. and Wibier, De financiëlezekerheidsovereenkomst: verkeerde implementatie van een Richtlijn en een smet op het Burgerlijk Wetboek!, WPNR 2006, 6667, p. 393 et seq.

192

b)

Sander Timmermann/Michael Veder

Scope

Like the Collateral Directive, the Implementation Act distinguishes between arrangements pursuant to which the ownership of the collateral is transferred (a “title transfer financial collateral arrangement”) and arrangements to which pledges over collateral are or can be created (a “security financial collateral arrangement”) (together “Financial Collateral Arrangements”). In order for a transfer or pledge to be considered a Financial Collateral Arrangement, the collateral must consist of money credited to an account or deposit (“cash”) or shares in companies or other securities equivalent to shares in companies or bonds or other forms of debt instruments if these are negotiable on the capital market42 (“financial instruments”) (together “financial collateral”). Cash in hand falls outside the scope of the Implementation Act. Furthermore, at least one of the parties to the Financial Collateral Arrangement must be: a) a government agency, b) a central bank, c) a financial institution subject to financial supervision, or d) a central counterparty, a settlement agent or a clearing house. The Implementation Act closely follows the Collateral Directive in this respect. The provisions regarding Financial Collateral Arrangements are not applicable if one of the parties to the title transfer or pledge is a natural person who is not acting in the conduct of a profession of business.

c)

Financial Collateral Arrangements

The Implementation Act does not contain any provisions regarding the formal requirements to effect a title transfer Financial Collateral Arrangement or a security Financial Collateral Arrangement. In the parliamentary history of the Implementation Act, the Dutch legislator takes the view that the normal formalities with respect to the assignment of or creation of a right of pledge over cash or financial instruments have to be observed. According to the Dutch legislator, Dutch law does not prescribe any formalities which are inconsistent with the Collateral Directive.43 In this respect reference is made to the fact that the Collateral Directive only applies to Financial Collateral Arrangements which can be evidenced in writing or in any other legally enforceable manner provided by the law which is applicable to the Financial Collateral Arrangements.44 According to the Dutch legislator, the formalities prescribed by Dutch law with respect to assignment or the creation of a right of pledge only serve to evidence those legal acts. This view has been 42 43

44

Art. 7:51 BW. See the Explanatory Memorandum (Memorie van Toelichting), Second Chamber of Parliament (Tweede Kamer), 2002-2003, 28 874, nr 3. Art. 3 para. 1 Collateral Directive.

Netherlands

193

criticised by legal writers45 who have pointed out that under Dutch law the assignment of or creation of a right of pledge over cash or financial instruments requires more than a written instrument such as a (non-authentic) deed of assignment or deed of pledge. For example, under Dutch law the delivery of a receivable without notification to the debtor requires either an authentic deed of assignment or the registration of the non-authentic deed of assignment with the competent tax authority.46 Additional formalities such as registration with the competent tax authority or a deed of assignment in authentic form seem contrary to Art. 3 para. 1 of the Collateral Directive which prohibits the Member States to require the performance of any formal act for the creation, validity, perfection, enforceability or admissibility in evidence of a Financial Collateral Arrangement or the provision of financial collateral under a Financial Collateral Arrangement.47 In the explanatory memorandum the Dutch legislator also expresses the view that an undisclosed right of pledge does not fall within the scope of the Collateral Directive as the directive only relates to Financial Collateral Arrangements in which the financial collateral is brought into the “possession” of the pledgee. Once the pledgee takes possession of the financial instruments or notifies the debtor, as applicable, the pledge can no longer be characterised as an undisclosed right of pledge and will fall under the scope of the Collateral Directive. However, this does not follow from the Implementation Act itself: according to the text even a pledgee with an undisclosed right of pledge in respect of Financial Collateral can exercise the powers relating to a security Financial Collateral Arrangement.48 As discussed in para I.3.1 supra, Art. 3:84 para. 3 BW prohibits a transfer of property for purposes of security. Art. 7:55 BW therefore provides that a transfer pursuant to a title transfer Financial Collateral Arrangement is not a transfer for the purposes of providing security or a transfer lacking the object of vesting title in the transferee, both of which are prohibited by Art. 3:84 para. 3 BW. Furthermore, Art. 7:55 BW provides that the rules on the right of pledge do not apply and are not of corresponding application to such a contract and its performance. In the parliamentary history of the Implementation Act, the Dutch legislator states that Art. 7:55 BW is actually superfluous. In this respect refer-

45

46 47 48

See also Verstijlen, ‘Van feo naar fzo (via Brussel) – Over het wetsvoorstel inzake de financiëlezekerheidsovereenkomst en het spanningsveld tussen Europees en nationaal goederenrecht’, Ondernemingsrecht 2005-3, p. 68 et seq. See para. I.2. supra. Art. 3 para. 1 Collateral Directive. See also Verstijlen, ‘Van feo naar fzo (via Brussel) – Over het wetsvoorstel inzake de financiëlezekerheidsovereenkomst en het spanningsveld tussen Europees en nationaal goederenrecht’, Ondernemingsrecht 2005-3, p. 68 et seq.

194

Sander Timmermann/Michael Veder

ence is made to the limited scope given to Art. 3:84 para. 3 of the BW by the Dutch Supreme Court in the Sogelease case.49

d)

Right of use

A security Financial Collateral Arrangement may provide that the secured creditor may use or sell the pledged assets and keep the proceeds.50 This right of the pledgee is often referred to as a “right of use”. If a right of use has been stipulated, the pledgee is entitled to use and dispose of collateral provided to it under a Financial Collateral Arrangement as if it were the owner of the collateral. A pledgee that has exercised its right of use by disposing of the pledged assets may keep the proceeds thereof, but is, however, obliged to transfer “equivalent assets” to the party providing security no later than at the time when settlement of the secured claim must take place.51 By law the right of pledge extends to any equivalent assets. Alternatively, a Financial Collateral Arrangement may provide that the secured creditor will net the claim secured by the pledged asset against the value of the equivalent assets at the time when settlement of the claim must be made or when there is a ground for foreclosure, whichever shall be the earlier.

e)

Enforcement

The Implementation Act contains certain important deviations from the standard procedural requirements for the enforcement of a right of pledge.52 49

50 51

52

HR 19 May 1995, NJ 1996, 119; On this case see Keijser, Financial collateral

arrangements: the European collateral directive considered from a property and insolvency law perspective (2006), p. 135 et seq. The Sogelease case is further discussed in para. I.3.1. supra. See Art. 7:53 BW. The term “equivalent assets” is defined in Art. 7:51 BW. If the collateral consists of cash, “equivalent assets” means the same sum in the same currency. Where transferable securities are concerned, equivalent assets are securities of the same issuing institution or debtor which form part of the same emission or category and which have a value in the same nominal value in the same currency and of the same class or, as the case may be, other assets, if the financial collateral arrangement provides for the transfer thereof after the occurrence of an event which relates to or has consequences for the transferable securities to which the debtor has established a right of pledge. See Art. 7:54 BW, which pertains to the enforcement of a right of pledge in respect of financial collateral.

Netherlands

195

If a “ground for foreclosure” occurs,53 the pledgee may enforce its right of pledge: (a) by selling any pledged financial instruments and taking recourse on the proceeds thereof or, (b) appropriation of the pledged financial instruments. The pledgee may enforce its right of pledge in respect of cash by setting-off the pledged cash against the sum owing to it. An enforcement sale of financial instruments must be made on an exchange through a qualified broker in accordance with the rules and customs applying there for ordinary sales. The pledgee may appropriate the pledged financial instruments only if this method of enforcement has been agreed upon in the security Financial Collateral Arrangement and the valuation of such securities is based on their market value or value on an exchange. Alternatively, a Financial Collateral Arrangement may provide that the temporary relief judge (voorzieningenrechter) of the district court may order, when so requested by the pledgee or the pledgor, that financial instruments be sold in a different manner or the temporary relief judge may order, on the request of the pledgee, that title to financial instruments shall vest by appropriation in the pledgee for a sum to be specified by the temporary relief judge. Certain provisions of pledge law54 regarding terms, notifications and the manner of sale (public sale, approval by a judge) are expressly made inapplicable to the enforcement of a security Financial Collateral Arrangement.

f)

Insolvency law

Art. 8 of the Collateral Directive provides that a Financial Collateral Arrangement may not be declared invalid or reversed solely on the basis that the arrangement came into existence, or was provided, on the day of the start of winding up proceedings or reorganisation measures, or within a prescribed period prior to the start of such proceedings or measures. As a result of the amendments made to the Dutch Bankruptcy Act pursuant to the Implementation Act, the retroactive effect of a bankruptcy or suspension of payments does not apply to Financial Collateral Arrangements and certain acts pursuant to existing Financial Collateral Arrangements (such as the provision of financial collateral), entered into or performed on the day on, but prior to the actual time at, which an insolvency is declared.

53

54

Art. 7:51(g) BW defines a “ground for foreclosure” as a default or another circumstance which entitles the secured creditor under the provisions of the Financial Collateral Arrangement or pursuant to the law to sell or to appropriate pledged assets, or to make use of a netting clause. Arts. 3:235, 3:248 para. 1 and 2, 3:249, 3:250, 3:251 and 3:252 BW.

196

Sander Timmermann/Michael Veder

(Art. 63e para. 1 Fw). Instead the actual time of the insolvency order applies to financial collateral arrangements.55 Furthermore, Art. 63e para. 2 Fw provides that the insolvent estate will be bound by Financial Collateral Arrangements and certain acts pursuant to existing Financial Collateral Arrangements (such as the provision of financial collateral), entered into or performed on the day on, but after the actual time at, which insolvency is declared, if the counterparty of the insolvent person can substantiate that it was not aware, nor should have been aware, of the declaration of the insolvency.56 Finally, a temporary stay ordered by the court on the basis of Art. 63a Fw is not applicable to assets pledged pursuant to a security Financial Collateral Arrangement.57

7.

Private international law

On 1 May 2008 the Property Law (Conflict of Laws) Act of 25 February 2008 (Wet conflictenrecht goederenrecht) entered into force.58 This act provides for a systematic body of statutory conflict rules in the area of property law (including receivables and shares). Netherlands private international law distinguishes between several issues relating to the assignment or encumbrance of receivables in a crossborder context: a) the assignability of the receivable (para. I.7.a) infra); b) the relationship between the assignor and assignee (para. I.7.b) infra); c) the relationship between the debtor and assignee (para. I.7.c) infra); d) the enforceability of the assignment against third parties, such as other creditors or assignees and the insolvency administrator in the assignor’s insolvency, i.e. the “proprietary aspects” (para. I.7.d) infra). Under Netherlands private international law, these issues are not all subject to the same conflict rule and therefore not uniformly referred to a single legal system.

55

56

57 58

Art. 14 and Art. 216 Fw contain an obligation for the judge to record the actual time at which a bankruptcy or suspension of payments was declared. In that case, inter alia, Arts. 23, 24, 35, 53 para. 1 and 54 para. 2 Fw are not applicable. Art. 63d para. 1 Fw. Wet van 25 februari 2008, houdende regeling van het conflictenrecht betreffende het goederenrechtelijke regime met betrekking tot zaken, vorderingsrechten, aandelen en giraal overdraagbare effecten (Wet conflictenrecht goederenrecht), Stb. 2008, 70.

Netherlands

a)

197

Assignability

Pursuant to Art. 12 para. 2 of the Rome Convention,59 the assignability of a receivable must be determined in accordance with the law governing the receivable.60 According to its literal text, Art. 12 para. 2 of the Rome Convention is limited to transfers (whether outright or for security), but it is generally considered that the same rule applies (directly or by analogy) in respect of the creation of security rights. The Dutch government has incorporated a specific rule to this effect in Art. 10 para. 1 WCG. In particular with respect to the use of receivables as the object of security rights, the question arises which law governs the assignability of future receivables. Under Netherlands private international law, the assignability of future receivables is a matter that, pursuant to Art. 12 para. 2 of the Rome Convention, is to be determined by the lex causae of the receivable concerned.61 The preliminary question whether a receivable is an existing (contingent) receivable or a future receivable, in our opinion is also a matter that, as it relates to the nature of the receivable, is governed by the (prospective) lex causae of the receivable. The question whether future receivables can in principle be the subject of an assignment must be distinguished from the question which requirements must be observed for a valid assignment of such future receivables (with effect against third parties). The latter question pertains to the law of property and is therefore governed by the law designated by the conflict rules concerning the proprietary aspects of the assignment or encumbrance. Provisions of Dutch law, for example, that restrict the possibility of encumbrance of future receivables with a right of pledge to receivables that arise directly from a legal relationship existing at the time of the encumbrance,62 are therefore applicable only if and to the extent that Netherlands law applies to the proprietary aspects of the encumbrance. 59

60

61

62

Rome Convention on the law Applicable to Contractual Obligations of 19 June 1980 (OJ 9 October 1980 L 266 / 1 et seq.; consolidated version OJ 31 December 2005 C 334 / 1). See, with respect to claims for damages relating to wrongful acts (onrechtmatige daad) also Art. 7 (e) of the Unlawful Act (Conflict of Laws) act. (Wet conflictenrecht onrechtmatige daad). Cf. HR 11 June 1993 Caravan Centrum Zundert, NJ 1993, 776; Steffens, Overgang van vorderingen en schulden in het Nederlands international privaatrecht, 1997, p. 238 et seq. Contra: Struycken, The proprietary aspects of international assignments of debts and the Rome Convention, LMCLQ 1998, 357 fn. 51; Bertrams / Verhagen, Goederenrechtelijke aspecten van de internationale cessie en verpanding van vorderingen op naam, WPNR 1993, 6088, p. 262 et seq., who are of the opinion that the assignability of future receivables is a matter of property law. Art. 3:239 para. 1 BW.

198

b)

Sander Timmermann/Michael Veder

Relationship between assignor and assignee

The mutual obligations of the assignor and the assignee are governed by the law that applies to the contract between the assignor and assignee.63 The lex causae of that contract governs issues of the assignment or encumbrance pertaining to the law of obligations, such as the extent and conditions of the assignor’s obligation to assign or encumber the receivable and possible liability of the assignor in respect of the existence and enforceability of the receivable.

c)

Relationship between the debtor and the assignee

Assignment of a receivable does not in itself have any effect on the nature and content of the assigned receivable. The terms and conditions of payment for the debtor do not change as a result of the assignment. This is clearly expressed in Art. 12 para. 2 of the Rome Convention. The relationship between the assignee and the debtor is governed by the law applicable to the receivable.64 The purpose is to protect the debtor. Consequently, the lex causae of the assigned receivable determines whether payment made to the assignor, despite the assignment, leads to the debtor’s discharge. Furthermore, the creditor’s right to demand payment, the place and time for payment and any defences that the debtor could invoke against a demand for payment, continue to be governed by the law governing the receivable. That is the law the debtor could rely upon. Also, we would argue that it follows from Art. 12 para. 2 of the Rome Convention,65 where it is stated that the lex causae of the receivable determines its assignability and the conditions under which the assignment can be invoked against the debtor, that the debtor can rely on a (contractual) limitation or prohibition of the assignability of the receivable based on the lex causae of the receivable. The lex causae of the receivable furthermore determines whether and how the assignment should be notified to the debtor in order for the assignment to have effect against the debtor. Within the framework of Art. 12 para. 2 of the Rome Convention such notification requirements are first and foremost relevant for questions pertaining to the law of obligations. Notification will be relevant for the question whether payment to either the assignor or the assignee will lead to the debtor’s discharge. Whether notification is a requirement of property law that is necessary for the assignment to be effective against third parties (i.e. the assignee acquiring “proprietary” rights in the receivable), is a matter that is referred to the law governing the proprietary aspects of the assignment. 63 64 65

Cf. Art. 12 para. 1 of the Rome Convention, See also Art. 10 para. 3 WCG. Cf. Art. 10 para. 1 and Art. 10 para. 3 WCG.

Netherlands

d)

199

Proprietary aspects

The proprietary aspects of the assignment concern the essential question whether the assignee can invoke proprietary rights in the receivable against third parties, such as other creditors of the assignor following attachment by garnishment on the receivable (derdenbeslag) and the administrator in the assignor’s insolvency. The proprietary aspects of the assignment include issues like the requirements that have to be observed for an effective assignment of receivables, the types of rights that can be created over receivables and the nature and content of such rights and the question who is entitled to exercise the rights originating from the assigned receivable.66 The position of Netherlands private international law with respect to the proprietary aspects of the assignment of receivables has for a long time been uncertain. In its decision of 17 April 1964, the Supreme Court had in principle referred the proprietary aspects of assignment to the lex causae of the assigned receivable.67 This decision was, however, criticised in legal doctrine and not followed by all the courts. In 1997 the Supreme Court created the much desired certainty on this issue in a case concerning a dispute over the effects of an extended reservation of ownership clause under German law (verlängerter Eigentumsvorbehalt mit Vorausabtretungsklausel).68 In its decision of 1997 the Supreme Court explicitly rejected the applicability of the lex causae of the assigned receivable that it had previously adopted in its decision of 1964. According to the Supreme Court, the proprietary aspects of the assignment of receivables are governed by the law applicable to the contract between the assignor and assignee from which the obligation to assign emanates. The conflict rule formulated by the Supreme Court in this decision is entirely based on the reasoning that Art. 12 of the Rome Convention also covers the proprietary aspects of the assignment of receivables. That assumption limited the options of the Supreme Court in respect of the applicable conflict rule. Either Art. 12 para. 1, referring to the law governing the contractual relationship between the assignor and assignee, or Art. 12 para. 2, referring to the law applicable to the assigned receivable, would apply. According to the Supreme Court, the enumeration of aspects governed by the lex causae of the assigned receivable in Art. 12 para. 2 Rome Convention is apparently exhaustive. Since the assignment itself is not mentioned in Art. 12 para. 2 of the Rome Convention, the Supreme Court held that Art. 12 para. 1 must designate the law governing the proprietary aspects of the assignment of claims. In support of this view the Supreme Court furthermore observed that Art. 12 para. 1 would lack any real mean66 67 68

E.g. the pledgor or the pledgee, see Art. 3:246 BW HR 17 April 1964 Escomptobank, NJ 1965, 22. HR 16 May 1997 Brandsma q.q. / Hansa Chemie, NJ 1998, 585; JOR 1997, 77.

200

Sander Timmermann/Michael Veder

ing and would be superfluous in light of the general conflict rules Art. 3 and 4 of the Rome Convention if it would apply only to the contractual relationship between the assignor and assignee. The fact that the applicability of Art. 12 para. 2 to the proprietary aspects of the assignment of receivables could lead to the relationship between assignor and assignee being governed by two different laws, is viewed by the Supreme Court as an argument against the applicability of Art. 12 para. 2 of the Rome Convention. According to the Supreme Court, such a division would be undesirable and could not have been the intention of the drafters of the Convention, given its lack of simplicity and practical manageability. Applicability of Art. 12 para. 2 was also rejected by the Supreme Court because this would make it impossible for the assignor and assignee to choose the law applicable to the assignment, whereas the principle of party autonomy is put first in Art. 3 para. 1 of the Rome Convention. The consequence of this decision is that, under Netherlands private international law, the assignor and assignee can, in international cases, choose the law that governs the effectiveness of the assignment of receivables against third parties. The Property Law (Conflict of Laws) Act of 25 February 2008 follows this decision of the Supreme Court. It makes clear that, as was already prevailing opinion in the Netherlands, this conflict rule applies to an outright transfer of receivables as well as the creation of other proprietary (security) rights over receivables. Neither Art. 12 para. 1 of the Rome Convention, the decision of the Supreme Court of 1997, nor the Property Law (Conflict of Laws) Act of 25 February 2008 that follows that decision, would prima facie appear to allow for the assignor and assignee to choose a law that governs the proprietary aspects of their transaction other than the law that governs their contractual relationship. On its face it would not be possible to create a security right over a claim in accordance with, for example, Netherlands law if the contractual obligation to provide security emanates from a contract that is governed by, for example, English law. Nevertheless, we would argue that “separate” choice of law in respect of the assignment of receivables, designating a different law to apply to the assignment (proprietary transfer) of receivables than the law governing the contract from which the obligation to do so emanates, is possible. Once it is accepted that parties are free to choose the law that applies to the proprietary aspects of the assignment by choosing the law that applies to their contract, there is no compelling argument why parties would not be able to refer the proprietary aspects of their transaction to a different law then the lex causae of their contract. Support for this view can be found in Art. 3 para. 1 of the Rome Convention, which allows contracting parties to agree on a choice of law in respect of the contract as a whole or in respect of parts of the contract. It would also accommodate the needs of practice. It may be that the actual assignment of

Netherlands

201

the claim is effected at a later stage pursuant to a prior contract containing the obligation to assign a claim upon request. Parties should be free to assign a claim in accordance with, for example, Netherlands law, even though the underlying contractual obligation to do so was governed by, for example, German law. In that case, the choice of law in respect of that particular aspect of the transaction between assignor and assignee, i.e. the actual transfer or creation of a security right, would be effective. In the absence of absolute clarity on this point, the issue is dealt with in practice by, for example, including in a deed of pledge governed by Netherlands law a separate obligation for the pledgor to create the pledge for the benefit of the pledgee in a transaction in which the finance documents are governed by another law.

e)

Assimilation of foreign (security) rights in receivables

A court may be required to examine whether and to what extent a right that has been created in a receivable pursuant to foreign law can be given effect within its own legal system. Such questions may for example arise in case of attachment in execution of the assigned receivable where the debtor of the attached receivable is domiciled in the Netherlands, or the assignor is declared insolvent in the Netherlands and the receivable is included in the Dutch insolvency proceeding. In a decision of 14 December 2001, the Dutch Supreme Court has set out the principles to be applied in this respect.69 The case concerned a dispute between the holder of a floating charge under the laws of Tanzania in respect of receivables that were subsequently attached in execution in the Netherlands by an Italian creditor. To decide on the priority ranking in the distribution of the proceeds, the court considered the question whether the holder of the floating charge was entitled to request the appointment of a delegated judge (rechter-commissaris) on the same basis as the holder of a right of pledge over the receivable under Dutch law can.70 The Supreme Court observed: 69

70

HR 14 December 2001, NJ 2002, 241 Sisal II; JOR 2002, 70, note Verhagen. This decision follows a previous decision in the same case, HR 23 April 1999 Sisal I, NJ 2000, 30, note Snijders; JOR 1999, 129, which concerned the interpretation of provisions of Dutch law (i.e. Art. 480 and Art. 481 Rv), under the assumption that the floating charge could be treated as a Dutch right of pledge. Cf. Art. 481 and Art. 480 Rv. In its decision of 23 April 1999 (NJ 2000, 30), the Hoge Raad decided that, if following attachment by a creditor of a claim that is encumbered with a right of pledge and payment of the claim to the bailiff (for the benefit of the attaching creditor), leading to the extinguishment of the claim and consequently extinguishment of the right of pledge, the pledgee, who retains priority in the proceeds (cf. HR 17 February 1995, NJ 1996, 471) may request the

202

Sander Timmermann/Michael Veder

“that this requires the assessment whether the holder of a foreign security right that has been validly created in accordance with the applicable law, from a point of view of justice and efficiency can be put on a level with the holder of a Dutch security right referred to in Art. 480 and Art. 481 Rv and thus is entitled to request a settlement of the order of priority. It must be observed that in that respect it is not decisive whether in general terms the foreign and the Dutch security right are comparable but whether for the application of a particular provision of Dutch law – in this case Art. 480 and Art. 481 Rv – the foreign security right can in view of its content and objective be put on a level with an equivalent Dutch security right.”71 Against the background of this general observation concerning the assimilation of foreign security rights over receivables, the Supreme Court determined that in its view the Court of Appeal did not apply an incorrect criterion when it compared the floating charge and the right of pledge on (only) two points, i.e. objective and result.72 A general comparison of the features of the rights in question is not required. The question is not whether in all of its aspects a particular foreign security right is the same as a Dutch security right. Conversion of the right created under a foreign law into an equivalent security right under Dutch law does not take place. Effect must be given to the floating charge, even if a right of pledge over the receivable concerned would not be valid under Netherlands law.73 That a floating charge can be created by one single act in respect of all future receivables, whereas under Netherlands law an undisclosed right of pledge can only be created in claims that arise directly from a legal relationship that existed at the time of the encumbrance, is irrelevant. The restrictions imposed by Art. 3:239 para. 1 BW apply only when Netherlands law governs the proprietary aspects of the assignment of charging of receivables.74 Once it is established that the proprietary aspects of the assignment of receivables are governed by foreign law, the existence and the effectiveness of the right in question must be assessed in accordance with that law.

71 72 73

74

court to appoint a delegated judge to decide on the order of priority between the pledgee and the creditor that had attached the claim in execution. Our informal translation. Cf. Hof Amsterdam 21 December 2000, JOR 2001, 46, note Struycken. Cf. Nr. 3.5.4. of the decision of the Hoge Raad (HR 14 December 2001, JOR 2002, 70). In the dispute between the holder of the floating charge and the Italian creditor, the court acted under the assumption that the floating charge was valid and extended to the receivables attached. See, with respect to the law applicable to the proprietary aspects of the floating charge under Dutch private international law, Struycken, De assimilatie van een floating charge in het Nederlandse beslagrecht, NIPR 2001, p. 191; Verhagen, De “floating charge”: toepasselijk recht en assimilatie, NIPR 2002, p. 283.

Netherlands

II.

Case Studies

1.

Security right over “future” receivables

203

Under Netherlands law the precise delineation of claims between existing and due, on the one end of the spectrum, and completely future claims, on the other, is not always clear. Before the contract between A and B has been concluded, claims under the contract will be regarded as future claims. Whether claims under the contract will be regarded as existing claims after the contract has been concluded will depend on where along the spectrum they are viewed as falling, once their nature has been determined from an analysis of the terms of the contract from which they arise. According to Dutch case law, it is not sufficient that a claim arises directly from an existing legal relationship to be regarded as an existing claim. In this respect the Dutch Supreme Court has held75 that claims which arise directly from an existing legal relationship, such as, for example, lease payments pursuant to an existing lease contract for future lease instalments, should be regarded as future claims to the extent such claims depend on an uncertain, future event, such as the quiet enjoyment of the leased property by the lessee. If the contract provides that A’s claims for payment will become due monthly based on the progress of the work, it may be argued that A’s claims against B are existing claims and that this provision only determines the moment at which claims under the contract become due and payable. However, it may also be argued that A’s claims will become “existing” only once the corresponding work has actually been performed (and before that time A’s claims will be regarded as future claims). Under Netherlands law the granting of a pledge on future receivables is generally permitted, provided that such assets are sufficiently determinable at the time the deed of pledge is executed. A pledge over future receivables is created by the execution of a deed of pledge and notification to the (prospective) debtor or the completion of other formalities in the case of an undisclosed pledge. The actual pledge, however, will become effective only at the time the “future” asset becomes an “existing” asset, i.e. exists in the patrimony of the pledgor, provided, always, that the pledgor is entitled to dispose of that asset at that time. The creation will then be automatic and requires no further action. With respect to an undisclosed pledge of future receivables, Netherlands law contains the additional requirement that the future receivables can be pledged by that method only if they arise directly from an existing legal relationship, such as, for example, claims for future lease instalments arising from a lease contract existing at the time of the pledge (these are characterised under Dutch law as future claims).76 75 76

HR 30 January 1987 WUH / Emmerig, NJ 1987, 530. HR 30 January 1987 WUH / Emmerig, NJ 1987, 530.

204

Sander Timmermann/Michael Veder

Consequently, before the contract between A and B is signed, claims under the future contract can be pledged if B as debtor of the pledged claims is notified of the pledge. Claims under the future contract cannot be subjected to an undisclosed right of pledge, unless the contract itself is concluded within the framework of an existing legal relationship between A and B (so that it can be said that claims under this new contract nevertheless arise directly from an existing legal relationship). After the contract has been signed, claims under the contract related to future work can be made subject to either a disclosed right of pledge or an undisclosed right of pledge (because even if the claims would qualify as future claims they arise under an existing legal relationship).

2.

Sale of existing receivables

Under Netherlands law, an outright transfer of receivables can be effected by either of two methods: (1) by means of a written (private or notarial) deed of assignment with notification to the debtor, or, alternatively, (2) by means of a deed of transfer in the form of an authentic deed, generally a notarial deed, or the recording of a (non-authentic) deed of transfer with the competent tax authority without notification to the debtor. The requirements that must be observed in order to effectively transfer receivables are further discussed in para. I.2. supra. The fact that the purchase price is lower than the aggregate principal balance of the receivables being transferred will in principle77 not affect the validity of such transfer. An outright transfer of receivables on a non-recourse basis will generally not be regarded as “a juridical act intended to transfer property for purposes of security” and therefore will not be prohibited by Art. 3:84 para. 3 BW as interpreted by the Dutch Supreme Court.78 This is different from Case 3 (para. II.3. infra), which involves the granting of a security right.

77

78

If as a consequence of this sale the creditors of M were prejudiced, there may be grounds, depending on the circumstances, for creditors (outside bankruptcy) or the liquidator in bankruptcy to challenge the transfer on the basis of the rules of the Actio Pauliana (not further discussed in this paper). In that case the rights of the financial institution in case of an event of default will not be limited to the right to realise the transferred receivables in order to have recourse to the proceeds thereof, while also being also under the obligation to pass on any surplus value to M. See HR 19 May 1995 Keereweer q.q. / Sogelease, NJ 1996, 119 and para. I.3. and I.6. supra.

Netherlands

3.

205

Security right in all existing and future receivables

As discussed above in para. I.3.a) supra and with respect to Case 2, Art. 3:84 para. 3 BW prohibits juridical acts intended to transfer property for purposes of security. This means that parties wishing to use receivables as security for extended credit cannot do so (in principle) by way of a transfer of the receivable to the lender as security for repayment of a loan, but must create a right of pledge over the receivable for the benefit of that lender. The requirements that must be observed in order to effectively pledge receivables are discussed in para. I.3.b) supra. The deed of pledge must sufficiently identify the receivables that are being pledged.79 According to Dutch Supreme Court cases, it is not necessary for the deed of pledge to contain specifics (such as the name of the debtor, the amount of the debt, invoice numbers or client numbers) of the receivables concerned. It is sufficient if such information is included in the deed of pledge that, on the basis of that information, it can be determined – if necessary retrospectively – which receivables have been pledged.80 A description that enables determination of the receivables that have been pledged on the basis of, for example, the pledgor’s books and records will suffice. In line with the foregoing, the Dutch Supreme Court has confirmed that a description such as “all present receivables and all future receivables originating directly from an existing legal relationship” contains sufficient information to determine which receivables have been pledged.81 As discussed above with respect to Case 1 (para. II.1.), it is not possible to pledge without notification in advance future receivables which do not originate directly from an existing legal relationship or which arise from any future legal relationship. In practice, the lender will require that additional deeds of pledge be signed and recorded with the competent tax authorities at regular intervals, in order to minimise the risk that certain receivables may not be caught by an undisclosed right of pledge.

4.

Sale of partial undivided interest in a portfolio of receivables

We assume that the bank wishes to obtain a proprietary interest in the receivables forming the portfolio and not just a contractual claim against L1.

79 80 81

Art. 3:84 para. 2 BW. See, for example, HR 19 December 1997 Zuidgeest / Furness, NJ 1998, 690. See HR 21 December 2001 Sobi c.s. / Hurks, JOR 2002, 38 and HR 20 September 2002 Mulder q.q. / Rabobank, JOR 2002, 211.

206

Sander Timmermann/Michael Veder

Under Netherlands law there are several techniques which can be used by L1 to transfer part of a portfolio of receivables to the bank.82 First, L1 can assign individual receivables with an aggregate amount of 4.000.000 €; for example, if the portfolio consists of 10 receivables each with a principal amount of 1.000.000 € L1 can assign 4 specified receivables, of 1.000.000 € each, to the bank. Second, L1 can partially assign each claim in the portfolio to an aggregate amount of 4.000.000 €; for example, if the portfolio (again) consists of 10 receivables each with a principal amount of 1.000.000 €, L1 can assign an amount of 400.000 € of each receivable to the bank. This will produce ten new receivables each of 400.000 € for the bank and leave L1 with 10 receivables each of 600.000 €. Finally, L1 and the bank can create a joint ownership (gemeenschap) of the receivables in the portfolio by having L1 assign a 40 % share in the receivables to the bank. The first two techniques would enable the debtors to choose whom to pay (although contractual arrangements between bank and L1 might ameliorate this risk to some extent); only the third technique provides the bank with an undivided 40 % interest in the portfolio and protects the two creditors from that possibility. If the third technique is used, the management (beheer; which includes collection) of the jointly owned receivables may be performed only by both participants (L1 and the bank) acting together,83 unless the participants enter into a management contract (beheersregeling). Acts which do not pertain to the management of the jointly owned property, e.g. transfer of a jointly owned receivable, may be performed only by the participants acting together. The requirements that must be satisfied in order to transfer receivables (discussed in para. I.2. supra) also apply to the partial transfer of receivables84 or the transfer of a share in jointly owned receivables.85 As discussed above with respect to Case 3 (para. II.3. supra), the deed of assignment must sufficiently identify the receivables that are being assigned.86 In case of a partial transfer of receivables or a transfer of a share in jointly owned receivables, the deed of assignment must also contain

82

83 84

85

86

See also Verhagen / Rongen, Cessie, Preadviezen uitgebracht voor de Vereniging voor Burgerlijk Recht (2000) p. 119. Certain exceptions exist, e.g. acts which cannot be delayed. See Art. 3:170 BW. Under Netherlands law, the “partial assignment” of a claim is possible to the extent that the original claim can be split in two or more separate claims. See Verhagen / Rongen, Cessie, Preadviezen uitgebracht voor de Vereniging voor Burgerlijk Recht (2000) p. 119. Art. 3:96 BW provides that the delivery of a share in (jointly owned) property is made in a manner corresponding to the provisions for delivery of that property and has corresponding consequences. Art. 3:84 para. 2 BW.

Netherlands

207

sufficient information to determine – if necessary retrospectively – which part of a receivable or which share in a receivable has been transferred.87

5.

Security right in receivables that are secured by real rights in goods

M1 may create a right of pledge in favour of the lender over the receivables it has or will acquire against its customers. M1 may do so either by way of a disclosed right of pledge or, and this will generally be the case in practice, by way of an undisclosed right of pledge.88 In the latter case, it is important to keep in mind that only receivables that exist at the time of the creation of the pledge or will arise directly from a legal relationship existing at that time, can be subject to an undisclosed pledge. In practice, the lender will require that additional deeds of pledge be signed and recorded with the competent tax authorities at regular intervals, in order to minimise the risk that certain receivables may not be caught by the undisclosed right of pledge. If the receivables of M1 are supported by a security right that is accessory in nature, for example a right of pledge over the goods sold, the lender will most likely get the benefit of that security by operation of law after the lender has notified the debtor of the pledge and, consequently, has become entitled to collect the pledged receivables. According to prevailing opinion, under Dutch law a pledgee that is entitled to collect a pledged receivable is also entitled to exercise accessory security rights securing that receivable.89 However, no conclusive case law exists on this issue, so the exact position of Dutch law in this respect remains somewhat uncertain. Under Netherlands law, a right of ownership based on retention of title is not regarded as an accessory right.90 The lender will therefore not by operation of law get the benefit from that type of security. In order for the lender to get the benefit of that type of security, M1 should create a separate right of pledge on the right of ownership retained by M1 in the goods sold to its customers. 87

88

89

90

See Verhagen / Rongen, Cessie, Preadviezen uitgebracht voor de Vereniging voor Burgerlijk Recht (2000) p. 120. The requirements for the creation of disclosed and undisclosed rights of pledge are discussed in para. I.3. supra. Cf. Kortmann, Inning van andermans gesecureerde vordering, TvI 2005, p. 67 et seq. (with further references). Support for this view can also be found in HR 11 March 2005 Rabobank / Stormpolder, JOR 2005, 131, in which case it was decided that an attaching creditor gets the benefit of security rights that secure the attached receivable. HR 18 February 1994 Koninklijke Nijverdal Ten Cate NV / Wilderink q.q., NJ 1994, 462.

208

6.

Sander Timmermann/Michael Veder

Security right in receivables that are supported by personal guaranties

Whether a lender that obtains from M2 a right of pledge on M2’s receivables gets the benefit of a personal guarantee from a third party depends on the nature of that guarantee. If the guarantee is a suretyship (borgtocht) it is most likely (see Case 5, para. II.5. supra) that under Netherlands law, the lender will get the benefit of that security if it has become entitled to collect the receivable, i.e. after notification to the debtor. A suretyship is considered as an accessory right under Netherlands law. However, if the contract of suretyship contains a clause prohibiting or restricting the transfer of rights under the suretyship, the lender may not get the benefit of that suretyship. If the guarantee is an independent guarantee which does not qualify as an accessory right, for example an independent bank guarantee, the lender will not automatically get the benefit of that guarantee. M2 could in that case create a separate right of pledge over its rights under the guarantee, provided that the guarantee does not contain a clause prohibiting or restricting the transfer of rights. For a discussion on the effects of clauses prohibiting or restricting the transfer of rights, see Cases 8 and 9 (para. II.8. and II.9. infra).

7.

Security right in receivables that are supported by independent undertakings

See Cases 5 and 6 (para. II.5. and II.6. supra), where we discussed the relevance of the nature of the guarantee. In case of independent (i.e. not accessory) undertakings that support the pledged receivable, the pledgee will not automatically get the benefit of that undertaking. The lender can obtain the benefit of M3’s rights under the letter of credit if M3 creates a separate right of pledge for the benefit of the lender.

8.

Contractual restrictions on assignment

Under Netherlands law, the transferability of receivables may be prohibited or restricted by an agreement to that effect between obligor and obligee.91 A clause in a contract pursuant to which receivables arising under that contract are not assignable or capable of being pledged has effect vis-àvis third parties, such as the assignee, in the sense that an assignment in contravention of that contractual arrangement simply has no effect.92 In 91 92

Art. 3:83 para. 2 BW. HR 17 January 2003 Oryx / Van Eesteren, JOR 2003, 52.

Netherlands

209

our view the same rule, and consequence, applies if restrictions, such as required prior consent, have not been observed. In principle, it is irrelevant whether the assignee at the time of the assignment was not aware, or even could not have been aware, of such contractual clauses. The outcome might be different if the assignee in the specific circumstances of the case relied, and could have reasonably relied, on statements of the debtor that the claim was transferable.93

9.

Legal restrictions on assignment

As indicated above in para. I.1., under Netherlands law a receivable is transferable unless the debtor and the creditor have contractually negated transferability, there is a statutory restriction or the nature of the receivable precludes its assignment.94 A court can come to the conclusion that a receivable is not assignable only because the debtor and the creditor have contractually agreed on prohibitions or restrictions on assignment (which will require the court to interpret the contract), assignability is prohibited or restricted on the basis of a statutory provision (which will require an interpretation of the relevant statutory provision) or the nature of the receivable precludes its assignment (which will require an interpretation of the nature of the receivable). The non-assignability of a receivable based on a statutory restriction or the nature of the receivable will have the same effects as non-transferability based on an agreement between the debtor and the creditor (see Case 8, para. II.8. supra). Judicial injunctions pursuant to which a party is prohibited from assigning a receivable do not render the receivable itself non-assignable. If a party were to assign a receivable in contravention of an injunction, this could constitute a wrongful act and lead to liability for compensation of losses suffered, but it would not render the assignment ineffective. If the 93 94

Art. 3:36 BW. Statutory limitations on assignability of claims can, for example, be found in Art. 6:106 para. 2 BW, pursuant to which claims for damages not comprising patrimonial damage (immateriële schade) cannot be assigned (or seized), unless agreed upon by contract or unless an action for such damages has been instituted. The Dutch Supreme Court has decided that it follows from the nature of the claim for damages that a liquidator in the bankruptcy of a company may have against directors of that company on the basis of Art. 2:138 / 248 BW (liability of directors for manifestly improper performance of duties) that such claims are non-assignable. According to the Supreme Court, the specific nature of a credit facility made available by the government by way of “state aid” may entail that claims arising from that facility are non-assignable (see HR 12 January 1990, NJ 1990, 766).

210

Sander Timmermann/Michael Veder

injunction were issued by a foreign court, an analysis of the recognition and enforceability of that injunction in the Netherlands would be necessary (this matter is not further addressed in this paper). Also, an attachment that is levied on a receivable does not in itself make a receivable non-assignable. The effect of an attachment is merely that the assignment cannot be invoked against the attaching creditor (relative nullity of the assignment vis-à-vis the attaching creditor).95 The attaching creditor can take recourse on the receivable, disregarding the later assignment. Under Netherlands private international law, the assignability of receivables is referred to the law applicable to the receivable (see para. I.7.a) supra). In principle, the law of the country in which the assignor, assignee or debtor is located, is irrelevant. The law of the location of the creditor or the debtor under the receivable may, however, be relevant in the determination of the law applicable to the receivable.

10. Publicity; priorities in general Netherlands law does not require publicity with respect to assignments. This is true even though an undisclosed transfer or undisclosed pledge requires registration of a deed of transfer or a deed of pledge with the competent tax authorities. The register maintained by the tax authorities is not available for inspection by the public generally or other creditors of the assignor. The registration serves only to provide a date certain, i.e. to prevent “back-dating”. The outright buyer or secured lender will therefore not be able to check the register to find out whether M has already sold or granted a security right in those receivables to another party. In practice, lenders rely on representations by their borrowers that the pledged assets are not subject to proprietary rights in favour of other parties or they require borrowers to disclose all competing rights. Netherlands law requires the pledgor to declare in the deed of pledge that it has the power to create the right of pledge in the receivables concerned and that such receivables are not encumbered with any limited proprietary (security) rights or, alternatively, to disclose the existence of other limited proprietary rights.96 If those representations turn out to be untrue, the lender will be confronted with proprietary rights that may take priority over its right of pledge. The assignee can, of course, inquire of individual debtors as to whether they have received prior notification of any proprietary rights.

95 96

Art. 475h Rv. Art. 3:239 para. 2 and Art. 3:237 para. 2 BW. A similar obligation does not exist in respect of a transfer of receivables.

Netherlands

211

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods Under Netherlands law, the rights of a title-retaining seller do not by operation of law extend to receivables arising from an on-sale. The title-retaining seller has no special priority ranking vis-à-vis an outright buyer of such receivables because of its status as such. However, the title-retaining seller can at the time the goods are sold to M, obtain security in such receivables by way of a right of pledge.97 The difficulty for the title-retaining seller will be that the receivables arising from an on-sale by M will be future receivables (at the time the goods are sold to M). As discussed, limitations apply to the creation of a right of pledge over future receivables.98 Either the sub-buyer of the goods (if known) can be notified of the right of pledge that is created (in anticipation) in favour of the title-retaining seller (regardless of whether the on-sale is effected within the framework of an existing legal relationship between M and the sub-buyer), or the on-sale must be effected in the framework of an existing legal relationship between M and the (prospective) sub-buyer, in which case the receivables could be subject to an undisclosed right of pledge (i.e. without notification to the debtor). Of course, M could create a right of pledge for the benefit of the title-retaining seller over the receivables generated by an on-sale of the goods at the time such an on-sale has occurred. In that case, they are existing receivables and the limitations described above do not apply. Netherlands law does not protect the outright buyer against an earlier created right of pledge (in favour of a title-retaining seller or any other person), even if the outright buyer was unaware (and could not have been aware) of the pledge. The outright buyer acquires the receivables encumbered with the right of pledge. The same rule applies if M would have first assigned a receivable to outright buyer A and, subsequently, would have assigned the same receivable to outright buyer B. Buyer B would not be protected against the prior assignment to buyer A and, consequently, would be left empty-handed.

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods With respect to the possible rights of a title-retaining seller in the receivables generated by an on-sale, reference is made to the observations in Case 11. If the title-retaining seller has obtained a right of pledge in respect of the receivables arising from an on-sale, the following applies. Netherlands 97

98

An assignment of the receivables by way of security to the title-retaining seller would be invalid in view of Art. 3:84 para. 3 BW. See para. I.3.b) supra.

212

Sander Timmermann/Michael Veder

law accepts the possibility of a first ranking right of pledge, second ranking right of pledge, etc. The general rule is that the pledge which was created first in time has the highest priority. With respect to the “invisible” security rights, such as an undisclosed pledge, it is, therefore, important that conclusive evidence can be provided as to the date when a security right was created. Under Netherlands law, such conclusive evidence is provided through the execution of a deed of pledge in the form of a notarial deed or by recording a non-notarial deed with the competent tax authority. Accordingly, a secured lender with an undisclosed right of pledge that was created earlier in time than the right of pledge of the title-retaining seller will have priority over the latter.

13. Notification With respect to a disclosed assignment,99 notification is a constitutive element, a requirement for the assignment to be effective. Without the notification of the assignment to the debtor, the assignee will not acquire any proprietary rights in the receivable.100 Notification is not subject to any specific form requirements, e.g. notification may be oral or in writing. Furthermore, Netherlands law does not prescribe any specific requirements as regards contents of the notification, other than that debtor must be notified that a deed of assignment has been executed. It is not necessary to inform the debtor of the contents of the deed of assignment. However, persons against whom the assigned claim is to be exercised may demand that they be given an extract, certified by the assignor, of the deed of assignment and the title upon which the assignment is based. The provision of such extract is not a constitutive requirement for the assignment. Stipulations which are of no importance to these persons need not be included in the extract. If no instrument of title has been prepared, the contents of the title must be notified to them in writing to the extent that it is of importance to them. Acknowledgement or acceptance of the assignment by the debtor is not a substitute for notification. The rationale behind this rule is that the debtor should not be able to control the moment of transfer. Whether the debtor has (or should have had) prior knowledge of the existence of a deed of assignment is deemed irrelevant in this respect. In case of an undisclosed outright transfer pursuant to Art. 3:94 para. 3 BW101 and an undisclosed right of pledge created pursuant to Art. 3:239 99 100

101

On the basis of Art. 3:94 para. 1 BW. See para. I.4. supra. With respect to proprietary rights, Dutch law does not distinguish between the proprietary effects between parties and vis-à-vis third parties. An assignment of a receivable cannot have proprietary effects between parties only. See para. I.4. supra.

Netherlands

213

para. 1 BW,102 the notification to the debtor is required for the assignee or pledgee to have the power to collect the receivable and enforce accessory security rights securing that receivable. Once the debtor has been notified of the execution of the deed of pledge (in case of an undisclosed right of pledge), the pledgee has the sole power to demand payment of the pledged receivable and the debtor will not be discharged by paying the pledgor as its creditor.103 Pursuant to Art. 3:94 para. 3 BW, an undisclosed transfer of receivables may not be opposed to the debtor except after the assignor or assignee has given the debtor notification (it is not sufficient that the debtor has otherwise learned of the transfer). According to the parliamentary history, this means that, until the debtor has been notified, only the assignor is entitled to collect the receivable (inningsbevoegd) and only payment to the assignor will discharge the debtor.104 This view has been criticised in legal writing, where it is argued that, since the receivable has become part of the patrimony of the assignee, the assignee (and not the assignor) has the power to collect the receivable, albeit that payment by the debtor to the assignor will, if made prior to notification, discharge of the debtor’s obligation).105 Some uncertainty as to the precise effects of an undisclosed assignment remains in Netherlands law. As discussed in para. I.4. supra, notification of a transfer / pledge to the debtor will also have impact on the debtor’s ability to invoke a right of set-off with a counterclaim against the assignor / pledgor.

14. Post-insolvency collection by buyer of receivables In the case of a disclosed outright transfer, if the debtor was not notified prior to the insolvency, the assignee would not have acquired any proprietary rights in the receivables (effective against third parties), as notification to the debtor is a constitutive element.106 Notification after the opening of insolvency proceedings against M will not lead to the assignee’s acquisition of rights in the receivables.107

102 103 104

105

106 107

See para. I.4. supra. Art. 3:246 para. 1 BW. See Parliamentary Papers, Second Chamber of Parliament (Tweede Kamer), 20032004, 28 878, nr. 5, p. 11 and Second Chamber of Parliament (Tweede Kamer), 2003-2004, 28 878 C, p. 3. See, inter alia, Abendroth, Een jaar stille cessie, TvI 2006, p. 58 et seq. and Van der Weijden, Overgang en uitoefening van nevenrechten bij stille cessie, WPNR 2007, 6716, p. 574 et seq. Cf. Art. 3:94 para. 1 BW. Art. 35 Fw. See para. I.5. supra.

214

Sander Timmermann/Michael Veder

In the case of an undisclosed transfer, notification is not a constitutive element and if all required formalities to make the transfer effective (see para. I.2. supra) were observed prior to M’s insolvency, the absence of notification does not render the transfer ineffective. The assignee may, even after M’s insolvency, notify the debtor of the transfer. The debtor must then pay the receivable to the transferee (prior to notification the debtor must pay the liquidator). Payment to the assignee after notification discharges the debtor. The assignee is entitled to keep the proceeds of the receivable, which, after all, already were part of its patrimony. In case prior to notification the debtor pays its debt to M’s insolvency administrator (and, consequently discharges its obligation), the assignee will have a claim against the estate for the amount of the proceeds.108 It will depend on the value of the estate and the total amount of the claims against the estate whether the assignee will be able to recover its claim.109

15. Post-insolvency collection by pledgee of receivables Reference is made to para. I.5. supra. As we observed there, the lender / pledgee can still effect notification of an undisclosed pledge to the debtor even after M’s insolvency. After notification of the pledge to the debtor, only payment to the lender will discharge the debtor. In practice, an undisclosed right of pledge over trade receivables is one of the most important forms of security for bank loans. The extent of the recovery on the receivables strongly depends on the manner in which the receivables are settled. In order for the bank to be able to take recourse on (almost) the full amount of the proceeds, it is essential that (1) the bank be able to notify the debtors of the receivables in time (before they have made payment), and / or (2) the bank and the liquidator come to an agreement regarding the collection of the receivables, and / or (3) the debtors pay into a bank account maintained by the pledgor with the pledgee-bank.110 If the pledgee-bank has not notified the debtors of the pledge and the debtors pay into a bank account maintained by the pledgor with a different bank, or into the bank account opened by the liquidator in respect of the estate or 108

109

110

This claim can be based on Art. 6:36 BW (cf. Second Chamber of Parliament (Tweede Kamer) 28 878, nr. 5, p. 13). Claims against the estate are paid prior to unsecured pre-bankruptcy claims. In a bankruptcy with a negative estate (i.e. the value of the estate is insufficient even to pay all claims against the estate), a ranking of claims against the estate similar to that among pre-bankruptcy claims must be observed. The transferee has no priority position as to the proceeds. In which case the bank may set-off its debt to the pledgor arising as a result of crediting of the pledgor’s bank account with a claim against the pledgor (HR 17 February 1995 Mulder q.q. / CLBN, NJ 1996, 471).

Netherlands

215

if they pay to the liquidator in cash, the debt is discharged but the pledgee obtains a right of priority in the distribution of the proceeds.111 However, the pledgee’s claim, even though preferential, is a pre-bankruptcy claim, so that distributions on that claim are subject to the apportionment of the general costs of the bankruptcy (which includes claims of estate creditors) and the pledgee will have to wait for a distribution of monies until a plan of distribution has become irrevocable. In practice, these costs can be quite substantial and may lead to the pledgee receiving little or nothing from the proceeds.

16. Securitisation Netherlands law provides for two types of security rights: (1) mortgage (hypotheek) and (2) pledge. A mortgage can be granted only on registered property (registergoederen), such as real estate, “registered” vessels and aircraft, and on limited rights (beperkte rechten) vested therein. All other assets, whether tangible or intangible, can be subject to a pledge. Accordingly, there is only one type of ‘land security right’ available in the Netherlands. As is the case with a right of pledge, mortgages generally are classified as accessory rights. The Dutch Civil Code provides that the transfer of a receivable also entails the transfer of all accessory rights to such receivable.112 Consequently, if a receivable is transferred, in principle all accessory security rights securing that receivable will also be transferred by operation of law (without any further action being required). As discussed in para. I.2. supra, the requirement that a transfer of a receivable could be effected only with notification of the debtor was regarded as a serious impediment to the proper functioning of the finance practice (securitisations, bulk assignments, etc.). The Dutch legislator therefore introduced the possibility of an undisclosed transfer (without notification to the debtor). However, an undisclosed transfer can be effected only with respect to receivables that already exist at the time of the delivery or that arise directly from a legal relationship which already exists at that time.113 Further, in the case of an undisclosed transfer, it is uncertain at which moment the assignee acquires and / or becomes entitled to enforce such accessory rights, i.e. at the time of the transfer or only after notification of the transfer to the debtor. A mortgage is not always an accessory security right. Exceptions may apply in case a mortgage has been created as a strictly personal right or in case of a so-called “bank mortgage” (bankhypotheek) or “credit mortgage” 111 112 113

HR 17 February 1995 Mulder q.q. / CLBN, NJ 1996, 471. Art. 6:142 BW. Art. 3:94 para. 3 BW, in effect as from 1 October 2004.

216

Sander Timmermann/Michael Veder

(krediethypotheek). Bank mortgages and credit mortgages do not serve as security for certain specific receivables, but rather as security for any and all debts which a debtor may now or in the future owe to the secured party (in case of a bank mortgage) or as security for any and all debts resulting from a specific legal relationship (such as debts pursuant to a facility agreement) which a debtor may now or in the future owe to the secured party (in case of a credit mortgage). Under Netherlands law it is uncertain if, and if so, to what extent, a bank or credit mortgage could be considered strictly personal and whether it will pass to the transferee in the event of a transfer of the secured receivable. Based on case law of the Dutch Supreme Court,114 legal writers generally take the position that if the wording of the relevant deed of mortgage does not object, the transfer of a receivable secured by that mortgage will also entail the transfer of a bank or credit mortgage securing the receivable. If the relationship between the assignor-secured party and the debtor has not been terminated in such a manner that following the transfer the assignor-secured party will not obtain any claims against the debtor that might fall under the bank or credit mortgage, it is generally assumed that the mortgage will be transferred partially, resulting in a joint ownership of the mortgage by the assignor and the assignee.115 Also if a receivable is made subject to a right of pledge, it is likely that the pledgee gets the benefit of any accessory security rights securing the claim and the pledgee is entitled to exercise those rights in foreclosing on the pledged claim. Consequently, if the receivables of L2 are supported by security rights that are accessory in nature (see above), the SPV will most likely get the benefit of that security by operation of law after the SPV has notified the debtor of the pledge and, consequently, has become entitled to collect the pledged receivable(s). According to prevailing opinion, under Dutch law a pledgee that is entitled to collect a pledged receivable is also entitled to exercise accessory security rights securing that receivable.116 However, no conclusive case law exists on this issue so that the exact position of Dutch law in this respect remains somewhat uncertain. Netherlands law does not have any special legislation relating to the private-law aspects of securitisation only.

114 115

116

HR 16 September 1988 Onderdrecht / FGH, NJ 1989, 10. See, inter alia, Verhagen/Rongen, Cessie, Pread viezen uitgebracht voor de Vereiniging voor Burgerlijk Recht (2000), p. 139 et seq.; Vranken, Roestplekken in de literatuur over bankhypotheek, in Kortmann (ed.), Yin Yang (Van Mourik Bundel) (2000), p. 433; Timmerman, Bankhypotheek en afhankelijkheid, in Kortman et al. (eds.), Onderneming en 10 jaar nieuw burgerlijk recht (2002), p. 409. See Case 5, para. II.5. supra.

Netherlands

217

III. Substantive Variations 1.

Nature of claim

The nature of the claim does not give rise to any variation of the governing rules under Netherlands substantive or private international law, except in the case of a Financial Collateral Arrangement (see para. I.6. supra).

2.

Nature of assignor

The nature of the assignor does not give rise to any variation of the governing rules under Netherlands substantive or private international law, except in the case of a Financial Collateral Arrangement (see para. I.6. supra).

3.

Nature of assignee

The nature of the assignee in principle does not give rise to any variation of the governing rules under Netherlands substantive or private international law, except in the case of a Financial Collateral Arrangement (see para. I.6. supra). In the case of syndicated loans where the receivables are intended to secure the claims of more than one lender and / or the identity of the lenders is expected to change over time, generally the security right over the receivables will be created in the name of a security trustee or collateral agent for the benefit of all present and future members of the syndicate. It is possible to create security over the receivables for the benefit of all lenders jointly, but this will lead to a joint ownership (gemeenschap) among the lenders with respect to the security, which will give rise to difficulties with respect to enforcement of the security or transfer of participations in the syndicated loan to new participants. Under Netherlands law, the creation of security over assets (such as receivables) in the name of a security agent for the benefit of the claims of all participants in the syndicated loan requires that a parallel debt be created for the benefit of the security trustee.117 According to prevailing opinion under Netherlands law, it is not possible to create a security right over assets in the name of a party that is not a creditor of the secured claim. The parallel debt will “mirror” the aggregate amount of the claims of all participants in the syndicate.

117

The effectiveness of a parallel debt construction has not been confirmed by the Dutch Supreme Court. However, according to prevailing opinion it is effective as security arrangements with a similar purpose have been approved by the Dutch Supreme Court.

218

Sander Timmermann/Michael Veder

IV. Private international law issues Reference is made to the general observations on Netherlands private international law in para. I.7. supra. Under the current conflict rule regarding the proprietary aspects of assignment (para. I.7.d) supra), the locations of the assignee and the assignor are irrelevant. However, in practice, the conflict rules regarding the proprietary aspects of assignment of the country where the assignor is located will generally be taken into consideration, as it may be necessary to enforce the assignment before the courts of the country where the assignor is located. Under the current conflict rule regarding the proprietary aspects of assignment (para. I.7.d) supra), the location of the debtor is irrelevant. However, in practice the conflict rules regarding the proprietary aspects of assignment of the country where the debtor is located will generally be taken into consideration, as that will be the country where (most likely) proceedings regarding the collection of the receivable will be conducted and it may be necessary to enforce the assignment before the courts of the country where the debtor is located. Under the current conflict rule regarding the proprietary aspects of assignment (para. I.7.d) supra), it is not relevant whether the receivable is governed by the law of a country other than that in which the assignor is located.

Belgium Eric Dirix / Ivan Peeters I.

Introduction

1.

Historical background

Until the 1994 Act, the provisions of the Belgian Civil Code relating to the transfer (and the pledge) of contractual monetary claims (hereafter referred to as “receivables”) were identical to those of the French Civil Code. According to these provisions (Art. 1690 Cc), a distinction had to be made between the “internal” and the “external” effects of a transfer. Between the contracting parties, the transfer of the receivable took effect as from the date of the agreement itself. In relation to all other parties (e.g. the debtor, creditors of the transferor or the transferee) the transfer was effective only when certain formal conditions were met, in particular the notification of the transfer to the debtor through a bailiff or the acceptance of the transfer by the debtor in a notarial deed. The pledge of receivables was subject to similar rules; it required the formal notification to the debtor or the debtor’s acknowledgment in a notarial deed. In order to facilitate securitisation, in 1994,1 the Belgian legislator removed the formalistic requirements of the old Art. 1690 Cc. As a consequence of the approach taken to amend the Civil Code directly and generally, the rules concerning the pledge of receivables were also modified; thus, the new rules are applicable to all kinds of receivables and apply regardless of the type of the parties concerned (individuals or legal entities). The Belgian approach differs significantly from the approach taken by the French legislator, which, to facilitate financing, introduced specific rules for certain categories of transferees and certain types of receivables only (Loi Dailly), and, to facilitate securitisation, subsequently introduced further rules specifically for that class of transaction.

2.

Outright transfer

According to the new Art. 1690 Cc provisions, the outright transfer is effective between the transferor and the transferee as from the moment of 1

Act of 6 July 1994 modifying the Act of 17 June 1991 on the organisation of the public credit sector, BS 15 July 1994.

220

Eric Dirix / Ivan Peeters

the agreement between the parties. There are no formalities to be observed. As to the external effects, a distinction needs to be made between different categories of third parties: (1) the debtor of the transferred receivable (hereafter referred to as the “debtor”); (2) certain parties that have a vested right in the receivable (or the payments made thereunder) which are in conflict with those of the transferee (e.g. another transferee, a pledgee); and (3) all other third parties (most importantly, the transferor’s insolvency administrator, and a levying creditor). a) With respect to the third category, the general rule of Art. 1690 para. 1 Cc applies without limitation. Consequently, there are no formalities required in order to make an outright transfer effective as against an administrator of the insolvency proceedings of the transferor and a creditor of the transferor that attaches the receivable (whether or not there has been a prior notification to or acceptance by the debtor). b) With respect to the debtor, however, the outright transfer is binding only from the moment the transfer has been notified to it or has been acknowledged by it. Prior to the receipt of the notification or the acknowledgement, the debtor will be entitled to invoke all types of defences which have accrued up to the date of notification or acknowledgement (including set-off, invalidity etc.), except that certain defences may be invoked only to the extent that the debtor had no knowledge of the transfer at the time such defence accrued. This additional requirement that the debtor must be acting “in good faith” applies only to (1) the discharge of the transferred receivable by way of payment and (2) to defences arising out of certain actions agreed between the debtor and transferor (i.e. amendments, waivers, novation, etc.). Under the new Civil Code provisions, notification entails no particular formalities. It can be made by letter, fax, telex or any other means of communication. Even an oral notification, provided the evidentiary problems are overcome, would be sufficient. Notification can be given by either the transferor or the transferee. Only the fact of the transfer, not the agreement itself, needs to be notified.2 If the notification is given by the transferee only, the debtor is entitled to raise defences regarding the existence of the transfer.3 c) The time of notification to the debtor (or acceptance by the debtor) also determines priority among multiple transferees (whether outright transferees or pledgees). 2 3

Cass. 28 October 1994, RW 1994 / 95, 1122. Cass. 27 April 2006, available at http: // www.cass.be (1 April 2009). A debtor who pays to the transferor notwithstanding prior notification of the transfer, will be compelled to pay a second time, i.e. to the transferee (Cass. 15 June 2007, available at http: // www.cass.be (1 April 2009)).

Belgium

221

d) An outright transfer will not be effective as against a creditor of the transferor which has attached the receivable and has received payment of the receivable, in good faith, from the debtor (also acting in good faith) prior to a notification or acceptance (Art. 1690 para. 4). Under Belgian law there is no clear definition of what constitutes a “future receivable” as compared to an “existing receivable”. In practice, receivables may arise with different characteristics: their existence, substance or enforceability may be fully determined already or may be subject to the expiry of a suspensive term, to conditions precedent or may otherwise depend on the completion of particular events. Although the better view is that a receivable must be deemed to constitute an “existing receivable” if it arises under an existing contract, there remain some discussions (in particular as to the consequences for a transfer – see Case 1, para. II.1. infra) as to the proper characterisation of receivables (such as lease receivables) arising under term contracts which provide for ongoing and consecutive performance obligations. What is certain, is that a transfer can cover both present and future receivables. Under Belgian law, the possibilities for the transfer of future receivables are very broad. It is sufficient that the agreement describes the receivables in such a manner that they can be identified without further discussion between the parties.4 An outright transfer or a pledge of all receivables that may become due from existing and future customers is sufficiently determinable. There are no restrictions concerning partial transfers other than that the assigned portion must be identifiable. If an assigned portion is not distinguishable from a different portion, the transfer would take effect as the creation of an undivided interest (copropriété / mede-eigendom) in the receivable between the transferor and the transferee. In the absence of case law on this topic, opinions among scholars differ as to whether or not anti-transfer clauses are effective as against third parties (whether outright transferees or pledgees). Some have expressed the view that such clauses are effective against a transferee. The more recent analysis advocated by very authoritative scholars is that the debtor of the assigned receivable cannot invoke the clause as a defence against a transferee (or a pledgee).5 The parties to a receivable may, of course, agree upon the non-assignability of a receivable, but such an agreement would be effective only between them and is not binding upon third parties. The transferee (or pledgee) who has knowledge of the clause can, however, be held liable in tort for inducement or participation in the breach of the contract by the transferor (pledgor) (Art. 1382 Cc). Although the mere knowledge 4 5

Cass. 9 April 1959, RCJB 1961, 32 note Heenen. Dirix / Sigman, The United Nations Convention on the Assignment of Receivables in International Trade. A Comparative Analysis from the Belgian and United States Perspective, Bank Fin. R. 2002, 204 et seq.

222

Eric Dirix / Ivan Peeters

of the existence of the clause is not sufficient for the liability for tortious interference with contracts,6 a transferee would typically be deemed to participate in such breach by entering into the transfer agreement knowing (or being deemed to know) of the existence of the anti-transfer clause. In practice, therefore, receivables that are subject to anti-transfer clauses are excluded from securitisation, factoring or similar programmes.

3.

Pledge of receivables

The rule of Art. 2076 Cc that requires the transfer of possession of the collateral to the pledgee is also applicable to the pledge of incorporeal movables (such as receivables). Prior to the 1994 Act it was generally held that the transfer of possession of a receivable (or other intangible) to the pledgee was realised through the notification to the debtor of the pledged intangible. The 1994 Act did not abolish as such the requirement of transfer of possession (Art. 2076 Cc) but it did amend Art. 2075 Cc in such a way that it now provides that the pledgee takes “possession” of the receivable as from the conclusion of the pledge agreement. In practice this means that a transfer of possession by way of notification is no longer required, since the Civil Code now equates the conclusion of the pledge agreement with sufficient dispossession. Notification is now relevant only with respect to the position of the debtor of the receivable and for deciding priority vis-à-vis third parties that have vested rights in the receivable (e.g. other pledgees or transferees). This means that a conflict between multiple pledgees is determined not by the date of the respective pledge agreements, but according to the date of notification to the debtor (provided the debtor and notifying pledgee are acting in good faith). The priority between an outright transfer and a pledge will also be decided according to the time of notification. The absence of notification will, however, not jeopardise the position of the pledgee in case of bankruptcy of the pledgor or the attachment of the receivable by another creditor of the pledgor. For a pledge of incorporeal movables other than receivables, the requirement of a transfer of possession from the grantor to the secured creditor as a condition to the existence of the security right (Art. 2076 Cc) remains. Unless specific statutory provisions apply (see below), this will be achieved through the notification of the pledge to the debtor (or the debtor’s acknowledgment). Conflicts between competing pledgees are determined according to the time of notification or acknowledgment. There are also a number of statutory provisions dealing specifically with the pledging of certain other intangibles, such as shares (Art. 504 Company Code: entry in 6

Cass. 22 April 1983, RCJB 1984, 359 note Merchiers, RW 1983 / 84, 427 note Dirix.

Belgium

223

the companies register of shares), intellectual property rights (Art. 46 Patent Act, Art. 11 Benelux Trademark Act, Art. 3 Copyrights Act), receivables under insurance policies (Arts. 117 to 120 Insurance Act), etc.

4.

Enterprise pledge (pledge over the business)

In practice, receivables of businesses will in most cases be encumbered by an enterprise pledge (Act of 25 October 1919: gage sur fonds de commerce / pand op handelszaak) in favour of a bank. The enterprise pledge is a non-possessory security right on the assets of a business. It is subject to publicity and can be granted only to banks and certain financial institutions. The pledge comprises all the essential movable assets of the business. The parties are entitled to specify additional classes of assets such as receivables.7 A general description is sufficient (for example: “all existing and future receivables”). Publicity is achieved by filing in the land register where the business is situated. The information provided by the publicity regime is rather limited. For example, the register will not show that receivables are included in the pledge. A prudent lender or creditor will assume that the totality of the movable business assets are encumbered, including receivables. The conflict between an enterprise pledge that includes the receivables and an outright transfer or a pledge of the same receivables will be decided with reference to the date of the filing of the enterprise pledge compared to the date of notification to the debtor of the outright transfer or pledge.

5.

Security transfer

The effectiveness between the parties and vis-à-vis third parties of a transfer for the purpose of providing security has always been the subject of fierce debate and of conflicting case law. In 1996 the Supreme Court rendered a decision which is predominantly construed as ruling that a security transfer is effective inter partes, but that it has no legal effect vis-à-vis third parties.8 As a result, a security transfer cannot be upheld in insolvency proceedings. Although quite a number of authoritative scholars have argued that this decision was not clear and that since 1996 (in particular since the new insolvency laws were enacted) Belgian statute and case law have evolved to be more friendly to this type of security arrangement, in practice a security transfer is used only when its effectiveness is guaranteed by a

7 8

Cass. 6 November 1970, Pas. 1971, I 200, RCJB 1972, 320 note Fontaine. Cass. 17 October 1996, Pas. 1996, I 992 concl. proc. gen. Piret, RW 1996 / 97, 1395 note Storme.

224

Eric Dirix / Ivan Peeters

specific statutory provision or if its effectiveness is governed by foreign law that would give it recognition. A substantial number of statutes provide for the recognition of security transfers in specific areas (including insurance claims, salary receivables, receivables arising under contracts with public bodies, etc.). Most recently such statutory recognition was introduced for certain financial transactions. The main example is that of bank accounts and other financial instruments (Act of 15 December 2004 implementing the Directive on Financial Collateral Arrangements). Art. 12 of the 2004 Act states that security transfers of financial collateral (which includes all types of financial instruments and receivables arising in respect of funds credited to a bank account) are effective and binding upon third parties. The provisions in the 2004 Act concerning security transfers are restricted to arrangements between legal persons. Arrangements with or between physical persons are excluded. The security right is created on the condition that the transferee acquires and maintains “control” of the asset. How this condition is to be met with respect to bank accounts has very recently become the subject of discussion among legal scholars. Although most likely the intention of the Belgian legislator was that this requirement should, with respect to security on bank accounts (which are typically classed as security over receivables), be dealt with as described in A.3 above (i.e. the mere conclusion of the contract of transfer is sufficient), recently some have argued that this interpretation falls short of giving the transferee control and that, accordingly, notification to (or the acknowledgment by) the debtor (i.e. the bank) is required.9

6.

Transfer of invoice

A specific way to facilitate the transfer of receivables was introduced by the 1919 Act. A receivable arising under a commercial contract can be assigned or pledged to banks or financial institutions through the transfer or pledging by way of endorsement of the invoice in which the receivable is stated (Art. 13). This system is still used for factoring, but lost most of its attraction since the 1994 Act that simplified the general rules on transfer and pledge. The effectiveness of the endorsement vis-à-vis third parties requires the actual endorsement of the pledge or transfer on the invoice and the delivery of the endorsed invoice to the transferee or pledgee (or a third party acting for its account).

9

Storme, Juridische stellagebouw die het zicht op Europa belet, geïllustreerd aan de hand van de bezitsverschaffing van financiële activa, TPR 2006-3, 1249 et seq.

Belgium

7.

225

Right to collect

A transferee of a receivable is entitled to collect the receivable in the same way and on the same conditions as the transferor could, from the moment notification of the transfer has been given to the debtor. It is generally accepted that notification can be given with full effect even after the insolvency of the transferor or the attachment of the receivable by a creditor. Although in principle the debtor may not assert defences that have not accrued in the relationship with the transferor prior to notification, there are some important exceptions to this rule (including the “exceptio non adimpleti contractus”, i.e. the right to suspend payment in case of a default by the assignor on the contract giving rise to the receivable). Under Belgian law a pledge is only an encumbrance (i.e. a limited interest in an asset). In principle, a pledge entitles the pledgee only to enforce the pledge by selling the pledged assets or to claim a right of priority if the asset is realised in another way (e.g. by the insolvency administrator). However, when the secured transaction is a commercial transaction (i.e. the secured obligation derives from a commercial transaction) the pledgee has a statutory right to collect amounts due under the pledged receivable if and when such amounts fall due, on the condition that the proceeds are applied to the secured liability. Such “collection right” includes the right to commence or continue legal proceedings or enforcement proceedings against the debtor without the co-operation of the pledgor. When a receivable is included in an enterprise pledge, the pledgee has no statutory right to collect the receivable, but may attach the receivable and seek collection in that way. Any pledgee can be given an irrevocable power of attorney by the pledgor to collect all pledged receivables, but it is uncertain whether or not such power of attorney will survive the insolvency of the pledgor.

II.

Case Studies

1.

Security right over “future” receivables

The effectiveness inter partes of a transfer or pledge of future receivables10 poses no difficulty under Belgian law. The only specific requirement is that the receivables can be determined without the need for further discussions between the parties. A transfer or a pledge of the receivables is possible regardless of the moment the work contract is signed or performance has started. However, the question from which moment the transfer or pledge would be effective vis-à-vis third parties (other than the debtor) is not definitively settled. Belgian bank lenders in practice assume that such ef10

As to the concept of “future receivable”, see para. I.2. supra.

226

Eric Dirix / Ivan Peeters

fectiveness will be achieved only from the date the receivable definitively comes into existence. Under Belgian law a receivable comes into existence upon the conclusion of the agreement that gives rise to the receivable. Unlike in the Netherlands or France, there is no specific rule of Belgian insolvency law which provides that an existing receivable under a contract that was assigned or pledged prior to the insolvency would still be part of the insolvent estate if the insolvent transferor’s performance under the contract would only become due after the insolvency (e.g. progress of work, rental period under a lease). An insolvency administrator would in such a situation need to suspend the performance under the contract or seek termination of the contract if it wants to avoid that the receivables that accrue as a result of the passage of time or the further performance of the contract by the insolvent estate benefit the pledgee (Art. 46 Bankruptcy Act).

2.

Sale of existing receivables

The outright sale to the financial institution is effective in accordance with the general rules on transfer (see above). Since the transfer does not relate to all the receivables of the merchant or to a specified category of receivables (e.g. all customer receivables with a principal amount higher than 1000 Euro), the transfer agreement (including, of course, any related documents that are part of the parties’ overall agreement) will need to contain additional elements to distinguish the sold receivables from the merchant’s other receivables. Assuming that the transfer is not effected by way of the endorsement of invoices, there are no formalities to be observed, other than the written transfer agreement and notification to the debtor if the transferee wants to attain priority over certain third parties (see para. I.3. supra).

3.

Security right in all existing and future receivables

A pledge agreement using the quoted language is effective. As to the requirements in practice for financing based on future receivables, see para. II.2. supra. In practice, the lender would be well advised to (a) specify in the pledge agreement the type of transactions to which the receivables relate (e.g. “all receivables arising out of sales of goods of whatever kind”) and (b) to require a list of all existing receivables (including the identity of the debtors) and regular updates of such list so that it can timely give notification to the debtors (and thereby gain priority over third parties) when it deems appropriate.

Belgium

4.

227

Sale of partial undivided interest in a portfolio of receivables

Both a partial transfer and a transfer of an undivided interest are permitted and are effective to the same extent as any other transfer. However, undivided interest structures are not common in Belgium (typically the entire portfolio will be sold and the transferor will be given a mere contractual “seller’s interest” by the transferee).11 Since the undivided interest is to be characterised as a co-ownership, transferor and transferee will, as a practical matter, need to agree on how to collect and enforce the receivable.12 The transferor and transferee will in case of insolvency of the transferor rank pari passu in respect of all collections. Where the transferee of the portion is a bank / lender or a securitisation vehicle, it will want to alter this pari passu ranking by requiring the transferor to subordinate its entitlement to the receivable. The effectiveness of the subordination in the insolvency of the transferor may, in many cases, require the fulfilment of certain formalities (e.g. if the receivable is secured by a mortgage).

5.

Security right in receivables that are secured by real rights in goods

Most commonly, the receivables due from the customers will be secured by a retention of title clause inserted in the sales contracts. In any event, the unpaid seller will be protected by a legal privilege on the sold goods (Art. 20, 5° Mortgage Act). A transfer of a receivable includes the transfer of all the accessories of that receivable, such as personal guarantees, security rights and mortgages (principle: Art. 1692 Cc). This is also accepted in regard to retention of title.13 The transfer takes place by operation of law, without the need of further formalities (except for security rights in immovables). The same principle applies in the case of a pledge of the receivables. The pledgee that enforces the receivable against the debtor is entitled to the benefit of all the rights that secure payment of the receivable, including the retention of title (even though the sold goods owned by the pledgor as a consequence of the title retention are not pledged independently).

11

12

13

Typically, such a “seller’s interest” would consist of the seller funding the purchaser for part of the acquisition price (equal to the percentage of the economic benefit it wants to retain), the repayment and remuneration of such funding being backed by its portion of (the “interest” in) the portfolio. Who decides whether, when and how, and who is required / entitled, to take action against the debtor, etc. For France: Cass. (France) 15 March 1988, JCP G 1989, II 21348 and after the 2006 reform: Art. 2367 para. 2 C. civ.

228

6.

Eric Dirix / Ivan Peeters

Security right in receivables that are supported by personal guaranties

The principle described under Case 5 (para. II.5. supra) applies to both personal and real rights that secure the payment of the receivables. Consequently, the lender is also entitled to enforce payment by the third party guarantor.

7.

Security right in receivables that are supported by independent undertakings

An independent undertaking is not regarded as an accessory right that will pass by operation of law to a transferee of the supported receivable. A transfer to M3 of any right to receive the proceeds of the independent undertaking requires a separate transfer.

8.

Contractual restrictions on assignment

See para. I.2. supra.

9.

Legal restrictions on assignment

Statutory prohibitions or restrictions have an effect erga omnes. In case of judicial restrictions, the position of a transferee can only be challenged on the basis of liability in tort. In an international context it is in principle the law governing the receivable that will address the question whether the receivable is assignable. It can however not be excluded that Belgian statutory restrictions intended to protect the debtor (e.g. a public body as debtor under a contract subject to public procurement legislation) could be relied on by the debtor even where the receivable is not governed by Belgian law.

10. Publicity; priorities in general There is no publicity regime for transfers of or security rights in receivables. In most cases, even the debtor will not be able to give that information since the notification of an transfer or a pledge is not a condition to effectiveness (see para. I.1. to I.3. supra). Consequently, M will be the only source of information. The registration of an enterprise pledge will put creditors on notice that presumably the receivables are already encumbered (see para.

Belgium

229

I.4. supra). As to the effectiveness and priority of the rights acquired by the outright buyer and the secured lender, see para. I.3. and I.4. supra.

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods There exists no case-law on this subject. According to most legal writers, the title-retaining seller prevails. This is also the solution adopted by the French Cour de Cassation.14 The outcome is explained as follows. According to the theory of “real subrogation” the receivable from the sale is subject to the same conditions (security rights, liens, etc.) as the goods themselves. Since the goods remain the property of the seller as long as the purchase price has not been paid, the seller’s entitlement to the receivable should enjoy the same property status. When M sells the goods, “real subrogation” prevents the receivable for the sale price from becoming part of M’s estate. M is, however, entitled to collect the receivable, and if M does so, the rights of the seller disappear because the money will be commingled with other funds in M’s account and thus become part of M’s estate. The seller will also lose its rights if the receivable is collected from the debtor by a transferee or a pledgee of M that is acting in good faith. But when an insolvency proceeding (concursus creditorum) arises in respect of M while the receivable is still unpaid, the seller can claim the right to the payment and the proceeds as an “owner”. A payment after the opening of the insolvency proceedings does not jeopardise the seller’s rights because no commingling of funds will be deemed to take place in the hands of the administrator.

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Same answer as Case 11 (para. II.11. supra). The position of the secured lender is not different from that of the outright transferee of the receivables. Although there is not yet case law confirming this analysis, based on the notion of “real subrogation”, the title-retaining seller should prevail.

14

Cass. (France) 20 June 1989, Bull. Civ. IV 1989, No. 197, D. 1989, jur. 431 note Perochon; Cass. (France) 26 April 2000, ERPL 2002, 823 note Sagaert. See also Dirix, Effect of Security Rights vis-à-vis Third Persons, in Drobnig et al. (eds.), Divergences of Property Law, an obstacle to the Internal Market? (2006), p. 68, at p. 87-88.

230

Eric Dirix / Ivan Peeters

13. Notification See para. I.3. supra. The time of notification to the debtor will determine priorities in all conflicts that arise between the transferee and third parties with vested rights in the receivables (e.g. a pledgee or another transferee).

14. Post-insolvency collection by buyer of receivables According to the principle of the new Art. 1690 Cc the transfer is binding on third parties (including an insolvency administrator) from the conclusion of the agreement. The opening of the insolvency proceedings will not prevent the factor from giving notification to the debtors and will not hinder its right to collect the receivables. The insolvency administrator of M’s insolvency will be obliged to account for collections paid to the insolvent estate (but not for amounts received by the transferor prior to the commencement of the insolvency but not paid over to the transferee – these sums were, most likely, commingled with other funds of M’s estate).

15. Post-insolvency collection by pledgee of receivables Same answer as Case 14 (para. II.14. supra). The position of the secured lender is the same as that of an outright transferee.

16. Securitisation If the loans are sold, the transfer will also entail by operation of law the transfer of the related security rights on land (mortgage). Subject only to limited statutory exceptions, due to the fact that security rights on immovable property are subject to publicity requirements (Art. 5 Mortgage Act), the transfer of loans that are secured by security rights on immovable property also require, to be effective vis-à-vis third parties, the publicity of registration in the land register. Without such publicity neither the sale of the loans nor the transfer of mortgages will be effective against third parties. If L2 borrows against the loan portfolio, it will need to grant a pledge over the loans. The pledge, like the transfer, will be subject to the requirements of Art. 5 Mortgage Act, as described in the preceding paragraph. Art. 5 Mortgage Act does not apply, however, where the transfer or pledge is created either by or for the benefit of a dedicated securitisation vehicle, called institution d’investissement en créances / instelling voor belegging in schuldvorderingen (institution for investment in receivables)

Belgium

231

as transferor / pledgor or as transferee / pledgee, which is set up or recognised in accordance with the Belgian legislation on collective investment institutions. These dedicated securitisation vehicles were introduced as part of special legislation to facilitate securitisation in Belgium, which includes provisions that facilitate the transfer of receivables and their accessory rights and particular tax and insolvency provisions that apply when the securitisation is structured using one of these particular Belgian vehicles.

III. Substantive Variations 1.

Nature of claim

Receivables arising under certain types of insurance agreements are subject to specific requirements, typically the execution of an amendment agreement (avenant). For private international law variations see para. IV. below.

2.

Nature of assignor

There are no particular variables based on the type of transferor, except that: a) a security transfer under the 2004 Act may not involve a physical person (irrespective of whether or not it is a consumer) either as transferor or as transferee; b) certain requirements as to the effectiveness of the transfer of certain types of receivables (secured by a mortgage, consumer loans) do not apply when the transfer is effected by or to an institution for investment in receivables (see Case 1, para. II.1. supra).

3.

Nature of assignee

There are no variables, except as set out in the preceding paragraph.

IV. Private international law issues The Belgian private international law rules for the transfer of contractual receivables can be summarised as follows:

232

Eric Dirix / Ivan Peeters

a) the law that applies to the receivable determines the assignability of the receivable and the conditions for the transfer to be binding on the debtor (Art. 12 of the Rome Convention15); b) the effectiveness of the transfer vis-à-vis third parties (other than the debtor) is to be determined by the law of the jurisdiction where the transferor has its usual residence at the time of the transfer. “Usual residence” is defined as (1) the place where a physical person is principally resident and (2) its principal establishment for a legal entity (Art. 87 § 3 Belgian Private International Law Code).16 The same rules apply mutatis mutandis for the granting of security over a contractual receivable. The law of the jurisdiction where the pledgor has its usual residence at the time of the creation of the security will determine which types of security can be created. It is generally understood that this also applies to the question to what extent a transfer for the purpose of creating security is effective against third parties (other than the debtor, but including the insolvency administrator of the transferor). The same rules apply in respect of non-contractual obligations (Art. 87 § 3 Belgian PIL Code and application of the rule to be laid down in Art. 15 of the Regulation (EC) No. 864 / 2007 of 11 July 2007 on the law applicable to non-contractual obligations (Rome II)17).

1.

The assignor is located in a country other than Belgium

In this section, we assume that the law applicable to the relevant receivables (lex causae) is Belgian law and that the contractual aspects of the transfer agreement are also governed by Belgian law. As to Cases 1 and 2 (para. II.1. and II.2. supra), the effectiveness of the transfer of future receivables will be determined in accordance with the laws of the jurisdiction where the transferor is located. The lex contractus of the transfer agreement will determine to what extent future receivables can be effectively sold and transferred as a matter of contract between seller and purchaser. The lex causae of the receivables will determine their assignability. As to Case 3 (para. II.3. supra), the law of the jurisdiction where the grantor of the security is located will determine the type of security interest

15

16

17

Rome Convention on the law Applicable to Contractual Obligations of 19 June 1980 (OJ 9 October 1980 L 266 / 1 et seq.; consolidated version OJ 31 December 2005 C 334 / 1). In the paragraphs below, unless indicated otherwise, any reference to “location” shall be a reference to such “usual residence”. OJ 31 July 2007 L 199 / 40.

Belgium

233

that can be created and the conditions for its effectiveness against third parties (other than the debtor). In addition to the principles set out above, the effectiveness of the transfer of the benefit of the retention of title will also need to be assessed under the law of the jurisdiction where the goods are located at the time of the transfer of the benefit of the retention of title; this is because transfer of title to the goods from the transferor to the transferee is involved.18 As to Cases 8 and 9 (para. II.8. and II.9. supra), the assignability and the effect of anti-transfer provisions will need to be assessed in accordance with the lex causae of the receivables, without prejudice to mandatory statutory rules of the laws of the jurisdiction of the transferor or the debtor. As to Cases 11 and 12 (para. II.11. and II.12. supra), this conflict will be solved in accordance with the law of the jurisdiction where the transferor or grantor of the security (as applicable) is located. As to Case 13 (para. II.13. supra), the additional relevance of a notification will need to be assessed under the law of the jurisdiction where the transferor is located. As to Cases 14 and 15 (para. II.14. and II.15. supra), the rights of the factor and the secured lender will be determined by the law governing the insolvency proceedings (including possibly the provisions of the EU Insolvency Regulation19) and the law of the jurisdiction where the transferor / grantor is located (effectiveness of the transfer / security against third parties20). In the case of the secured lender, one will also need to review the law governing the security (extent of the rights obtained by the lender pursuant to the security arrangement21).

18

19

20

21

E.g. the goods may be located in a jurisdiction where the effectiveness of a transfer of title between the parties and / or vis-à-vis third parties requires delivery of possession. A mere transfer of the receivable will thus not by operation of law be effective to transfer title to the transferee. Regulation 1346 / 2000 / EC of 29 May 2000 on insolvency proceedings (OJ 30 June 2000 L 160 / 1 et seq.). I.e. the property law aspects are typically governed by the fictional lex rei sitae; in this case, in Belgium, this would be the principal establishment of the transferor / grantor. The rights obtained by a secured creditor under the law governing the security arrangement (e.g. an English law fixed charge) may differ from the rights obtained under the laws of the (fictional) lex rei sitae (i.e. the law of the location of the assignor / grantor (e.g. providing for a pledge over receivables). This is why it is highly advisable to procure that the law governing the security agreement is the same as the lex rei sitae.

234

2.

Eric Dirix / Ivan Peeters

The assignee and assignor are located in Belgium but the debtor that owes the assigned receivable and any collateral securing that person’s obligation is located in a different country

The location of the debtor is not relevant for the Belgian private international law analysis. Of course, the transferee or pledgee will want to be certain that under the law of the jurisdiction of the debtor the transfer or pledge would also be held to be effective as against third parties (other than the debtor), whether under the substantive law of the debtor’s location or as a consequence of the local private international law rules, in particular against third parties that might attach the receivable (or the collateral that secures it) in the debtor’s location and thus seek payment directly from the debtor of that collateral. If the collateral is located outside Belgium the consequences of the transfer or pledge of the receivable on such collateral would also need to be assessed under the law of that foreign jurisdiction.

3.

The assigned receivable is governed by the law of a country other than that in which the assignor is located

The principal variable will be that the effectiveness of the transfer as against the debtor and the assignability of the receivable will need to be assessed under that foreign law and not Belgian law.

Spain Cosme Colmenero García I.

Introduction

1.

The basic Spanish legal regime

Under Spanish law, the codified regulation of the assignment of receivables falls within the scope of the provisions relating to the transfer of credit rights (transmisión de créditos) (which includes the assignment of contractual and non-contractual monetary claims) contained in Art. 1526 et seq. C.c. In addition to these Civil Code provisions, the assignment of receivables is also partially governed by a number of sector regulations including, among others, Art. 149 to Art. 151 of the Spanish Mortgage Law (Ley Hipotecaria) and related provisions, for the assignment of receivables secured by a mortgage over real estate, Art. 347 and Art. 348 CCo, for the assignment of receivables arising from the professional (commercial) activities of the assignor (this would encompass most trade receivables, the most accepted view being that these provisions do not modify the general regulations of the Civil Code), and other specific regulations (for instance, those which apply to consumers and to public entities and those (discussed below) which apply to factoring and securitisations). Notwithstanding the wide variety of legislation, the assignment of receivables is, in general terms, poorly regulated under Spanish Law. Therefore, the relevant rules under Spanish law are often constructed by reference to judicial rulings and the opinion of scholars. There follows a description of the Spanish legal regime applicable to the outright transfer of a receivable (i.e. the true sale, whereby the transferee acquires full ownership over the receivable) and to the pledge (i.e. the creation of a security right, denominated as such, in the receivable, with the pledgor retaining ownership of the receivable). Spanish law does not recognise a security transfer of receivables (i.e. the transfer of ownership of a receivable for security purposes). Once the basic legal regime has been explained, we shall describe the manner in which the Financial Collateral Directive has been implemented in Spain. We provide our interpretation of the relevant regulations of the Rome Convention on the Law Applicable to

236

Cosme Colmenero García

Contractual Obligations of 19 June 19801 in the context of a discussion of private international law issues at the end of the Report.

a)

Outright transfer of a receivable

In the Spanish Civil Code, the regulation of the transfer of ownership of a receivable falls under the regulation of sale and purchase agreements. However, the outright transfer of a receivable may be carried out in the form of any other contract that provides for the transfer of ownership of an asset, thus, certain formalities may need to be fulfilled depending on the nature of the contract chosen by the parties for the execution of the assignment. Art. 1526 C.c. states that the outright transfer will only be effective against third parties from the moment when its date is deemed to be certain, which, in the case of a public document, shall be the date established therein and, in the case of a private document, will normally be the date on which the document is registered in a public registry. Likewise, Art. 149 LH states that the transfer of title of a mortgage over real estate securing a receivable must be formalised in a public deed (escritura pública) and registered in the Property Registry. However, it is unanimously accepted that these provisions do not establish requirements of form necessary for the effectiveness of the outright transfer. Instead, these articles establish rules that are only procedural, setting out the evidentiary means available to the transferee in order to prove the date of the outright transfer (and its existence) against third parties. Therefore, the outright transfer is effective against third parties from its proven date certain even if not formalised in writing. As regards whether notification of the outright transfer to the debtor is required, Art. 1527 C.c. establishes that the debtor will be released from its obligation if it satisfies the debt by paying the assignor prior to the former having knowledge of the outright transfer. Therefore, notification to the debtor is not a condition for the effectiveness of the outright transfer, not even in the case of outright transfer of receivables secured by a real estate mortgage. Since Spanish law does not establish any specific rules as to how the notification is to be made, it is understood that it may be made either by the transferor or by the transferee and may be made by any means which informs the debtor of the outright transfer. It is also accepted that the debtor must be furnished with reasonable evidence that the outright transfer has taken place. In the absence of proof to the debtor’s reasonable satisfaction, the latter may be released from its obligation by paying the transferor or by making a judicial deposit of payment. Therefore, the transferee will be 1

OJ 9 October 1980 L 266 / 1 et seq; consolidated version OJ 31 December 2005 C 334 / 1.

Spain

237

entitled to collect the debt directly from the debtor provided that notification to the latter has been provided as explained above. Some scholars maintain that, in the absence of notification, the debtor is not released by paying the transferor if it has become aware of the outright transfer by any other means. Notification is also relevant with respect to the debtor’s right of set-off. Art. 1198 C.c. establishes that the debtor shall be entitled to off-set any claims that it may have against the transferor provided that they have arisen prior to the date of the outright transfer, as well as those claims that may arise between the date of the outright transfer and the date on which the debtor becomes aware of the outright transfer. The debtor will not be entitled to off-set any claims that it may have against the transferor if the debtor gives its consent to the outright transfer. A receivable may be transferred only if it is identified or capable of being identified without the need for a new agreement to be entered into between assignor and assignee (Art. 1273 C.c.). It is, therefore, not required that either the receivable, or the legal relationship from which the receivable arises, exist at the time of the outright transfer; it is also not required that the debtor’s identity be known at that time. Although outright transfer of future receivables is generally accepted, it might be advisable2 to include limitations based on time and / or the nature of the receivables subject to the outright transfer. It should be noted that the outright transfer will only become effective from the date on which the transferred receivable arises. Likewise, although not expressly acknowledged in the Civil Code, it is unanimously accepted by scholars that partial outright transfer of receivables and outright transfer of receivables in bulk are permitted under Spanish law. Anti-assignment provisions are valid and effective vis-à-vis third parties under Spanish law. Thus, an outright transfer made in breach of such a provision would entail the ineffectiveness of the outright transfer itself and, therefore, also the contractual liability of the transferor vis-à-vis the assignee for any damages caused to the latter as a consequence of the ineffectiveness of the transfer. However, some scholars maintain that the outright transfer would be effective should the transfer be made in favour of a bona fide transferee (i.e. a transferee that was not aware and should not have been aware of the anti-assignment provision), in which case the transferor would be liable vis-à-vis the debtor for any damages caused to the latter as a consequence of the transfer made in breach of the antiassignment provision. Finally, according to Art. 1528 C.c., the outright transfer of a receivable entails the automatic transfer of all accessory rights and collateral, including personal guarantees, mortgages, pledges and any other privileges.

2

See the discussion in Case 3, II.3. infra.

238

b)

Cosme Colmenero García

Pledge of a receivable

Until recently, Spanish civil law has not regulated pledges of receivables, although pledges of receivables had been unanimously accepted by court rulings and Spanish scholars. The Spanish Insolvency Act (Ley Concursal), which came into force on 1 September 2004, expressly acknowledges pledges of receivables as specially privileged (i.e. secured) claims. The legal regime applicable to pledges of receivables is derived from the rules applicable to the outright transfer of receivables and those applicable to pledges (with transfer of possession) of tangible assets (the so-called “ordinary pledges”, as opposed to “pledges without transfer of possession”, which will be briefly mentioned below). In this sense, in accordance with Art. 1865 C.c., for an ordinary pledge of receivables to be perfected it is necessary that the pledge be entered into by means of a public deed (instrumento público). As regards notification to the debtor, some scholars have maintained that for an ordinary pledge of receivables to be perfected it is necessary for the pledge to be notified to the debtor, while other eminent scholars, such as Professor Pantaleón, have maintained that the rules on the outright transfer of receivables should prevail, it therefore not being necessary for the debtor to be notified of the pledge. This latter interpretation, i.e. that a silent (non-notified) ordinary pledge of receivables will nevertheless result in a perfected security interest in the receivable, has been ratified by the recent resolution of the General Directorate of the Registries and Notaries (Dirección General de Registros y del Notariado) of 18 March 2008, admitting that an ordinary pledge over receivables may be validly created and perfected without notification to the debtor, the only consequence of a failure to notify being the discharge of the debtor by means of the payment of the receivable to the pledgor. The rules indicated above on the identification of the receivables in the case of an outright transfer also apply to ordinary pledges of receivables. It is accepted, therefore, that ordinary pledges of future receivables are valid under Spanish law, such a pledge, however, only being effective from the date on which the receivable subject to the pledge arise. Likewise, pledges of receivables in bulk are valid under Spanish law, although it has been argued that such a pledge would be unlawful if it seriously threatened the financial situation of an individual pledgor. Until the obligations secured by the pledge become due, the pledgor (unless otherwise agreed) will be the only party entitled to claim payment of the receivables from the debtors as and when the receivables become due. In this case, the parties could agree that the amounts collected by the pledgor be kept by the latter (becoming pledgor’s property free of any rights of the pledgee) or, alternatively, that they be deposited at a bank account pledged in favour of the pledgee (so that the value of the collateral

Spain

239

from which the pledgee benefits will not be reduced as a consequence of the receivables being paid to the pledgor). It could, alternatively, be agreed that the pledgee is entitled to claim payment from the debtors prior to the obligations secured by the pledge being due, in which case the pledgee will hold (and subsequently apply) the amounts necessary for the satisfaction of the obligations secured by the pledge and will deliver any excess to the pledgor. Once the obligations secured by the pledge become due, the pledgee will be entitled to enforce the pledge by (1) claiming payment of the receivables directly from the debtors, acquiring ownership over the amounts paid by the debtors (up to the amount of the obligations secured by the pledge), or (2) realise upon the collateral by means of the sale of the receivables in an out-of-court public auction held by a notary or in a court-conducted auction, as established in Art. 1872 C.c. and in Art. 571 et seq. LEC, respectively. In all these cases, the acquirer of the receivables (whether the pledgee by enforcing the receivables against the debtors or a third party acquiring them at auction) will become beneficiary of any security interests accessory to the receivables, provided that any perfection requirements are complied with (such as notifications to debtors, transfer of share certificates, registration, etc. depending on the nature of the accessory security) and of any personal guarantees accessory to the receivables (provided that there are no contractual restrictions on the transfer of the guarantees). A new law, enacted in December 2007, has provided for the constitution of pledges of receivables as “pledges without transfer of possession”, subject to the specific rules set out in the Law on Chattel Mortgage and Pledge without Dispossession of 16 December 1954 (Ley de Hipoteca Mobiliaria y Prenda sin Desplazamiento). Among other specific features, these pledges must be formalised in a public document and are subject to registration at a public registry. After some controversy as to the extent of this new piece of legislation, the abovementioned resolution of the General Directorate of the Registries and Notaries (Dirección General de Registros y del Notariado) of 18 March 2008 has clarified that this is an alternative regime to the granting of ordinary pledges of receivables subject to the Civil Code (explained above). We will not explain this new regime in further detail as it seems highly unlikely that this type of pledge of receivables (“without transfer of possession”) will be often seen in practice, given the few advantages which this regime may offer (express recognition of second ranking pledges and of the validity of pledges without transfer of possession over future receivables) and the many uncertainties to which it may give rise (amongst others: (1) the public registry to which these pledges have access is not a registry of ownership – i.e. the registration does not establish ownership (at the time of registration or any other time) – but merely registers encumbrances; (2) due to the absence of a single nationwide registry and

240

Cosme Colmenero García

of a clear rule for the determination of which is the appropriate registry, a prospective pledgee seeking to verify whether the receivables offered as collateral are already pledged by a previous pledge without transfer of possession might be obliged to request information from numerous registries; (3) the information provided from these registries would only show any registered pledges without transfer of possession over the receivables but not any existing “ordinary” pledges over the same (an earlier in time “ordinary” pledge would have priority over a subsequent pledge without transfer of possession); and (4) in contrast with the Property Registry, the content of this registry is not presumed to be accurate).

c)

Security transfer of a receivable

Spanish law does not recognise the transfer of ownership of a receivable for security purposes. Most scholars maintain that if the parties’ intention is to secure an obligation of the transferor (whether in favour of the transferee or a third party), then the so-called “transfer of ownership of a receivable for the purpose of providing security” will not be void, but will be recharacterised as a pledge of the receivable, and, thus, be subject to the rules applicable to pledges.

2.

Implementation in Spain of Directive 2002 / 47 / EC of 6 June 2002 on financial collateral arrangements

Spain has implemented Directive 2002 / 47 / EC, of 6 June on financial collateral arrangements3 by virtue of Royal Decree-Act 5 / 2005 of 11 March (Real Decreto Ley 5 / 2005 de 11 de marzo de reformas urgentes para el impulso a la productividad y para la mejora de la contratación pública), which applies to close-out netting arrangements and financial collateral arrangements. As regards which entities may be parties to close-out netting arrangements and financial collateral arrangements for these purposes, Spain has implemented Directive 2002 / 47 / EC in the terms of Art. 1, requiring that at least one party to these arrangements be (1) a public authority; (2) the European Central Bank, another central bank or a similar international or European bank or fund; (3) a credit institution or other financial institution subject to prudential supervision; or (4) a central counterparty, settlement agent, clearing house or similar institution, and that the other party be a legal entity. In the case of close-out netting arrangements, it is also permitted that the other party be a natural person, and in the case of financial collateral, a natural person may be a party to such arrangements provided 3

OJ 27 June 2002 L 168 / 43 et seq.

Spain

241

that the other party is a central counterparty, settlement agent, clearing house or similar institution. As regards what kinds of financial collateral fall within the scope of Royal Decree-Act 5 / 2005, in contrast to other countries such as the Czech Republic, France and Sweden, which have widened the scope of application of Directive 2002 / 47 / EC to include specific kinds of receivables, Spain has chosen to limit its scope to cash in bank accounts, securities and other financial instruments (as in the Directive). Therefore, Spanish law pledges of receivables do not fall within the scope of application of Royal Decree-Act 5 / 2005, which implements Directive 2002 / 47 / EC, other than in the case of pledges of bank accounts, to the extent that they are deemed to be pledges of cash. In this latter case, the creation of such a pledge could be subject to Royal Decree-Act 5 / 2005, which only requires that the pledge be formalised in writing, without further requirements for its validity, effectiveness vis-à-vis third parties and enforceability. Likewise, a pledge of cash may be enforced, in accordance with Royal Decree-Act 5 / 2005, by offsetting the amount against, or applying it in discharge of, the relevant financial obligations secured by the pledge. Royal Decree-Act 5 / 2005 provides that the financial collateral arrangement may not be annulled or set-aside merely as a consequence of the insolvency of the pledgor, provided that the financial collateral arrangement was formalised prior to the commencement of the insolvency proceedings (other than when the financial collateral arrangement has been created in prejudice of the company’s creditors, i.e. where there is no equivalent value given in exchange of the granting of the financial collateral arrangement). It also provides for the financial collateral being subject to separate enforcement proceedings upon the insolvency of the pledgor. Likewise, the insolvency of one of the parties to a close-out netting arrangement shall not prevent the application of the close-out netting provisions. When Royal Decree-Act 5 / 2005 is not applicable (i.e. in the case of an assignment of receivables or of a pledge over receivables other than credit rights arising from bank accounts), close-out netting in cases of insolvency is subject to the rules contained in the Spanish Insolvency Act. Pursuant to Art. 58 LC, upon the insolvency of a party, no offset of its debts and obligations shall apply, unless the requirements for such set-off were satisfied prior to the declaration of insolvency. It must be noted that whereas some scholars maintain that this article refers to the satisfaction of legally established requirements for offset (i.e. that the credits be liquid, due and payable), other scholars maintain that if the arrangements entered into by the insolvent party establish different requirements for the application of offset clauses, then satisfaction of these contractual requirements will suffice to enable the offsetting of the debts and credits against one of the parties upon its declaration of insolvency. Likewise, according to the private

242

Cosme Colmenero García

international rules contained in the Spanish Insolvency Law, the set-off will be permitted when the reciprocal claim of the insolvent debtor is subject to a foreign law which allows it to be set-off in an insolvency scenario.

II.

Case Studies

1.

Security right over “future” receivables

Before the contract between A and B is signed, A can grant to the lender a pledge of the claim it will have against B (a pledge of a future receivable), since it can be identified without need for a further agreement. Likewise, after the contract between A and B has been signed but before work has begun, A can pledge the receivable arising out of that contract. In an insolvency scenario, the key issue will be whether the contract between A and B has been entered into before or after the declaration of insolvency of A. If the contract between A and B has been signed before A becomes insolvent, the lender will benefit from the pledge being a specially privileged credit in A’s insolvency. However, if the contract between A and B is signed after A becomes insolvent, then the receivable will arise as part of the insolvency estate of A and the lender will not have the benefit of the pledge.

2.

Sale of existing receivables

M and the factor should enter into a contract of transfer of ownership of the receivables (whether sale, assignment or any other contract under which ownership is transferred) as explained above. We note here the potential applicability of the claw-back provisions of Spanish insolvency law with respect to any payments made by the debtor on a receivable to the transferee during the two years prior to the declaration of insolvency of the debtor when the transfer was prejudicial to the insolvency estate. With respect to outright sales and factoring (but not pledges) of receivables, a special narrower regime applies when the following conditions are met: (1) the transferor is a company or an individual businessman and the transferred receivables arise from the transferor’s commercial activity; (2) the transferee is a credit entity or a securitisation fund; and (3) the receivables exist on the date of the sale agreement, or arise from the transferor’s commercial activities within one year from the date of the sale agreement, or otherwise the identity of any future debtors is expressly included in the sale agreement. When this special regime applies, the payments made by the debtor to the transferee will not be subject to the claw-back provisions unless the transferor or the transferee was aware

Spain

243

of the insolvency of the debtor on the date when the transferee paid to the transferor the consideration under the sale agreement or unless the debtor has made payments which were due after the declaration of the debtor’s insolvency. Even then, the claw-back provisions will affect the transferee only if the transferee has expressly agreed in the transfer agreement to accept this risk (otherwise, the insolvency administrators of the debtor will be entitled to claim the return of such payments from the transferor only).

3.

Security right in all existing and future receivables

A pledge of all present and future receivables of M would in principle be valid under Spanish law, although it would be advisable to limit the scope of the pledged receivables by reference to the nature of the receivables, in order to identify them more clearly. Such limitation could be as wide as “all present and future receivables arising out of M’s business activities”. Although no time limitation is required under Spanish law with respect to future receivables, it cannot be ruled out that a judge might apply the oneyear time limit legally established for factoring contracts4 also to pledges and assignments of receivables generally. The matters explained in Case 1 (para. II.1. supra) regarding the date of effectiveness of the pledge and the effects of the commencement of insolvency proceedings against M prior to M’s entering into the legal relationships which give rise to the receivables would also apply here.

4.

Sale of partial undivided interest in a portfolio of receivables

The true sale of an undivided 40 % interest by L1 in its portfolio of loans to a bank would be formalised by assigning a 40 % interest in each of the loans which form part of L1’s portfolio. In this case, the true sale would be effective without need to notify the debtors, with L1 collecting payments from the borrowers and subsequently distributing 40 % of the payments to the assignee. Upon an insolvency of L1, the assignee would normally notify each of the borrowers of the assignment in its favour of 40 % of their respective loans, so as to be entitled to collect payments directly from the borrowers. The 40 % interest in each loan would therefore not be part of L1’s insolvency estate. Alternatively, L1 could assign a right to receive 40 % of the global net outcome of the portfolio to the bank. This, however, would not constitute a sale of an interest in the receivables but rather a right to receive an amount measured by the collection receipts. Therefore, the bank would not be entitled to collect payments directly from the borrowers. Upon an insolvency 4

See Case 2, para. II.2. supra.

244

Cosme Colmenero García

of L1, the bank would be an ordinary creditor of L1 for an amount equal to 40 % of the global net outcome of the portfolio.

5.

Security right in receivables that are secured by real rights in goods

According to Art. 1528 C.c., the assignment of a receivable entails the automatic assignment of all accessory rights and collateral (unless the parties otherwise agree in the assignment agreement). In the Case at hand, it is contemplated that M1’s receivables are secured on the basis of the goods sold, either by a title retention contract or by means of a non-possessory security right in the sold goods. In the first situation, it is not clear amongst scholars whether under Spanish law a title retention contract qualifies as a security right accessory to the receivables (since the seller retains ownership of the goods sold). If the retention of title is viewed as a security right accessory to the receivables, then, upon enforcement of the pledge created in favour of the lender over M1’s receivables, the acquirer of the receivables (either the lender by appropriation or a third party at the auction where the receivables were sold) would become beneficiary of the said security right. If the retention of title is not viewed as a security right accessory to the receivables, then it would not be automatically attached to the pledge created in favour of the lender over M1’s receivables unless the parties specifically agree that M1 transfers ownership of the goods sold to the lender. Therefore, upon enforcement of the pledge, the lender will be entitled to either claim payment from the debtors under the receivables or to sell the receivables at auction, but in both cases, M1 will continue to be the owner of the goods sold under the title retention contract. It could therefore happen that, upon a payment default under the receivables, M1 would acquire definitive title (free of any rights of the buyer) to the goods sold. In such a scenario, the parties to the pledge agreement (i.e. M1 and the lender) would normally agree that M1 would sell the goods and pay the amounts obtained (up to the value of the receivables) to whoever acquired the receivables (either the lender by appropriation or a third party at the auction where the receivables were sold). In the second situation (i.e. M1’s receivables are secured by means of a non-possessory security right in the sold goods), M1’s security right in the goods would be accessory to the receivables. Therefore, upon enforcement of the pledge, the acquirer of the receivables (either the lender by appropriation or a third party at the auction where the receivables were sold) would become beneficiary of the said security right.

Spain

6.

245

Security right in receivables that are supported by personal guaranties

The personal guarantee would be accessory to the receivables and, upon enforcement of the pledge over the receivables, the acquirer of the receivables would become beneficiary of the personal guarantee unless the agreement of creation of the said guarantee prohibits or otherwise restricts its transferability.

7.

Security right in receivables that are supported by independent undertakings

The independent undertaking (letter of credit) is not accessory to the receivables. Therefore, upon enforcement of the pledge over the receivables, the acquirer of the receivables would not become beneficiary of the right to payment under such independent undertaking (letter of credit).

8.

Contractual restrictions on assignment

Provisions setting out prohibitions or restrictions or that require the prior consent of the debtor to an assignment or pledge are effective under Spanish law. Thus, a sale or pledge made in breach of such a provision would entail the ineffectiveness of the sale or pledge itself and, therefore, also the contractual liability of the seller or pledgor, as applicable, to the buyer or pledgee, for any damages caused to them as a consequence of the ineffectiveness of the sale or pledge. However, some scholars maintain that the sale or pledge would be effective should it be made in favour of a bona fide buyer / pledgee (i.e. in the Cases at hand, only when the buyer or the lender did not have knowledge and should not have had knowledge of the said provisions), in which case the burden of proof with respect to the applicability of this legal protection would be on the buyer / lender. In this case, the seller / pledgor would be liable vis-à-vis the debtor for any damages caused to the latter as a consequence of the transfer or pledge made in breach of the anti-assignment provision.

9.

Legal restrictions on assignment

Should there be a legal prohibition or restriction on the assignment or pledging of the receivables, then the assignment or pledge made in breach of such a provision would entail the ineffectiveness of the assignment or

246

Cosme Colmenero García

pledge itself. The scholars agree that, in this scenario, no bona fide party protection would be available to the assignee / pledgee, as they should have known of the existence of such a legal rule. It should make no difference whether the purpose of the rule is to protect the assignor or third debtors (unless the “beneficiary” of such protection is permitted to waive it). Please see the section below on private international law issues for discussion of the consequences of legal restrictions being part of the law of the assignor or of the law of the debtor.

10. Publicity; priorities in general There are no public registries or other sources of public information where the outright buyer may verify that M has not previously sold those receivables (other than receivables secured by a mortgage over real estate, which must be registered in the Property Registry for the outright buyer of the receivables to be entitled to enforce the mortgage). Therefore, the factor or the secured lender will have to rely on M’s representations and warranties. Pursuant to Art. 1529 C.c., the assignor warrants the existence (existencia) and legitimacy (legitimidad) of the receivable. These warranties, however, are default rules and can be excluded by contract (including a complete disclaimer of all warranties). Likewise, there are no public registries or other sources of public information where the secured lender may verify that M has not previously granted an “ordinary” pledge of those receivables. It would be possible to verify (although it would not be a simple procedure) whether a pledge without transfer of possession has been previously granted over the receivables, provided that information is requested from all regional registries. Therefore, the secured lender will generally have to rely on M’s representations and warranties (see preceding paragraph). The priority of an outright buyer of receivables will be determined based on the date which is proved to be certain of the transfer agreement. The priority of an “ordinary” pledge of receivables will be determined based on the date of the public deed (instrumento público) in which it has been formalised. With respect to pledges of receivables without transfer of possession, the priority will be determined based on the date of registration of the pledge at the Moveable Goods Registry (Registro de Bienes Muebles).

11. Priority between buyer of receivables that arose from subsale of goods and rights of seller of those goods In this Case, A has sold goods to B on deferred payment terms, with A retaining title to the goods sold. In turn, before B has fully paid the pur-

Spain

247

chase price to A, B on-sells the goods to C with the payment of the price from C to B also being deferred, generating a receivable in favour of B against C. A, either by contract or by operation of law, would have rights in B’s receivable against C. B sells this receivable to a factor and becomes insolvent before paying the purchase price in full to A. Thus, the question is presented as to who has priority with respect to that receivable, A, the unpaid seller, or the factor. These facts give rise to at least two initial issues under Spanish law: (1) B would have no right to on-sell the goods acquired from A prior to satisfying the purchase price in full without A’s written consent (we will assume consent was given on the condition that the unpaid portion of the purchase price be secured by a pledge of any receivable generated by such on-sale); and (2) since A would not have any rights in B’s receivable against C by operation of law, we will assume that A has received a pledge of that receivable from B created by contract. It must also be noted that, under Spanish law, in order for the retention of title to the sold goods to be effective vis-à-vis third parties it must be registered in the Registry of Sales of Movable Assets in Instalments. In this case, if A has registered its retention of title, C cannot qualify as a bona fide third party that is not aware of the retention of title. Therefore, upon B’s insolvency, A would be entitled to demand that C either pays to A the amounts due to A from B or, otherwise, that C return the goods so that they can be sold at a public auction, with A applying the proceeds of the auction to the payment of B’s remaining purchase price debt to A and any excess being returned to C. It is not clear whether the factor can claim from C payment of the receivable assigned to the factor by B. If A has not registered its retention of title, C would qualify as a bona fide third party (unless C had knowledge of the unregistered title retention, although Spanish law on this point is not clear). Therefore, upon B’s insolvency, C would be entitled to keep the goods which B sold to it. In turn, A, as pledgee of B’s receivable against C, would be entitled to enforce this pledge with priority over the factor (who would have acquired the receivables subject to the earlier in time pledge in favour of A). Once A’s secured debt has been satisfied, any surplus from the proceeds of the enforcement of the pledge would be delivered to the factor.

12. Priority between pledgee of receivables that arose from subsale of goods and rights of seller of those goods Same analysis as in Case 11 (para. II.11. supra). In this Case, the secured lender would have a second ranking pledge over B’s receivable against C, based on the fact that the secured lender’s pledge came later in time.

248

Cosme Colmenero García

13. Notification See the Introduction above for a full discussion regarding notification to debtor and its effects on the discharge and set-off rights of the debtor.

14. Post-insolvency collection by buyer of receivables As explained in the Introduction above, notification to the debtor is not a requirement for the effectiveness of the outright transfer of receivables under Spanish law, it simply determines whether or not payments made by the debtor to the assignor discharge the debtor’s obligations and which claims of the debtor against the assignor may be used by the debtor as an off-set. Additionally, Spanish law does not set out any rules regarding the timing of notification. Therefore, the factor would be entitled to notify the assignment to the debtors even after the commencement of insolvency proceedings against M. Upon receipt by the debtors of notification, the factor would be entitled to collect payments directly from the debtors. Prior to receipt of notification, the debtors’ obligations under the receivables would be discharged by payment to M.

15. Post-insolvency collection by pledgee of receivables Although this previously had been a controversial issue, the recent resolution of the General Directorate of the Registries and Notaries (“Dirección General de Registros y del Notariado”) of 18 March 2008 has resolved that for a pledge of receivables to be perfected, it is not necessary that the debtor of the receivables be notified of the pledge. Therefore, in the Case at hand, the solution would be the same as in Case 14 (para. II.14. supra).

16. Securitisation The Spanish securitisation regime favours the assignment of loans made to special purpose funds created in the form of a Fondo de Titulización de Activos (FTA) or Fondo de Titulización Hipotecaria (FTH), which are subject to supervision by the Spanish Stock Market Regulator (Comisión Nacional del Mercado de Valores). Under this specific regime, the assignment to FTAs and FTHs of loans secured by real estate mortgages is not subject to stamp duty (as opposed to the general rule, under which the assignment of mortgage-backed loans is subject to stamp duty at a rate of 1 %) and need not be registered at the Property Registry. Also, although some scholars dissent, we understand that in the event of an insolvency of

Spain

249

the assignor, the assignment of loans by the latter to an FTA or an FTH, if executed during the two years prior to the declaration of the insolvency of the assignor, is not subject to claw-back provisions unless the assignment was carried out fraudulently (as opposed to the general regime contained in the Spanish Insolvency Law, under which claw-back provisions apply to those acts executed during the two years prior to the declaration of insolvency which are prejudicial to the insolvency estate, even if not carried out fraudulently). Please note that the above-described regime only applies to the outright transfer of mortgage-backed loans. Therefore, should L2 wish to obtain financing secured by a pledge of its portfolio of mortgage-backed loans, it would obtain no benefit from creating an FTA or an FTH. The general regime of pledges over receivables would apply to this scenario, bearing in mind that, upon an enforcement of the pledge, the acquirer of the loans (or the beneficiary of the pledge itself, should it choose to appropriate the loans) would be required to register the transfer of the loan(s) at the Property Registry in order to benefit from the mortgage(s).

III. Substantive Variations Despite the wide variety of regulations that apply to the assignment of receivables, Spanish law does not establish relevant differences based on the nature of the claims, on the nature of the assignor or on the nature of the assignee. Some specific regulations that are worth mentioning include those applicable to factoring agreements – which apply to a certain type of receivables (those that arise from the assignor’s commercial activities) when assigned to credit entities– and the specific regulations on securitisation, both of which have already been discussed. Other specific rules include those that refer to the assignment of indemnities to electric companies arising out of the nuclear program moratorium to special purpose vehicles; these rules regulate the assignment of this type of governmental debt. Finally, receivables arising from bank accounts, due to their consideration as cash claims, present differences which allow them to benefit from the application of Royal Decree-Act 5 / 2005 of 11 March (Real Decreto Ley 5 / 2005 de 11 de marzo de reformas urgentes para el impulso a la productividad y para la mejora de la contratación pública) implementing Directive 2002 / 47 / CE in Spain.

250

Cosme Colmenero García

IV. Private international law issues 1.

The Rome Convention on the Law Applicable to Contractual Obligations of 19 June 1980

In our view, the Rome Convention deals only with contractual aspects of assignments. Where there is an international element in an assignment or pledge of receivables, the parties will be free to choose the law applicable to the contract of assignment or pledge, as provided for in Art. 3 of the Rome Convention. In accordance with Art. 4 of the Rome Convention, to the extent that the law applicable to that contract has not been chosen by the parties, that contract shall be governed by the law of the country with which it is most closely connected. The test for determining the “most closely connected” is carried out by reference to the party which is to effect the performance which is characteristic of the contract, with certain exceptions. In our opinion, the performance which is characteristic of an outright transfer would be that performed by the transferor and, in the case of a pledge, the performance due from the pledgor. Thus, the outright transfer of a receivable and the pledge of a receivable would, in the absence of choice by the parties thereto, be subject to the law of the transferor or the pledgor, as applicable. Art. 12 of the Rome Convention establishes that, notwithstanding the above, the following issues will be subject to the law governing the sold or pledged receivable: (1) the assignability of the right, (2) the relationship between the assignee and the debtor, (3) the conditions under which the assignment may be invoked against the debtor and (4) any issues in relation to whether the debtor’s obligations have been discharged. We understand that this applies not only to the true sale of receivables but also to pledges over receivables. As before, the law governing the sold or pledged receivable is that chosen by the parties to the legal relationship from which the receivable arises and, in the absence of choice, the law of the creditor of the receivable (i.e. the transferor or pledgor, as applicable) since it is the performance of the creditor that gives rise to the receivable and, therefore, it can be deemed that it is this performance which is characteristic of the relevant contract. The above conclusions appear to be widely accepted amongst scholars. In our opinion, the Rome Convention does not deal with proprietary aspects of assignments, that is, it does not set out which rules govern the effects of an outright transfer or pledge of receivables vis-à-vis third parties. Four alternatives are advanced by scholars: (1) the law of the State where the receivable is located which, in turn, is deemed to be the law

Spain

251

of the State where the debtor is located; (2) the law governing the transferred / pledged receivable, (3) the law governing the contract of the outright transfer / pledge, and (4) the law of the State where the transferor / pledgor is located, this last alternative being that chosen by the UN Assignment of Receivables Convention. According to Spanish scholars, the two alternatives which would have more solid grounds would be (1) the law of the State where the receivable is located which, in turn, is deemed to be the law of the State where the debtor is located (its place of residence), which follows the general principle of lex rei sitae (applied to an intangible) and (2) the law governing the transferred / pledged receivable. The European Commission has approved a Regulation on the law applicable to contractual obligations (“Rome I”) which transforms the Rome Convention into a European Regulation. The evolution of this proposal for a Regulation has been as follows: a) Paragraph 3 of Art. 13, under the drafting of the initial proposal, established that “The question whether the assignment or subrogation may be relied on against third parties shall be governed by the law of the country in which the assignor or the author of the subrogation has his habitual residence at the material time”, thus reflecting the rule established by the UN Convention. b) In June 2007, the German Presidency and the incoming Portuguese Presidency suggested two different options for regulating the effects of an assignment or pledge of receivables vis-à-vis third parties: leaving it as drafted by the Commission (i.e. the law of the State of habitual residence of the assignor / pledgor) or submitting these effects to the law governing the assigned or subrogated credit. c) In August 2007, the European Parliament suggested that the effects of an assignment or pledge of receivables vis-à-vis third parties should be determined by the law governing the assigned or subrogated credit. d) Finally, no consensus was reached, and the proprietary aspects of assignments, i.e. the effects of an assignment or pledge of receivables visà-vis third parties, were left out of the scope of the Regulation.

252

Cosme Colmenero García

2.

Effect of variations of the assumptions

a)

The assignor is located in a country other than Spain

aa) Those issues which refer to the relations between assignor and assignee are governed by the law which governs the assignment agreement which, in the absence of express submission by the parties thereto, will be determined by the party which is to effect the performance which is characteristic of the contract. In principle, the characteristic performance of the assignment agreement may be deemed to be that of the assignor; therefore the issues regarding the relations between assignor and assignee would be governed by the law of the State of the assignor. bb) The effects of the assignment vis-à-vis the debtor are governed by the law which governs the assigned receivable. Again, in the absence of express submission by the parties thereto, such law would be that of the State where the assignor is located if the performance which is characteristic of the credit agreement is that of the assignor (in its capacity as creditor of the receivables). cc) The effectiveness vis-à-vis third parties of the assignment would be subject, according to what are in our view the most solid arguments (1) to the law of the State where the receivable is located which, in turn, would be the law of the State where the debtor is located, in which case the location of the assignor would be of no relevance; or (2) to the law governing the assigned receivable, in which case the conclusions in (bb) above would apply.

b)

The assignee and assignor are located in Spain but the third debtor that owes the assigned receivable and any collateral securing that person’s obligation is located in a different country

aa) Those issues which refer to the relations between assignor and assignee are governed by the law which governs the assignment agreement, for which purposes the location of the debtor would be irrelevant. bb) The effects of the assignment vis-à-vis the debtor are governed by the law which governs the assigned receivable. In the absence of express submission by the parties thereto, such law would be that of the State where the debtor is located if the performance which is characteristic of the credit agreement is that of the debtor.

Spain

253

cc) The effectiveness vis-à-vis third parties of the assignment would be subject, according to what are in our view the most solid arguments (1) to the law of the State where the receivable is located which, in turn, would be the law of the State where the debtor is located (i.e. its place of residence); or (2) to the law governing the assigned receivable, in which case the conclusions in bb) above would apply.

c)

The assigned receivable is governed by the law of a country other than that in which the assignor is located

aa) Those issues which refer to the relations between assignor and assignee are governed by the law which governs the assignment agreement, for which purposes the law governing the assigned receivable would be irrelevant. bb) The effects of the assignment vis-à-vis the debtor are governed by the law which governs the assigned receivable. cc) The effectiveness vis-à-vis third parties of the assignment would be subject, according to what are in our view the most solid arguments (1) to the law of the State where the receivable is located which, in turn, would be the law of the State where the debtor is located (in which case the law governing the assigned receivable would not be relevant); or (2) to the law governing the assigned receivable.

d)

The meaning of “location”

Spanish law does not contain specific rules determining or clarifying the meaning of “location” when the relevant person has more than one place of business. Therefore, for the purposes of determining the law which governs the assignment agreement and the law which governs the assigned receivable, the provisions of Art. 4(2) of the Rome Convention would apply. For the purposes of determining where a receivable is located (this being relevant in order to determine the effects of the assignment vis-à-vis third parties, as explained above), the application of general Spanish law principles would indicate that the receivable is located at the place where it may be enforced, that is, the residence of the debtor. This view is supported by Art. 2(g) and Art. 3(1) of EC Regulation on insolvency proceedings5, pursuant to which (1) claims are situated at the Member State within the territory of which the third party required to meet them has the centre of 5

Council Regulation 1346 / 2000 / EC of 29 May 2000 (OJ 30 June 2000 L 160 / 1 et seq.).

254

Cosme Colmenero García

his main interests and (2) in the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary.

Italy Lisa Curran I.

Scope and Terminology

This volume focuses on receivables, defined as the contractual right to payment of a monetary sum. Receivable is a business term, and, in Italy, it is a subset of the legal category of claims (crediti), the right to performance of an obligation. Generally speaking, Italian law concerning assignments does not distinguish between monetary and non-monetary claims, and gives broad recognition to the assignability of claims.1 For all practical purposes, however, only receivables are used in Italian financing practice.

II.

Forms of assignment available with respect to receivables

The Italian Civil Code provides specific recognition of the pledge (pegno) over receivables and the outright transfer (true sale, cessione) of receivables, but does not specifically address the transfer of receivables by way of security, herein “security transfer” (cessione a scopo di garanzia). In the event of insolvency proceedings, the security transfer enjoys a substantial advantage over the pledge as a technique for taking security (described more fully below). For many years, Italian scholars and courts struggled with the concept of the security transfer of receivables. The principal challenge posed by 1

The essential characteristics of a claim are “relativity” and that the performance owed must be “patrimonial” in nature. “Relativity” refers to the fact that a claim is an in personam right as opposed to a right in rem. Nevertheless, claims are protected under Italian law against interference by third parties. The “patrimonial” nature of claims refers to the fact that the claim in question must be capable of economic valuation. The fact that a claim must be capable of economic valuation does not restrict the category to obligations which are strictly for the payment of money; claims include also the right to the supply of goods or performance of services generally and include also the benefit of obligations on the part of others to abstain from undertaking specific actions. Gazzoni, Maunuale di Diritto Privato (2006), p. 592. See also, Bianca / Patti / Patti, Lessico di Diritto Civile (2001), p. 217 et seq. On the other hand, Italian law does not allow for a transfer or pledge of rights which are purely of a personal nature (e.g., the right to receive an artistic performance).

256

Lisa Curran

Italian law in this regard stemmed from the impact of Art. 2744 C.c. (prohibition of “pactum commissorium”) which, in substance, provides that any agreement by which security is provided to the creditor, and pursuant to which ownership of the item granted by way of security is transferred to the creditor in the event of default by the debtor, is null and void. In order to understand the magnitude of the obstacle posed by Art. 2744 C.c., it is worth noting that the consolidated trend of the case law has clarified that the prohibition applies to virtually any form of sale agreement entered into in circumstances where the court determines that the true intention of the parties was to create a security interest for underlying obligations. Notwithstanding this back-drop, the unanimous opinion of case law,2 as well as the majority view expressed by legal scholars,3 holds that an assignment of receivables by way of security is valid and enforceable and does not contravene the prohibition against foreclosure agreements. The fact that such vastly different conclusions were reached with regard to two forms of transfer of rights (i.e. outright transfer and security transfer) which, although distinct, are in many respects similar, particularly in circumstances where both are being used to pursue an intention to create security, may be partially explained in terms of the object of the security interest in the case of receivables (i.e. money). In particular, it has been noted that Art. 2803 C.c., which governs the pledge of receivables, provides that if the claim secured by the pledge has matured, the creditor can retain from any cash amounts it has received from the third-party debtor a sum necessary to satisfy its rights, returning any surplus to the pledgor. As such, it has been pointed out that Art. 2803 C.c. constitutes a codified exception to the prohibition against foreclosure agreements when the collateral concerned is money. It should also be noted that the law which instituted Mediocredito Centrale as a public law entity in Italy implicitly recognised the validity of security transfer of receivables by stating that the institution is authorised “to undertake financings against assignment, whether total or partial, of receivables by way of security”. In addition, the validity of the security transfer of receivables received further support as a result of Italian implementation of the EU Collateral Directive.4 Art. 1 of Legislative Decree No. 170 of 24 May 2004 (Attuazione della direttiva 2002 / 47 / CE, in materia di contratti di garanzia finanziaria) 2

3

4

See Cass. No. 2343, 6 March 1991; Cass. No. 9650, 22 September 1990; App. Palermo 8 May 1991; App. Milan 31 October 1989. See Bavetta, La cessione di credito a scopo di garanzia, Dir. fall. 1995, 588; Viale, Le garanzie bancarie, in Galgano (ed.), Trattato di diritto commerciale e di diritto pubblico dell’ economia, Vol. 28 (1994), 109; Dolmetta / Portale, Cessione del credito e cessione in garanzia nell’ ordinamento italiano, Banca e borsa 1999, 76 et seq.; Perlingieri, Della cessione dei crediti, in Scialoja / Branca (eds), Commentario al Codice Civile (1982), Art. 1260-7, p. 37. Directive 2002 / 47 / EC of 6 June 2002 (OJ 27 June 2002 L 168 / 43 et seq.).

Italy

257

defines a financial collateral arrangement as a contract of pledge or a contract for the assignment of receivables or for the transfer of “financial assets”5 by way of security, including repurchase agreements, and any other contract for in rem security having as its object financial assets and aimed at guaranteeing compliance with financial obligations. This drafting is quite broad and the inclusion in the definition of the assignment of receivables goes beyond what was required by the Collateral Directive itself. The favourable regime introduced by Legislative Decree No. 170, however, applies only in cases where the underlying receivable relates to a claim for the restitution of money or financial instruments or a deposit. This means that commercial receivables representing payment for goods or services cannot form the basis of a financial collateral arrangement. Nevertheless, implementation of the Collateral Directive is widely accepted in Italy as having placed beyond doubt the validity in general of the security transfer of receivables, whether or not used in the context of a financial collateral arrangement. Various Italian scholars, in commenting on the provisions of Legislative Decree No. 170, have pointed out that express reference to the assignment of receivables, as well as the language referring to “any other contract for in rem security” undoubtedly indicate that the intention of the legislature was to remove entirely the numerus clausus6 approach in respect of arrangements utilizing financial assets to provide security for the performance of financial obligations. This intent is, moreover, reinforced by the provisions of Art. 6 of Legislative Decree No. 170 which state that a financial collateral arrangement which provides for transfer by way of security shall take effect in accordance with the provisions set forth therein, without regard to their legal characterisation. According to many scholars, the effect of Legislative Decree No. 170 has thus been to “functionalise” the approach to recognition of proprietary interests in financial collateral, in recognition of the need to favour the proper functioning of the financial markets. In other words, regardless as to their characterisation for civil law purposes, proprietary rights created in respect of financial assets in order to secure the performance of financial obligations should be recognised by the Italian courts in recognition of their common economic function. Following passage of Legislative Decree No. 170, these academics are of the view that virtually any contract creating rights in rem over financial assets for the performance of financial obligations may qualify as a financial collateral arrangement, provided only that the relevant collateral is in the possession 5 6

The definition of “financial assets” refers to cash and financial instruments. A numerus clausus system is a “closed” system of property rights, in which only those forms of property interests that are recognised under the laws of that system are possible. Prior to implementation of the Financial Collateral Directive, this principle was recognised in Italy as inhibiting parties by agreement to constitute a right which produces an effect erga omnes if that right does not fall within the legal configurations specifically foreseen in the law.

258

Lisa Curran

or control of the beneficiary of such security.7 This proviso is set forth in the definition of “provision of collateral” contained in Legislative Decree No. 170. Art. 2 of Legislative Decree No. 170 requires that the “provision of the collateral” to the creditor is an essential requirement for the efficacy of a financial collateral arrangement. As a result of the definition of “provision of collateral”, notwithstanding the broad implementation of the Collateral Directive and the undoubtedly revolutionary consequences for Italian jurists of a removal of the numerus clausus approach in the context of a financial collateral arrangement, the floating charge as known to common law systems continues to be unenforceable in Italy and this is true also in respect of security over receivables. Notwithstanding what may have been seen as a situation of limited legal certainty, the taking of security over receivables by means of security transfers became a highly consolidated practice among Italian banks during recent decades.

III. Substantive law re Security over Receivables There are four legal regimes8 which may apply in Italy to an assignment of receivables, namely: the Civil Code, the Factoring Law,9 the Securitisation Law10 or Art. 58 of the Banking Law.11 Although the formalities for perfection of a transfer under the Factoring Law, Securitisation Law or Banking 7

8

9

10 11

Sardo, La disciplina del contratto di garanzia finanziaria: appunti sul D. Lgs. 21 maggio 2004, nm. 170, I Contr., 2005, 618-619. Art. 46 of the Banking Law (Testo Unico delle leggi in materia bancaria e creditizia, Legislative Decree No. 385 of 1 September 1993) provides a limited statutory regime for security over receivables that are the proceeds of inventory encumbered under that article. Art. 46 provides a form of special privilege (privilegio speciale) to banks that grant medium and long-term loans (i.e., loans with a tenor in excess of eighteen months). Although the special privilege is very useful in terms of providing the only form of “floating charge” type financing available in Italy in respect of inventory, due to the complexity and expense of putting this security right into place, it is used only when the parties intend to create security over substantially the whole of the borrower’s enterprise, including equipment, licences, etc. This special privilege is not commonly used when the intention is to grant security over receivables as a distinct asset class. Law No. 52 of 21st February 1991, Disciplina della cessione dei crediti d’impresa. This law is not limited to factoring, but provides relief from the Civil Code constraints for all outright transfers of receivables made by a firm to a bank or other financial institution, provided that the receivables arose from contracts made by the transferor in the course of business. Law No. 130 of 30th April 1999, Disposizioni sulla cartolarizzazione dei crediti. See fn. 8 supra.

Italy

259

Law are considerably simplified, the transfers under those regimes will typically be by way of outright transfers rather than security transfer Nevertheless, developments relating to the use of the assignment of receivables in the context of these special legislative regimes have influenced substantially the taking of security over receivables pursuant to the provisions of the Civil Code. This is particularly so with regard to the important question of taking security over future claims. In order to appreciate the difficulties presented by the case of future claims, it is important to understand that the Civil Code requires that perfection of a pledge over (and also an outright transfer of) receivables requires notification to the debtor, or acceptance by the debtor, in either case by means of a written document bearing a date certain (data certa – this is achieved by notarisation or authentication by a public official of a private written document, see Art. 2704 C.c.). Prior to the passage of the Factoring Law in 1991, the traditional approach of the Italian courts was to recognise that an assignment of future claims takes effect between the parties thereto upon execution of the relevant contract, but will not be opposable to third parties until such time as notice of the assignment is served on, or accepted by, the debtor following the date on which the receivable actually comes into existence. In part, this result was by way of application of Art. 1472 C.c., which provides that “in the sale of a future thing, the transfer of title occurs as soon as the thing in question comes into existence”. The Factoring Law makes specific provision for the enforceability, including in the event of insolvency of the transferor of receivables, of the transfer of all future receivables which came into existence up until the time of admission to proceedings. Under the Factoring Law, the transfer of future receivables is enforceable against third parties provided only that: (1) the factor (assignee) has paid the purchase price for the receivables and (2) such payment bears a date certain. The practical approach brought into favour by the Factoring Law in recognition of the need to balance the protection of third parties against access to credit has gradually brought about a shift in the approach of the Italian courts to the recognition of transfers of future claims under the general provisions of the Civil Code. In particular, the prevailing view of the Italian Supreme Court now is to relax strict compliance with perfection formalities for transfers of future claims which can be characterised as “possible in concrete”, as opposed to “possible in abstract”.12 The former category is limited to situations when there is a strong likelihood that the future claims will come into existence and when the claims, although arising after the transfer, arise from a contractual relationship between the transferor and the debtor that existed at the time of the transfer. The agreement for the transfer of such future claims must identify the debtor and the contractual relationship with the transferor. Where the future claims can be classified as “possible in con12

See Cass. No. 15141, 26 October 2002.

260

Lisa Curran

crete”, all claims which come into existence until such time as insolvency or attachment proceedings are commenced in respect of the transferor will be deemed to have been acquired by the transferee, provided only that the relevant transfer agreement was in writing and the account debtor was notified of, or accepted, the transfer agreement prior to the date of commencement of proceedings by means of a written document bearing a date certain. There are, however, two additional limitations which apply in these circumstances: first, that the transfer agreement cannot be for a term in excess of three years,13 and secondly that all claims which arise following the date of the proceedings will not be subject to the transfer.14

IV. Perfection formalities The pledge, the security transfer and the outright transfer of receivables all require notification to or acceptance by the third-party debtor pursuant to a deed bearing a “date certain” in order to be perfected. In addition to the effect of perfection in rendering the interest of the assignee opposable to third parties, including an insolvency official of the pledgor / transferor, perfection also has the important effect of forestalling any decrease in the value of the assigned receivable as a result of set-off, since the debtor will not be able to exercise rights of set-off which accrue following the date on which the assignment is perfected. Moreover, if the account debtor accepts the assignment explicitly without reservation, rights of set-off accruing prior to the date of perfection are also excluded.15 Because of the requirements for perfection, neither the pledge nor the security transfer is a practical way of securing a loan if the receivables consist of many small amounts due from a large number of debtors. The security transfer of receivables and, to a lesser extent, the pledge, are however important forms of security in cases where the receivables are owed by a debtor that is a large customer of the borrower under a long-term supply or service contract. 13

14

15

This limitation has been imposed by way of analogy with Art. 2918 C.c., which provides that assignments of future rent from buildings or land for a period in excess of three years are unenforceable against attachment creditors unless registered against title to the property in question. This limitation derives from a combination of the provisions of Art. 1472 C.c. and the general rule embodied in Art. 44 L. Fall. to the effect that all acts undertaken by the bankrupt after the date of the declaration of bankruptcy are of no effect vis-à-vis creditors. Art. 44 L. Fall. is considered a mandatory principle of Italian law and goes to the question of the capacity of the debtor to deal with his assets (see also Cass. No. 4434, 7 July 1981). The words usually employed to achieve this waiver are senza riserva (without reservation). Some also insert a reference to Art. 1248 C.c., but there is no universally acknowledged magic formula.

Italy

V.

261

Registration tax

Registration of a pledge or security transfer of receivables is required only for taxation purposes, and even then is not necessary so long as the pledgor / transferor is the party that owes the obligation secured (i.e., is not a third-party security provider). Even when granted by a third-party security provider, registration with the Italian tax authorities (and payment of the consequent 0,5 % tax calculated on the value of the receivable) may be avoided when the agreement is entered into through an exchange of commercial correspondence. The usual procedure in this regard would be for one party to first send a “letter of proposal” by fax to the other, which then sends a “letter of acceptance”, also by fax. These letters will be drafted by each party on its own letterhead, and the party sending the acceptance will copy into its letter the text of the letter of proposal. In a cross-border context, the practice is for the non-Italian resident party to first send the letter of proposal, in order to be in a position to show (following the rules of contract formation set forth in the Civil Code) that the contract was not concluded in Italy. In any case, not more than one party should sign on each piece of the correspondence.

VI. Assignment of secured receivables Art. 1263 C.c. specifically provides that a claim subject to assignment is transferred with all privileges, personal guarantees, real security and any other accessories. The only exception to this rule relates to the case of any security held by the assignor in the form of a possessory pledge, where the assigned debtor must consent specifically to the transfer of possession. However, if no such consent is forthcoming, the benefit of the pledge will still accrue to the assignee, although the assignor will remain custodian of the pledged property.

VII. Restrictions on Assignment Italian law does not permit assignment of a claim with respect to which a specific legislative prohibition exists.16 The ability to assign or pledge a receivable may also be excluded contractually, although this will not be enforceable vis-à-vis a transferee unless the debtor establishes that the transferee had knowledge of the prohibition at the time the assignment was made, Art. 1260 C.c.

16

E.g., claims for tort damages or claims for alimony or child support.

262

Lisa Curran

VIII. Enforcement and ranking of security created by

pledge / security transfer of receivables In the event of insolvency proceedings, a creditor that has obtained a security transfer of receivables will rank, in respect of such collateral, in priority of payment above the claims of all other creditors of the debtor and will not be subordinate to the claims of preferential creditors such as employees for wages or the government for taxes. The Italian case law clearly supports the view that, provided that the security transfer was perfected prior to the date of issuance of a declaration of admission to insolvency proceedings, the security transfer will be enforceable also against the relevant insolvency official. In this case, the transferred receivables do not form part of the estate to be administered in insolvency proceedings since title thereto has already passed to the secured creditor. For this reason, the majority view is that a creditor holding a perfected security transfer of receivables need not file a proof of claim in the proceedings. On the contrary, the receivables will be collected directly from the debtors, the excess, if any, being paid to the insolvency official. By contrast, a creditor holding a pledge over receivables is required to file a proof of claim in the insolvency proceedings and will rank behind preferential creditors.

IX. Security over Bank Accounts Another instance in which security over receivables is often used is the pledge over a receivable in the form of a bank account balance. There is currently some debate in Italy as to the extent of application to security granted over a current account of the favourable regime introduced by Legislative Decree No. 170 in implementation of the EU Collateral Directive. In particular, many commentators are of the view that Legislative Decree No. 170 applies only to security granted over a fixed deposit, as opposed to a current account balance. Principally, this is because of the requirements relating to identification of the financial collateral, which are incompatible with a configuration of the pledge as relating to future assets (i.e. cash deposited from time to time in the account without any control by the creditor over withdrawals prior to default on the secured obligations). Under the regime of the Civil Code without reference to Legislative Decree No. 170, there is some discussion in the case law and legal theory as to whether a pledge over an account balance granted in favour of the bank that acts as depository should be considered to constitute a pledge over receivables. The prevailing view appears to be that a pledge in favour of the bank of the account balance of one of its customers would constitute an irregular pledge of the actual cash deposited in the account rather than a pledge over the receivable owed by the bank for the account balance.

Italy

263

This conclusion is based on the fact that the deposit of money with a bank is already considered by Italian law to give rise to an irregular, as opposed to a regular deposit, meaning that the bank becomes owner of the cash deposited and has only an obligation to return equivalent assets. This is of course a reflection of the nature of cash as fungible, but gives rise to an apparent paradox since the bank would be receiving a pledge over something which it already owns. The Italian case law has recognised that the paradox is only apparent and that the creation of a pledge over a deposit of cash results merely in a conversion of the previous deposit relationship into a new relationship, with a novation of the unconditional obligation of the bank to deliver equivalent assets into a obligation which is conditional on due performance of the secured obligations. The irregular, as opposed to the regular, pledge is a sub-category of pledge governed by Art. 1851 C.c., with reference to financial facilities advanced by a bank to its client in respect of supply transactions, although it has been extended by the case law to other forms of credit relationships. The irregular pledge can be created when the collateral is cash, goods, or securities of a fungible nature, which are either not yet identified or of which the pledgee is granted the right to dispose. As in the case of the irregular deposit, title to the collateral passes to the pledgee, who then has only the obligation to return to the pledgor the value of the collateral exceeding the underlying debt. The excess value is determined by the value of the collateral upon maturity of the secured debt. Since the object of the irregular pledge is the actual cash deposited in the account rather than the receivable owed by the bank for any positive account balance owing from time to time in favour of its customer, the implication is that the bank obtains a pledge over future property (i.e. the actual cash which will be on deposit in the account when the secured obligation becomes capable of enforcement). This means that, pending enforceability of the secured obligation, the pledge produces its effects only as between the parties thereto (i.e. the bank and its customer). It would therefore be important to ensure that the relevant pledge agreement specifically includes the creation of third party rights in the account as an event giving enforcement rights to the pledgee. Furthermore, in order to ensure perfection against third parties generally, including an insolvency official, the Civil Code requires that the pledge agreement be attributed with a date certain and also include a sufficient indication of the secured claim and the pledged assets. With regard to the latter, it is accepted that reference to the balance of the relevant account is sufficient. With regard to the former, when the secured claim extends to future obligations owed to the bank, the pledge agreement must include a maximum amount.17

17

This is as a result of an expansive application of Art. 1938 C.c., which requires inclusion of a maximum amount in any guarantee of future obligations.

264

Lisa Curran

When the receivable in question is a bank account, this form of collateral may give rise to an additional benefit for a creditor that is the depositary bank, in the form of a reduction in regulatory capital charges under the Bank for International Settlement rules.

X.

Capacity, authority and corporate benefit

The following material is not unique to assignment of receivables, but is, of course, relevant to the enforceability of the assignment. Although Italian companies are required to adopt by-laws which, inter alia, must define the principal and ancillary objects of the company, when assessing the enforceability of transactions against a company, Italian law approaches the issue of capacity from a slightly different perspective, namely that of the role which the directors of a company must necessarily play in representing the company vis-à-vis the outside world. Italian corporate law was extensively reformed in 2004, including with regard to the enforceability of transactions concluded without powers of representation, in a manner which is intended to limit the ability of a company to repudiate transactions based on an ultra vires defence. The current position thus limits the need for counterparties of a company to become concerned with its constitutional documents. The rationale behind this formulation is not only to protect bona fide third parties but also to enhance the security of transactions concerning companies. In this way, companies themselves are presumed to receive a benefit as the approach eliminates any disincentive for people to transact for fear of a transaction being repudiated. In general terms, the reform which entered into force in 2004 has the effect of limiting the ultra vires defence to performance by a company of a contract, although subject still to a exception doli, or “bad faith”, exception. In particular, Art. 2384 C.c. now provides that the power for a director to represent the company as granted in the by-laws of under a resolution of appointment is general. The provision goes on to state: “limitations on the authority (of directors to act for the company) arising from the by-laws or from the resolution of the company’s appropriate administrative organ, even if published, cannot be raised against the interests of a third party, except when it is proved that the third party intentionally acted to the detriment of the company”. Prior to the reform, limits resulting from the drafting of the corporate objects could be opposed to third parties if it could be shown that such third parties did not act in good faith in dealing with the company. By contrast, limitation arising from the by-laws generally could only be opposed to third parties who were shown to have acted in bad faith.

Italy

265

As a result of the reform, the majority of scholars are of the view that a distinction must be made between the powers of a director to represent the company vs. the power to manage the company. The power to represent is now, as a result of Art. 2384 C.c., expressed to be general and incapable of derogation. Any limits posed on the activity of the company as a result of the corporate objects or other provisions expressed in the by-laws are considered to relate exclusively to the powers of the director to manage the company and, as such, may not be raised against third parties, unless it can be shown that there was an intention to act in a manner which would create damage to the company. The limited body of case law which has emerged since 2004 is less conclusive in terms of the inability of a company to raise an ultra vires defence in repudiation of an obligation undertaken by its directors. In one case involving an alleged lack of approval by way of board resolution for the engaging of professional services, the Supreme Court upheld the views set forth above concerning the inability to raise a deficiency in the powers of representation or management of directors, unless the company can show that the counterparty acted in bad faith.18 However, in another case involving the granting of security by one company for the obligations assumed by an affiliate, the Supreme Court did not adhere to a rigid application of Art. 2384 C.c.19 The facts of this case were perhaps more acute since (1) the granting of security was not included in the corporate objects; and (2) the security was provided for the obligations of a separate entity, albeit an affiliate. The Court went into the question of corporate benefit in considerable detail in this situation and ultimately decided that the bank receiving the security, had the means and the duty to ascertain that the granting of the security was an ultra vires act, which was enough to exclude that the bank was acting in good faith in its dealings with the company. The Court did not make specific mention in this case as to the fact that Art. 2384 C.c. was amended to elevate the burden of proof on a company seeking to repudiate a transaction by introducing a “bad faith” test in place of a lack of good faith analysis. The implication of the decision, as yet unconfirmed by any further judicial pronouncement, is that the general exceptio doli defence may be invoked in circumstances where a transaction is not included in the corporate objects. This difference in the approach of the courts to amended Art. 2384 C.c. highlights a separate issue, namely the importance of the corporate benefit analysis in the context of dealing with corporate groups. Although most scholars are of the view that Art. 2384 C.c. embodies a comprehensive rule for assessing the enforceability of obligations undertaken by a company,20 18 19 20

Cass. No. 1525, 26 January 2006. Cass. No. 26325, 11 December 2006. See, for example, Buonaura, Il Nuovo Diritto delle Società, Vol. II, (2007), p. 659665.

266

Lisa Curran

there may continue to be a tendency for the Italian courts to “water-down” the general rule in intra-group situations. Where one company undertakes obligations or grants security for the performance of actions of a related company, the Italian courts had, prior to introduction of the reform in 2004, developed an approach designed to assess whether there was any concrete, albeit indirect, expectation of benefit to the former, whether in legal or economic terms. Generally speaking, where there is an affiliate, as opposed to a subsidiary, relationship between the Italian company granting security and the company owing the relevant claim, the test will be harder to meet.21 Although the scholars noted above have suggested that the consequences of any lack of benefit should be dealt with exclusively in terms of the liability of the head group company pursuant to separate provisions of the Civil Code which also came into force in 2004,22 it is as yet uncertain that the Italian courts will abandon what appears to be a broader approach to the analysis of corporate capacity in the case of intra-group transactions. In the current climate, it is considered prudent practice for sophisticated entities such as banks and other financial institutions to review the corporate objects of any counterparty in order to determine whether there are any limits placed on the ability of the company to contract indebtedness or grant security. In the case of intra-group dealings, ideally a resolution of the board of directors should be obtained which discusses and illustrates specifically the corporate benefit, also in group terms, which will accrue to the company. In the case of closely-held companies, a shareholders’ resolution approving the transaction will often also be obtained. 21 22

See Cass. No. 27696, 4 August 2006; Cass. No. 8159, 15 June 2000. Art. 2497 C.c.

Schriften zum Gemeinschaftsprivatrecht Thomas Rauscher, Der Europäische Vollstreckungstitel für unbestrittene Forderungen. 2004. ISBN 978-3-86653-000-3 Stefan Leible / Monika Schlachter, Diskriminierungsschutz durch Privatrecht. 2006. ISBN 978-3-86653-001-0 Axel Flessner / Hendrik Verhagen, Assignment in European Private International Law. Claims as property and the European Commission’s ‘Rome I Proposal’. 2006. ISBN 978-3-86653-008-9 Christian Baldus / Peter-Christian Müller-Graff, Die Generalklausel im Europäischen Privatrecht. Zur Leistungsfähigkeit der deutschen Wissenschaft aus romanischer Perspektive. 2006. ISBN 978-3-86653-002-7 Peter Jung / Christian Baldus, Differenzierte Integration im Gemeinschaftsprivatrecht. 2007. ISBN 978-3-86653-025-6 Eva-Maria Kieninger / Harry C. Sigman, Cross-Border Security over Tangibles. 2007. ISBN 978-3-86653-037-9 Marco B.M. Loos, Review of the European Consumer Acquis. 2008. ISBN 978-3-86653-072-0 Martin Schmidt-Kessel, Der Gemeinsame Referenzrahmen. Entstehung, Inhalte, Anwendung. 2009. ISBN 978-3-86653-099-7 Elisabeth Lege, Sprache und Verbraucherinformation in der Europäischen Union, Deutschland und Luxemburg. 2009. ISBN 978-3-86653-106-2 Eva-Maria Kieninger / Harry C. Sigman, Cross-Border Security over Receivables. 2009. ISBN 978-3-86653-117-8