Cross-Border Security over Tangibles 9783866537057

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GPR

Praxis

Schriften zum Gemeinschaftsprivatrecht

Die Schriften zum Gemeinschaftsprivatrecht werden herausgegeben von Professor Dr. Martin Schmidt-Kessel, Osnabrück Professor Dr. Christian Baldus, Heidelberg Privatdozent Dr. Martin Gebauer, Heidelberg Professor Dr. Brigitta Jud, Salzburg 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 Tangibles

edited by

Harry C. Sigman Eva-Maria Kieninger

ISBN 978-3-86653-037-9 Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http: / /dnb.d-nb.de abrufbar.

© 2007 by sellier. european law publishers. Dieses Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwertung außerhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Das gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Gestaltung: Sandra Sellier, München. Herstellung: Karina Hack, München. Druck und Bindung: AZ-Druck, Kempten im Allgäu. Gedruckt auf säurefreiem, alterungsbeständigem Papier. Printed in Germany.

Preface This book originates from a workshop, organized by the editors, that took place at the European Law Academy in Trier in March 2007. The case studies and national reports were presented, compared and discussed by the panel of authors and among the participants, mostly law practitioners from a large number of EU Member States. The book presents significantly revised versions of the national reports, together with a comparative study of the current divergences and in-depth material about Uniform Commercial Code Article 9 (particularly about “notice filing”), as well as a discussion of the prospects for and possible content of a harmonized European secured transactions law. The editors and authors thank the European Law Academy, 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 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 secured transactions and contribute to reform and to a future European harmonization measure. Harry C. Sigman Eva-Maria Kieninger

List of Contributors 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. 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. Ángel Carrasco Perera received his Master of Law in 1982 and his Doctor of Law in 1985, both from the Autonomous University of Madrid. He has been a Professor of Civil Law at the Autonomous University of Madrid (1987), Professor of Civil Law at the University of CastillaLa Mancha (1989) and Vice-Chancellor of Institutional Relations at the University of Castilla-La Mancha (1991-1997). He now holds the Chair of Civil Law at the University of Castilla-La Mancha and is a member of the Academic Counsel of Gómez-Acebo & Pombo since 1998. He has written Fianza, accesoriedad, contrato de garantía (1992), Tratado de los derechos de garantía (2002) with co-authors and Los derechos de garantía en la Ley Concursal (2005). 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, and has written extensively on the areas of contracts, security and insolvency. He is also the president of the Belgian Centre for Comparative Law. 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). Contact: Kieninger@ jura.uni-wuerzburg.de.

VIII

List of Contributors

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 he 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. Julia Rakob studied law from 1988 to 1992 at the universities of Heidelberg, Freiburg and at the Free University of Berlin. In 1996/97 she completed a master’s program at Cornell (USA). She worked as assistant at the Institute of Foreign and International Private and Business Law of the University of Heidelberg and completed her doctoral thesis on security rights in movables in cross-border transactions in 1999. 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. 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 is a U.S. Delegate with respect to the UNCITRAL Legislative Guide on secured transactions. He is a contributing author, Security Rights in Movable Property in European Private Law (2004). Contact: [email protected]. Michael Veder is an attorney in the Amsterdam office of De Brauw Blackstone Westbroek, specialising in insolvency law and security rights. 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. He is a Fellow of the Business & Law Research Centre (University of Nijmegen).

List of Contributors

IX

Anna Veneziano is Professor of Private Comparative Law and International Commercial Transactions at the University of Teramo, Italy (since 2000). She studied law at the University of Rome La Sapienza, as Erasmus at the University of Hamburg and at the Yale Law School (USA), where she received an LL.M. in 1993. She received her PhD at the University of Florence, Italy. She has written in the field of secured transactions and international insolvency. She was a member of the Italian delegation with respect to the 2001 Cape Town Convention on International Interests on Mobile Equipment and the Protocol thereto relating to aircraft collateral, and is national Advisor to the Working Group on Proprietary Security within the Study Group on a European Civil Code.

Table of Contents Table of Contents Preface List of Contributors Abbreviations

V VII XIX

Introduction Harry C. Sigman/Eva-Maria Kieninger I.

Basic structure and development

3

II. The Case Studies Case Study 1 Case Study 2 Case Study 3 Case Study 4 Case Study 5 Case Study 6 Case Study 7 Case Study 8 Case Study 9 Case Study 10 Case Study 11 Annex

11 16 17 19 24 27 28 28 28 28 30 32

III. Harmonisation

32

IV. Perfection and Priority under UCC Article 9 (with special focus on notice filing) 1. Meaning of the term “perfection” 2. Meaning and importance of “priority” 3. How perfection is achieved 4. Filing/registration 5. Content of the filed financing statement 6. The UCC Article 9 priorities regime

36 38 40 42 44 49

XII

Table of Contents

V. Some Guiding Principles for Reform

54

VI. Conclusion

56

The Case Studies Harry C. Sigman/Eva-Maria Kieninger A. General remarks B. The Case studies 1. Non-possessory security right in specific equipment 2. Non-possessory security right in present and future equipment (floating security right) 3. Non-possessory security right in present and future inventory (floating security right) 4. Purchase-money financing – alternative sources 5. Bona fide acquisition 6. Possessory pledge – constructive or fictive possession 7. Over-security 8. Legal (non-consensual) rights of unpaid seller 9. Special property registries 10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment) 11. Cross-border issues

57

57 58 59 59 59 60 60 60 60 61 61

Germany Julia Rakob I. Introduction 1. General background; structure of national law re security over tangibles 2. Security devices denominated as such 3. Title-based security devices 4. Existing registries 5. Issues beyond the scope of this survey II. Case studies General remarks on all case studies 1. Non-possessory security right in specific existing items of equipment 2. Non-possessory security right in present and after-acquired equipment (floating security right)

63 68 68 69 69

70 71 76

Table of Contents

3. Non-possessory security right in present and after-acquired inventory (floating security right) 4. Purchase-money (asset-acquisition) financing – alternative sources 5. Bona fide acquisition 6. Possessory pledge – constructive or fictitious possession 7. Over-security 8. Legal (non-consensual) rights of unpaid seller 9. Special property registries 10. Non-possessory security rights in raw materials-effect of processing (commingling, attachment/accession) 11. Cross-border issues Annex – Limitations on granting and holding security under German law 1. Corporate Law Issues: upstream security and financial assistance 2. Holding accessory security for several lenders

XIII

77 77 86 87 87 89 89 90 92

96 98

France James Leavy I.

Introduction

II. Case studies Preliminary Remarks to the Case Studies 1. Non-possessory security right in specific existing items of equipment 2. Non-possesory security right in present and after-acquired equipment (floating security right) 3. Non-possessory security right in present and after-acquired inventory (floating security right) 4. Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third-party secured lender 5. Bona fide acquisition 6. Possessory pledge – constructive or fictive possession 7. Over-security 8. Legal (non-consensual) rights of unpaid seller 9. Special property registries 10. Non-possessory security rights in raw materials – effect of processing 11. Cross-border issues

101

105 105 110 110

112 115 117 117 117 118 119 120

XIV

Table of Contents

England and Wales Michael Bridge I. Introduction 1. The statutory schemes 2. The general features of the law of security II. Case Studies 1. Non-possessory security right in specific equipment 2. Non-possessory security right in present and future equipment (floating security right) 3. Non-possessory security right in present and future inventory (floating security right) 4. Purchase-money financing – alternative sources 5. Bona fide acquisition 6. Possessory pledge – constructive or fictive possession 7. Over-security 8. Legal (non-consensual) rights of unpaid seller 9. Special property registers 10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment) 11. Cross-border issues

125 126

133 142 144 144 148 149 150 151 152 153 155

Italy Anna Veneziano I. Introduction 1. General background; structure of national law re security over tangibles 2. Security devices denominated as such 3. Title-based security devices 4. Existing registries II. Case studies 1. Non-possessory security right in specific existing items of equipment 2. Non-possessory security right in present and after-acquired equipment (floating security right) 3. Non-possessory security right in present and future inventory (floating security right) 4. Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third party secured lender

159 162 166 168

170 179 179

181

Table of Contents

5. Bona fide acquisition 6. Possessory pledge – constructive or fictive possession 7. Over-security 8. Legal (non-consensual) rights of unpaid seller 9. Special property registries 10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment/accession) 11. Cross-border issues

XV 187 187 187 187 189 190 191

Netherlands Michael Veder I. Introduction 1. General background; structure of national law re security over tangibles 2. Right of pledge in tangibles 3. Reservation of ownership (retention of title) II. Case studies 1. Non-possessory security right in specific equipment 2. Non-possessory security right in present and future equipment (floating security right) 3. Non-possessory security right in present and future inventory (floating security right) 4. Purchase-money financing – alternative sources 5. Bona fide acquisition 6. Possessory pledge – constructive or fictive possession 7. Over-security 8. Legal (non-consensual) rights of unpaid seller 9. Special property registries 10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment) 11. Cross-border issues

193 194 199

201 207 207 209 212 213 213 213 215 215 217

Belgium Eric Dirix I. Introduction 1. General background; structure of national law re security over tangibles 2. Security devices denominated as such

221 224

Table of Contents

XVI

3. Title-based security devices 4. Existing registries II. Case studies 1. Non-possessory security right in specific existing items of equipment 2. Non-possessory security right in present and after-acquired equipment (floating security right) 3. Non-possessory security right in present and future inventory (floating security right) 4. Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third-party secured lender 5. Bona fide acquisition 6. Possessory pledge – constructive or fictive possession 7. Over-security 8. Legal (non-consensual) rights of unpaid seller 9. Special property registries 10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment/accession) 11. Cross-border issues

228 228

230 230 234

234 237 238 238 239 239 240 240

Spain Angel Carrasco I. 1. 2. 3. 4. 5.

General background; structure of national law relating security over tangibles Assets which may be subject to security: general considerations Assets which may be subject to security: specific security rights Enterprises as chargeable assets Parties Priority Rules

243 244 245 245 246

II. Security devices denominated as such 1. Possessory devices 2. Non-possessory devices

247 247

III. 1. 2. 3. 4.

247 247 248 248 249

Title-based security devices Reservation of title Security ownership Lease back Trust

Table of Contents

XVII

IV. 1. 2. 3.

249 250 255

Existing Registries Kinds of Registries for Tangible Movables Depossession and Registration requirements Characteristics of the Registries

Abbreviations Abbreviations AC AG

AktG All ER An. der. civ. App Cas App. Aranzadi Jur. Arch. civ. Banca e borsa BB BCC BCLC BGB

BGBl. BGH BGHZ

Bing BOE

Bull. Civ. IV

BW

C. aviat. C. civ. C. com. C. ind. cin. C. mon. fin.

Appeal Cases, Law Reports Die Aktiengesellschaft (law journal) Aktiengesellschaft (German stock corporation) Aktiengesetz (German Stock Corporation Act) All England Law Reports Anuario de Derecho Civil (law journal) Law Reports, Appeal Cases, House of Lords Corte d’appello (Italian Appeal court) Repertorio de jurisprudencia (Aranzadi) (law journal) Archivo Civile (law journal) Banca, borsa e titoli di credito (law journal) Betriebs-Berater (law journal) British Company Cases Butterworth’s Company Law Cases Bürgerliches Gesetzbuch (German Civil Code) Bundesgesetzblatt (German Government Gazette) Bundesgerichtshof (German Supreme Court) Entscheidungen des Bundesgerichtshofs in Zivilsachen (Decisions of Federal Supreme Court in Private Law Matters) Bingham’s Common Pleas Reports Boletín Oficial del Estado (Spanish State Gazette) Bulletin des arrêts des Chambres civiles de la Cour de Cassation (Decision of the Commercial Civil Chamber of the French Supreme Court, as published in the official Bulletin) Burgerlijk Wetboek (Dutch Civil Code) Code de l’aviation civile (French Civil Aviation Code) Code civil (French Civil Code) Code de commerce (French Commercial Code) Code de l'industrie cinématographique (French Cinema Industry Code) Code monétaire et financier (French Monetary and Financial Code)

XX

C. nav. C. propr. intel. C.c. C.p.c. CA

CanBusLJ Cass.

CB (NS)

Cc CCJCiv. CDC

Ch CLR

Cmnd concl. proc. gen. Contr. e impr. D. DAR

Dir. comm. int. Dir. Mar. DNotZ

Abbreviations

Codice della navigazione (Italian Maritime Code) Code de la propriété intellectuelle (French Intellectual Property Code) Codice civile (Italian Civil Code), Código civil (Spanish Civil Code) Codice du procedura civile (Italian Code of Civil Procedure) Court of Appeal Canadian Business Law Journal Corte di Cassazione (Italian Supreme Court), Cour de Cassation (French Supreme Court), Hof van Cassatie/ Cour de Cassation (Belgian Supreme Court) Common Bench Reports by Manning Granger & Scott, New Series Code Civil (Belgian Civil Code) Cuadernos Civitas de Jurisprudencia Civil (law journal) Cuadernos de Derecho y Comercio (law journal) Law Reports, Chancery Division Commonwealth Law Reports Command Paper Conclusions du procureur général Contratto e impresa (law journal) Recueil Dalloz (law journal) Deutsches Autorecht (law journal) Diritto del commercio internazionale (law journal) Diritto Marittimo (law journal) Deutsche Notarzeitschrift (law journal)

Ex

European Court of Justice Treaty establishing the European Community editor(s) edition Einführungsgesetz zum Bürgerlichen Gesetzbuche English Reports European Review of Private Law (law review) Law Reports, Exchequer Reports

Foro it. Fw.

Il Foro italiano (law journal) Faillissementswet (Dutch Insolvency Act)

ECJ ECT

ed., eds. edn. EGBGB ER ERPL

Abbreviations

Giust. civ. GmbH GmbHG

XXI

Giustizia civile (law journal) Gesellschaft mit beschränkter Haftung (German limited liability company) Gesetz betreffend die Gesellschaften mit beschränkter Haftung (German Act on Companies with Limited Liability)

HLC HR IFLR

Clarks’ House of Lords Cases Hoge Raad (Dutch Supreme Court) International Financial Law Review (law journal)

InsO Inv.

Insolvenzordnung (German Insolvency Code) Invorderingswet 1990 (Dutch Collection of State Taxes Act) Praxis des Internationalen Privat- und Verfahrensrechts (law journal) Die deutsche Rechtsprechung auf dem Gebiete des Internationalen Privatrechts (law reports)

IPRax IPRspr.

JCP G JO

Jurisclasseur Périodique (La Semaine Juridique) – Édition Générale (law journal) Journal Officiel de la République Française (French State Gazette)

KB KWG

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

La Ley LC

Revista juridica española La Ley (law journal) Ley Concursal (Spanish Bankruptcy Act) Ley de 16 Dec. 1954 de Hipoteca Mobiliaria y Prenda sin Desplazamiento (Spanish Law of Chattel Mortgage and Pledge without Dispossession) Gesetz über Rechte an Luftfahrzeugen (German Statute on Rights in Aircraft) Ley de Ventas a Plazos de Bienes Muebles (Spanish Law on Instalment Sales)

LHMPSD

LuftFzgG LVPBM

MDR

Monatsschrift für Deutsches Recht (law journal)

NJ NJW NJW-RR

Nederlandse Jurisprudentie (law reports) Neue Juristische Wochenschrift (law journal) Neue Juristische Wochenschrift Rechtsprechungs-Report (law journal) New Zealand Law Reports

NZLR

Abbreviations

XXII

obs. OJ OLG OLGR

Pas. QB

Rass. Avv. St. RCJB

Rev. der. not. RG RGBl. RGZ

Riv. dir. civ. RIW RW

SchRG

Sec(s). SI

Trib. TS

observations Official Journal of the European Union Oberlandesgericht (German Regional Appeal Court) OLG-Report (law reports) Pasicrisie belge (law journal) Law Reports, Queen’s Bench Division Rassegna dell’Avvocatura dello Stato Revue critique de jurisprudence belge (law journal) Revista de derecho notarial (law journal) Reichsgericht (German Imperial Court) Reichsgesetzblatt (German Imperial Gazette) Amtliche Sammlung von Entscheidungen des Reichsgerichts in Zivilsachen (Decisions of the German Imperial Court in Private Law Matters) Rivista di diritto civile (law journal) Recht der internationalen Wirtschaft (law journal) Rechtskundig Weekblad (law journal) Gesetz über Rechte an eingetragenen Schiffen und Schiffsbauwerken (German Statute on Rights in Registered Vessels and Vessels under Construction) Section(s) Statutory Instruments Tribunale (Italian Court of first Instance) Tribunal Supremo (Spanish Supreme Court)

US

Uniform Commercial Code Uniform Law Review/Revue de droit uniforme (law journal) United States Supreme Court reports

WLR WM WN

Weekly Law Reports Wertpapiermitteilungen (law journal) Weekly Notes

ZInsO

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

UCC

Unif. L. Rev./ Rev. dr. unif.

ZIP ZPO

Introduction Harry C. Sigman/Eva-Maria Kieninger The importance of the subject of security rights in movables has gained recognition in Europe recently.1 Long seen in the academic curriculum as little more than a sliver of the law of property, security rights in movables are now recognized as an important element in modern economies, of special importance to capital-hungry small and medium enterprises, and a much-needed addition to security in immovables and personal security. The importance of these rights has also been recognized from a financial supervisory point of view. Under the Basel II requirements, financial institutions require a clear and certain legal structure to support the efficient supply of credit, generating an immediate need for modernization of the law governing security in movables. This volume focuses on security rights in tangibles. It will be followed by a volume on security rights in (and outright transfers of) receivables. Both volumes deal with substantive law and, given the increasing importance of cross-border transactions, with private international law as well. The laws of seven European countries are studied in depth. These countries represent economies of varying sizes, different legal families and different approaches to the solution of the problems presented. They 1

Not only has France just made extensive modifications to its secured transactions regime, but in the recent past most of the countries studied, as well as other European countries (particularly Central and Eastern Europe) have modified their secured transactions laws and/or their insolvency laws. In addition, many multilateral organizations (e.g., UNCITRAL (United Nations Commission on International Trade Law), UNIDROIT (International Institute for the Unification of Private Law), the Hague Conference on Private International Law, EBRD (European Bank for Reconstruction and Development)) have been and are currently engaged in projects affecting this field. See also the reform proposals made by the English Law Commission, whose Final Report can be found at Company Security Interests (Law Com No. 296, available at http://www.lawcom.gov.uk/lc_reports.htm (1 August 2007)). Cf. Drobnig/Snijders/Zippro (eds.), Divergences of Property Law, an Obstacle to the Internal Market? (2006); Graham-Siegenthaler, Kreditsicherungsrechte im internationalen Rechtsverkehr (2005); Kieninger (ed.), Security Rights in Movable Property in European Private Law (2004); id., Nationale, europäische und weltweite Reformen des Mobiliarsicherungsrechts, WM 2005, 2305 et seq. and 2353 et seq.

2

Harry C. Sigman/Eva-Maria Kieninger

reflect different stages in the legislative or judicial development of structures to accommodate the need for non-possessory security rights in tangibles and to respond to the increased need for credit in modern economies. A careful comparison at the practical level, examining the rules actually at work in the marketplace, reveals many significant differences between the countries, even where there are similarities or identities at the highest conceptual level. In certain countries, reliance for credit support is still based primarily on personal security and security in immovables (and, more recently, on security in financial instruments and receivables), reflecting the absence in those countries of a legal structure that facilitates security over tangibles and makes it effective. All countries provide for a possessory pledge, and this device is, at the least, the baseline provision for security rights in the Civil Codes of all six Continental countries studied. Although Roman law knew of a nonpossessory pledge, this device became lost to memory and was functionally non-existent in the nineteenth century.2 By the beginning of the twentieth century, however, it had become clear that non-possessory3 security rights in tangibles were needed. The following comparative overview, setting out the different paths on which secured transactions law developed in the seven countries, is drawn from the reports presented in this volume. References in the country reports to statutory provisions, court decisions and scholarly writing are not reiterated here. On various specific points, footnotes in this Introduction provide information about Article 9 of the Uniform Commercial Code, the secured transactions law in the states of the United States, primarily to illustrate contrasts in law-making technique, in specific rules or in policy.4 Because of the great importance of registration to modern secured transactions law, a more elaborate discussion of filing under UCC 2

3

4

Zwalve, A labyrinth of creditors: a short introduction to the history of security interests in goods, in Kieninger (ed.), Security Rights in Movable Property in European Private Law (2004), p. 38 et seq. In contrast to the European distinction between possessory and non-possessory security interests, UCC Article 9 provides for a “unitary” security device, and does not treat possessory and non-possessory security interests as two distinct types of right. Instead, UCC Article 9 treats dispossession of the debtor as one of several possible methods of perfecting a security interest (depending on the nature of the collateral, possession may be a permitted but not exclusive method of perfection, the exclusive method of perfection or not available as a method of perfecting). For a thorough discussion of UCC Article 9, including the history of its development, its structure and concepts and a detailed discussion of its rules and the policies underlying them, see Sigman, Security in movables in the United States – Uniform Commercial Code Article 9: a basis for comparison, in Kieninger (ed.), Security Rights in Movable Property in European Private Law (2004), p. 54 et seq.

Introduction

3

Article 9 is presented separately in Part IV of this Introduction. And because of the key role played by the filing system in the priorities regime, as well as the great difference in the modes of development and presentation of priority rules among the UCC and the legal structures of the countries studied, Part IV also includes a more elaborate discussion of the UCC Article 9 priorities regime. We start with a brief description of the basic structure of the national systems, followed by a discussion of some core concepts. The Introduction then presents the Case Studies and continues the comparative overview on a case by case basis.

I.

Basic structure and development

In Germany, the BGB provided for a possessory pledge and, as the only security arrangement without change of possession or other means of publicity, title retention as security for the unpaid seller. Only a few years after the adoption of the BGB, the courts permitted non-possessory security rights through the use of ownership. This was permitted to non-seller creditors in the form of transfer of title by way of security (also referred to as fiduciary transfer). The German courts allowed the seller by contract to expand the benefit of the retention of title in the sold goods by also obtaining (i) a security transfer of the receivable generated in favor of the buyer by a subsale and (ii) a right in products resulting from the processing or manufacturing by the buyer of the sold goods.5 This right in such products is usually created by a contractual agreement that the buyer processes the sold goods on behalf of the seller, rather than by a security transfer. Further, the German courts also permitted the seller to condition transfer of title upon payment not only of the price of the sold goods but also payment of any other obligation.6 Through such expansions, coupled with the 5

6

UCC Article 9 provides (in secs. 9-203 and 9-315) with respect to all security interests (including those retained by a seller) for an automatic security interest in all “proceeds” (broadly defined in sec. 9-102(a)(64)) of collateral. With the assistance of tracing rules provided under other law, proceeds may be identified even after they have been commingled with other property; also, the definition of “collateral” includes proceeds of proceeds. UCC Article 9 places no limits on the nature, source or extent of the obligation(s), present or future, that may be secured by a security interest (subject, of course, to the basic delineation of UCC Article 9’s scope provided in sec. 9-109). Qualification of a security interest in goods as a “purchase-money” security interest is limited to the extent that it secures an obligation “incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of

4

Harry C. Sigman/Eva-Maria Kieninger

priority given by the courts to title-retaining sellers over competing interests (both as to the sold goods and also as to the receivables proceeds), German practice built the title retention device into something far more powerful than in any other European country, and without imposing any form of publicity (see the discussion in the report on Germany of the verlängerte und erweiterte Eigentumsvorbehalt). Consequently, title retention is a common, and possibly the principal, form of secured assetacquisition credit in Germany. The fiduciary transfer device (Sicherungsübereignung) was, and continues to be, flexible enough to serve the business needs of borrowers and lenders, functioning as a non-possessory pledge but without any formality or publicity. The courts, however, recognized, at least in certain contexts, that the “title” transferred to the creditor is a fictitious one, intended only to serve a security purpose, and, by imposing fiduciary obligations on the financier, limited the benefit of the transfer to the security purpose intended by the parties; thus, for example, in insolvency, the holder of the fiduciary title is treated the same as a pledgee, i.e., the holder’s right is limited to the realization proceeds rather than in the asset itself (this result was reached judicially under the old insolvency law and is now expressly so provided under the new insolvency law). In principle, however, an actual “title” has been transferred, leaving the debtor7/transferor with only a personal claim against the transferee/cre-

7

the collateral if the value is in fact so used.” Qualification as a purchase-money security interest makes available a super-priority over an earlier perfected competing security interest and a grace period of twenty days after delivery for achieving perfection, both discussed below. Note that UCC Article 9 expands the class of benefited secured creditors beyond sellers to include any person that provides assetacquisition financing. With respect to the scope of collateral covered by a purchasemoney security interest, a special cross-collateralization provision applies with respect to inventory and there are also special provisions with respect to software acquired in an integrated transaction with the related goods when the software is acquired for the principal purpose of using it in the goods. See sec. 9-103. See further discussion of this subject in Case Study 4. References in this Introduction to “debtor” are intended to mean the person that grants the security right, whether or not that person owes the secured obligation. UCC Article 9 uses the terms “debtor”, “obligor” and “secondary obligor”, all defined in UCC sec. 9-102. Because the principal focus of UCC Article 9 is on the security interest, rather than on the secured obligation, “debtor” is defined as a person that has an interest (other than a security interest or other lien – interests that normally derive from and encumber the debtor’s interest) in the collateral, whether or not that person has an obligation to pay or otherwise perform the secured obligation. “Debtor”, therefore, also includes a transferee of the collateral (whether or not that person has assumed the secured obligation). The existence of a right of re-

Introduction

5

ditor. This seems to have stimulated recent judicial recognition of an Anwartschaftsrecht (a form of expectancy interest, regarded as a proprietary right) in the buyer that has not yet fully performed its purchase contract. This reflects an implicit recognition that the conceptual approaches based on title, which leave the buyer or debtor, not having ownership, with nothing (or no more than personal claims) until it has fully performed, require ameliorating doctrines in order to fit comfortably with economic reality and modern business needs. In sharp contrast, France took a completely different path, both in legal structure and in methodology. In France, title retention was an ineffectual and little-used device until the 1980’s amendment to the insolvency law made the retained title effective in that context. Further, even then, the title retention is limited to the goods sold and whatever substitute assets might qualify for “real subrogation”. With respect to tangibles, France did not recognize transfer of ownership for purposes of security generally until it adopted legislation in 2007 authorizing the fiducie, which may, however, be constituted only by a legal person, must involve a bank as fiduciaire (trustee) and must be registered. It remains to be seen precisely how and to what extent this will be developed into a useful commercial security device. Instead of using fiduciary transfer of ownership to evade the bedrock principle of il n’y a pas de gage sans dépossession, France permitted, through a series of laws adopted throughout the twentieth century (e.g., gage sur fonds de commerce, nantissement d’outillage, warrants for specialized purposes), the creation of specific non-possessory pledges, substituting registration for dispossession. Only in 2006 was the Code civil amended to add a general gage sans dépossession (along with other modernizations), also based on registration. Even this legislation, however, failed to revise the subject comprehensively into a single coherent body, as it left the pre-existing devices in place alongside the new additions,8

8

course and the law of suretyship will determine whether the obligation of an “obligor” is primary or secondary. Useful illustrative examples are found in the Official Comment to UCC sec. 9-102. The significance of the categories is mainly in the context of post-default rights and remedies, governed by Part 6 of UCC Article 9. Both the German and French methodology and structure contrast sharply with the development in the United States (which commenced during the late 1940’s) of UCC Article 9, which presents a single comprehensive legislative treatment of the entire subject of secured transactions over movables (tangible and intangible). Article 9 established a single device, denominated a “security interest” (although terminology used by the parties and structure of the transaction are irrelevant under UCC Article 9), and, making the location of title irrelevant for secured transactions purposes, eliminated the possibility to use title as an alternative technique to obtain security. Further, in adopting a functional approach, UCC Article 9 effectively leveled the

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although it did provide greater flexibility in enforcement of security rights. Belgium largely followed the French technique of development by legislation and the French path of no fiduciary transfer for tangibles and no useful title retention until the 1997 amendment of its insolvency law. Belgium in 1919 adopted a gage sur fonds de commerce, based on registration, similar to the equivalent device found in France, although it excluded only 50% of the value of inventory while the French version excluded inventory entirely. Belgium has not, however, followed the French approach of supplementing this form of enterprise pledge by enacting a series of specialized pledges. On the other hand, Belgian law provides for an enforcement that is more speedy and efficient than many other European countries. The Netherlands, although its earlier Civil Code had been modeled on the French Civil Code, generally followed, judicially, the German and English pragmatic/consensual path during the twentieth century until the new Dutch Civil Code was adopted in 1992. This Code expressly forbids fiduciary transfer; it substituted for that device an undisclosed or “silent” pledge, without dispossession and without registration. (Netherlands law refers to the requirement of submission to the tax authority of a copy of a non-authentic deed of pledge as “registration”, but this is not registration as that term is used in this volume. The submission is not to a publicly searchable record; rather, this mechanism is designed only to provide a date certain). Netherlands law continued to recognize title retention by sellers, although without as generous a widening and with no lengthening as Germany had developed. Spain, in 1954, legislatively created a pledge without dispossession (Ley de Hipoteca Mobiliaria y Prenda sin Desplazamiento), with registration. Spain also has a legislated form of title retention, also with registration (Ley de Ventas a Plazos de Bienes Muebles); this law renders ineffective title retention with respect to property that is acquired for resale. Spain has continued to legislate refinements, and generally might be characterized as having somewhat flexible security devices, based on registration, but greatly limited, however, by somewhat rigid requirecompetitive playing field among providers of acquisition credit., by making the same rules applicable to the (i) title-retaining seller, (ii) the lessor that leases goods under terms that in economic reality amount to a disguised conditional sale and, in an expansion not found in the systems of the countries studied, (iii) the security interest of a third-party lender who supplies the acquisition credit. Thus, by virtue of the enactment of UCC Article 9, modern secured transactions law in the United States, unlike German law, did not rely on judicial development and, unlike French law, is based on a single coherent legislative scheme, and, unlike both of them, does not use title as an alternative technique for establishing security.

Introduction

7

ments concerning description of collateral. Therefore, although on a theoretical level there seem to be ample possibilities to take security rights over tangibles, in practice these devices are hardly used except for items that can be described individually and with great specificity, for example, by plate or chassis number. Of the countries studied, Italy, acting primarily by sporadic legislation, can be said to have the least effective security regime (even taking into account the 1993-enacted Art. 46 Bank Charge), with limited scope, significant complexities and rigidities and significant uncertainties, such that, taken together, they effectively limit the utility of the available devices. Further, the available devices generally have very inefficient enforcement remedies. Even title retention, though expressly regulated in the Codice Civile since its enactment in 1942, is of extremely limited commercial utility, in particular due to strict formalities requirements and the unreliability of its effectiveness against third parties. Italy, like France (at least until the recent French enactment of the fiducie) and Belgium and the Netherlands (under the Dutch Civil Code) has rejected the fiduciary transfer. All of the countries studied provide equipment acquisition financing through leasing. Indeed, in Italy and some of the other countries, it appears to be the most flexible and effective available device for such transactions. Financial leasing is discussed in detail in Case Study 4. England has relied primarily on the judicial development of a scheme of legal and equitable rights, most importantly fixed and floating charges, to enable non-possessory rights to secure present and future obligations with rights in present and future movables. The English scheme provides for registration of charges granted by English companies and companies that have registered in England as foreign companies. Through the device of the private contractually-created receiver, England provides a most powerful enforcement device, although recent insolvency law modifications have changed this regime somewhat. At least in the context of company chargors, the existing regime is flexible and effective – extremely creditor-friendly. England does also recognize title retention, in the techniques of conditional sale (buyer committed to purchase) and hire-purchase (bailment with an option to purchase) and financial lease (see the extensive discussion in Case Study 4) – often the differences being of form rather than economic substance. The titleretaining seller may condition transfer of title on payment not only of the purchase price of the sold goods but also on the payment of any other obligation (which need not otherwise be related to the sale) owed by the buyer to the seller (often referred to as an “all monies” clause). On the other hand, the title-retention does not carry forward into proceeds of the sold goods, nor does it extend to the goods once they have been processed. Thus, the value of the title-retention is limited to the seller’s

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being able to locate the goods in the hands of the buyer in their original form. None of these devices, being in the form of rights retained by the asset supplier rather than charges granted by the acquirer, need be registered. In many of the regimes, the security devices are available only for the benefit of certain classes of creditors and/or may be created only by certain classes of debtors. England is the most extreme example of difference in regimes depending on whether the debtor is an individual or a company. In particular, floating charges are not granted by individuals and the charge registry is at Companies House. In France, the fiducie may not be constituted by an individual and the devices under the Code de Commerce may be provided only by a “merchant”. In Italy, the “dedicated assets” device may be granted only by a stock company and only a bank may enjoy the Art. 46 Bank Charge. Some words about registration: In Germany and the Netherlands, there is no registration for security rights in tangibles. In the Netherlands, submission to the tax authority of a copy of a non-authentic deed of pledge with respect to an “undisclosed” pledge is required. As noted above, although this is referred to in the Netherlands as “registration”, this cannot be viewed as registration as that term is used in this volume; such submission is not to a searchable public record, and is merely a device to provide a date certain as an alternative to use of an authentic deed. In contrast, all the other countries studied do have registries, although they vary widely in coverage and in efficiency. None is fully electronic. In England, registration does not apply to security given by sole proprietors and ordinary partnerships. Further, it is flawed in that it imposes on searching parties two risks: the risk of a difference between the terms of the charge instrument and the information provided in the publicly available particulars, and the risk that a registration made subsequent to the search but during a 21-day “blind” period may nevertheless have priority. The Spanish registries accept only notarized documents and have very significant specificity of description requirements. The recently published regulations for the new French registration system provide for the user to submit both original documents and a summarizing bordereau. The regulations provide for an index searchable nationally via the internet, but require that the user specify not only the name of the debtor but also substantial further identification details (e.g., date and place of birth or entity details), and searches must be conducted separately with respect to particular categories of collateral. Even then, the search response does not provide the desired data but instead merely directs the searcher to the particular greffier who actually has custody of the registered documents. Belgian registration for the enterprise pledge is local (in the land register of the judicial arrondissement in which the enterprise is located), but is readily accessible. However, substantial

Introduction

9

documentation – a copy of the pledge agreement and two copies of a summary (borderel) – must be submitted, and, more importantly, a prerequisite to such filing is the “registration” of the pledge instrument (the date of the instrument plays no role in determining priority), which entails payment of a fee based on a percentage of the credit (in addition to the minimal filing fee). In Italy there is quite a wide variety of registries, none of which is based on notice filing and none of which is completely electronic (searches may be made electronically but data entry is in the hands of the competent authority for each registry, to which complete documentation must be presented). Thus, while the majority of the countries studied do have some form of registration, none has an efficient electronic notice filing system that is speedy, inexpensive and easy to use for both the filer and the searcher.9 The extent to which a security right can be obtained over the proceeds of collateral that has been disposed of by the debtor varies from country to country,10 as does the technique for achieving this. In some countries, the extent of the right will vary based on the device used. The issue of proceeds is further developed in the discussion below of the Case Studies. In countries that provide for a flexible security right in future assets, the items that might become proceeds can be subjected to a security right in advance, but efficacy of this technique will depend on the ability to foresee, and to describe in a legally sufficient manner, all the types of property that might turn up as proceeds. While the matter of proceeds may not have been of great importance in less-developed economies and under regimes that precluded taking inventory as collateral, modern business needs for inventory finance and the replacement of equipment as it becomes obsolete, and the fact that a right in proceeds can be an important supplement to (and not infrequently of greater practical value than) a droit de suite, suggest that being able efficiently to encumber proceeds is of importance to a modern regime.

19

10

Generally speaking, the Continental systems are essentially variations of land registries; also, they typically fail to take advantage of modern technology. This contrasts sharply in purpose, design and operation with the notice filing systems found in New Zealand, the PPSA provinces and territories of Canada, Quebec (in significant respects) and the states of the United States under UCC Article 9. A discussion explaining notice filing under UCC Article 9 and highlighting how it differs from registration in the countries studied is found in part IV of this Introduction. Under UCC Article 9, the extension of the security interest into proceeds is automatic (see footnote 3, supra), and it is in addition to, not in lieu of, a continuing security interest (droit de suite) in the original collateral (although, of course, the secured party can ultimately realize from all sources no more than the amount of the secured debt).

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Some words about “priority”. While it is typical to think of a priority contest in the secured transactions field as one between two secured parties (something that can happen with greater or lesser frequency under the various national regimes), the term priority is used in this volume in the sense of any competition between any two persons both of which claim a proprietary right in the same asset. It is not limited to secured creditor A versus secured creditor B (whether either or both has perfected its right, either has possession, one or both are acquisition financiers, one bases its claim on the asset as its initial collateral and the other on the asset as proceeds of its initial collateral, and whether subsequent advances enjoy the same priority as the initial advance, etc. – making clear that even this competition is far more complex than appears at first blush). Rather, it includes also the contests between each type of secured creditor and the insolvency administrator of the debtor, each type of secured creditor and a buyer from the debtor (whether the buyer is one that qualifies as a bona fide purchaser who takes free of the security right or one that does not so qualify), each type of secured creditor and one who repairs or stores the asset, each type of secured creditor and a donee from the debtor, etc. One may say, on a very general level, that in the countries studied these various contests are decided on a first-in-time basis (although the relevant time is not always identical) or on extrapolations from one or more other principles.11 But this would hide the actual diversity and complexity. To illustrate the latter point, consider that the English priorities regime is an amalgam of all of the following: a basic nemo dat quod non habet rule, a first-in-time priority rule, a distinction between absolute interests (which may be used as financing devices) and security interests, registration systems that provide a first-to-register priority rule, the company charges scheme (Part 25 of the Companies Act 2006), which includes a registry but does not include any priority rules and instead leaves priority to be determined under principles of general law, except that registration under sec. 860 will be relevant in that a later registered charge may take priority over an earlier unregistered one and in that in some circumstances registration provides constructive notice (which is relevant to the priority of a legal interest over an equitable interest).

11

In contrast, UCC Article 9 provides an elaborate array of very specific definitive rules for each contest, carefully tailored to maximize the efficiency of business practices. This minimizes the need for ex post judicial fact-sensitive determinations and provides the greatest possible ex ante certainty to the actors. It also benefits from the rules having been made by the legislator, institutionally far better equipped to make such rules and able to draw definitive and arbitrary lines rather than being confined to the announcement of general principles.

Introduction

11

The various national approaches to enforcement of security rights are discussed in the context of Case Study 1. They vary from each other and within each country more often based on history and the particular type of the right rather than on coherent broadly applicable principles that reflect a sensible balancing of the interests of the debtor and competing creditors of the debtor and a careful consideration of the effect of the remedial scheme on the effectiveness of the security right to induce the extension of credit, the burden on the judicial system, etc. This study makes clear that both modernization and harmonization are needed to produce coherence and efficiency within and among European countries. Harmonization issues are discussed in part III of this Introduction.

II.

The Case Studies

The analytical approach of this volume is to present parallel responses to specific cases, to facilitate comparison by the reader. Each national report begins with an introduction describing the legal structure and explaining the historical development of movables security and the solutions adopted. The reports then continue with national responses to the Case Studies. The scheme of the Case Studies and the structure of the reports are as follows.

Case Study 1 Case Study 1 presents the basic pattern of a security right in existing “equipment” (tangibles held by the debtor for use and not for sale12). The

12

Under UCC Article 9 (see the definitions of the following terms in sec. 9-102), a computer might be classified as “consumer goods” (used by the debtor “primarily for personal, family or household purposes”), “inventory” (held by the debtor “for sale or lease” or out on lease by the debtor as lessor), or “equipment” (defined as all remaining goods [disregarding the category of “farm products”]; essentially, goods held by the debtor for use other than for personal, family or household purposes), depending on the use to which it is put by the debtor. This illustrates the use by UCC Article 9 of definitions not to make abstract statements of absolute meaning but rather to facilitate the efficient legislative expression of different rules for distinct situations. Thus, for example, subdividing “goods” into these categories enables the efficient formulation of rules tailored to effectuate different policy considerations based on factual differences, e.g., distinctions between inventory and

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national reports describe the documentation and formalities required to create the right, as well as any additional steps required to make it opposable against third parties (herein, to “perfect” the right). The reports indicate that Germany (the most simple, requiring only a private contract), the Netherlands (also a private contract, but with an authentic deed or submission to the tax office of a copy of a non-authentic deed), England (with its simple fixed charge, also a private contract, but with registration of the charge in Companies House) and Spain (requiring a notarial deed and registration) provide relatively simple devices for the creation and perfection of a non-possessory right in a single machine or a group of machines, with the primary issue being one of the quality of the description of the collateral.13 Under the newly modified French regime, not yet tested in practice, France probably can be said to belong in this category as well. In Belgium, on the other hand, except for a chattel mortgage on an asset of the type that is registered, there is no simple device available for this basic transaction, as the basic non-possessory device is an enterprise pledge. In Italy, the Art. 46 Bank Charge might be used to encumber existing equipment, but, for the many reasons explained in the Italian report, can hardly be considered an effective practical device. The question is raised whether mechanisms exist to enable a prospective secured creditor to discover the existence of any earlier-in-time nonpossessory rights that might be superior to, or preclude the existence of, the prospective creditor’s rights, the implicit assumption being that a creditor that is in a position to learn of the existence of actual or potential competitors will be better able to assess the credit risk involved and the value of the prospective collateral to offset the credit risk. This highlights the efficiency element of registration. Absence of registration raises the risk of “false poverty” (the assumption, for example, that, unless disproved by the debtor, everything in the debtor’s possession is subject to a title retention claim). Next, the reports consider the consequences of a sale by the debtor of the encumbered asset, both with respect to the continuation of the security right in the asset after sale (droit de suite) and whether a security right in the proceeds of sale exists by reason of the security right in the original collateral, and, if so, whether it is in addition to or in substitution for the right in the original collateral. None of the countries studied provides for an automatic security right in a replacement asset arising simply by virtue of its being a replacement

13

equipment are made with regard to super-priority, protection given vis-à-vis buyers of the collateral, etc. Compare the description requirement under UCC Article 9, discussed in part IV, infra.

Introduction

13

asset (i.e., as a form of “real” subrogation), although some of the jurisdictions provide a limited form of this device, with respect to insurance proceeds that replace a destroyed asset (and in Belgium, a claim arising out of a subsale falls under this concept). Then the reports discuss the post-default remedies available to the secured creditor under each of the devices (judicial, nonjudicial and a right of appropriation or attribution (qualified or absolute)). The absence of speedy and effective remedies undermines the efficacy of even apparently sound security rights to actually induce the extension, or the lowering of the cost, of credit. Where nonjudicial remedies or special speedy judicial procedures are not provided, mandatory judicial involvement invites the use of the process to delay the exercise of remedies. The most speedy and effective remedial schemes seem to be found in England (particularly in the form of the receiver), Germany, Belgium, and the Netherlands, and all countries appear to permit a debtor, after default, to agree with the secured creditor on a disposition procedure. Although France maintains in principle the requirement of judicial involvement, the recent Civil Code amendments appear to have largely abandoned the notion that no man can make his own justice by rendering effective an agreement by the debtor, made at the outset of the transaction, that the creditor may appropriate the collateral based on an appraisal by an agreed expert (although the French continue to be unwilling to trust the marketplace by permitting a nonjudicial disposition sale by the secured party). There is in France a form of debtor-protection, at least in some instances, in the rule that the creditor (even a title-retaining seller) may not profit from the debtor’s default, i.e., must account to the debtor for any surplus value, that is, value of the collateral in excess of the secured obligation, although it appears that the debtor may have the burden of initiating litigation in order to effectuate this protection, and this rule does not appear to override provisions of a crédit-bail that might well have the effect of depriving the “lessee” (or the lessee’s other creditors) of any excess of the value of the leased asset over the amount remaining due under the lease (this appears also to be true with respect to a lease under English law). The rule against the creditor profiting from the debtor’s default appears to be more broadly applied in Belgium, and perhaps also in the Netherlands. Thus, the degree of debtor-protection against forfeiture varies between countries and varies within countries depending on the security device involved. None of the countries studied appears to require that a secured party give notice to junior or other creditors before the secured party may exercise its remedies.14 14

The UCC Article 9 post-default remedial regime: (i) allows for judicial assistance to any party that wishes to seek it, but does not mandate judicial involvement as a matter of course; (ii) permits the taking of possession of the collateral by the se-

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The reports then discuss the position of the various security rights in the event insolvency proceedings are commenced by or against the debtor. In this context, too, we see a great variation among the countries studied in several different respects, including the extent of the subordination of the security holder’s ranking to various preferential or privileged claims; the degree of delay or interference with exercise of remedies by the secured party; the distinction between title-holders and holders of “mere” security rights (or a conversion of the fiduciary title-holder into a secured party); and the participation in the costs of the insolvency proceeding. Although all rank secured creditors above unsecured creditors, in several of the countries studied there are privileges or preferential claims that rank higher than security rights (usually not limited as to amount), with the consequence that in many instances, perhaps the majority, there is in fact little or nothing left for secured creditors. This has the obvious effect of degrading the value of security rights, undermining the goal of providing such rights in order to induce greater availability of credit at lower cost. Treating title-based rights better than security rights denominated as such (as to ranking, degree of interference with remedies, etc.) has the effect of distorting the credit-supplying field. For example, in France, cured party without judicial assistance if this can be achieved without breach of the peace (and the availability of speedy judicial assistance induces debtor cooperation in the vast majority of cases); (iii) permits non-judicial disposition of the collateral by the secured party, either publicly or privately, conditioned on the requirements that the secured party act in good faith and in a commercially reasonable manner and after notice to other creditors claiming an interest in the collateral; (iv) provides that the secured party may propose to accept the collateral in full or partial satisfaction of the secured obligation, with the debtor and all junior secured interests having the unconditional right to reject the proposal; (v) provides the debtor with the absolute right of redemption of the collateral, upon payment of the full amount of secured obligation, at any time prior to actual disposition by the secured party, and (vi) specifies a list of rights that a debtor may not waive (sec. 9-602), specifies certain rights that may be waived after default (sec. 9-624) and provides statutory remedies in the event of the secured party’s failure to comply with its obligations under UCC Article 9 (sec. 9-625). Notice prior to disposition or of the proposal to accept the collateral must be given to the debtor and to holders of junior security interests. UCC Article 9’s extremely flexible approach relies on the marketplace and the self-interest of all concerned to produce economically sensible results; it provides protection to the debtor and other creditors against secured party abuse without imposing cumbersome, expensive or time-consuming procedures; and it keeps down the costs to the parties and society generally by providing for judicial intervention only if specifically sought. This regime has proved to be effective and thus to encourage secured credit.

Introduction

15

title-retaining sellers and crédit-bailleurs are effectively placed ahead of the privileges for the employees and the treasury (by being outside the insolvency estate, counter to the goal sought to be achieved by the privileges), while all gagistes are subordinated to those privileges, even those gages that secure acquisition credit. In Germany, fiduciary title-holding creditors are treated like pledgees, but title-retaining sellers are “excluded” from the insolvency system for security rights by treating them in effect as executory contracts, again resulting in favoring sellers over lenders that provide acquisition credit. Thus, differentiating between title-based security devices and those denominated as security devices is not merely a matter of conceptual distinction – it has very real consequences, precluding a level playing field among diverse sources of credit, to the detriment of those acquiring goods on credit. This is not to suggest, however, that it is necessary to abandon the distinction in order to level the playing field. The same favored status vis-àvis the insolvency trustee could be provided to all acquisition financiers, without regard to the location of title or the nomenclature used in the documentation of the transaction, by giving purchase-money secured lenders the same status and remedies given to title-retaining sellers and financial lessors. Or, on the other hand, the playing field could also be leveled by giving title-retaining sellers and financial lessors the same status and remedies given to purchase-money secured lenders. Either approach will produce a level playing field among competing sources of credit, and either could be accomplished by amending the security law or the insolvency law. The point is to establish internal coherence, with the results being determined, not by history or by extrapolation from concepts, but by the legislator making a conscious and transparent policy determination about the relative weight of the policy of supporting assetacquisition finance (and lower-cost more widely available credit generally) and the policy sought to be protected in insolvency in the form of the privileges. In most of the countries studied, the general rules apply when the collateral consists of motor vehicles, despite the fact that, unlike most tangible collateral, this type of collateral is generally uniquely identifiable based on some type of registration number (there is everywhere a need for financing to make automobiles available to the mass market). An exception is Italy, where motor vehicles (along with aircraft and ships) are considered “registered tangibles”, and are subject to a public title registration system in dedicated registries. The inefficiency of the existing system, however, has prompted the legislator recently to consider reform, and cancellation of the register of title for motor vehicles has been suggested. In England, motor vehicle credit is the subject of voluntary private registration. In France, there is a special registration for those who finance acquisition of motor vehicles and they are treated as having a

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fictitious possession, providing them with a right of retention, powerful even in insolvency. In Germany, there are no special legal provisions with respect to motor vehicle collateral, but there is a practical effect stemming from the fact that automobiles are registered and owners receive a document. It is customary for lenders to take possession of the document. The inability of the owner to display the document is usually considered sufficient to prevent a buyer that did not examine (or ask to see) the document from claiming protection as a bona fide purchaser. Thus, while the document is not an instrument that, taken by itself, enables the holder to sell the vehicle, practice has converted the document into the equivalent of a negotiable document of title in the negative sense, in that depriving the owner of possession of the document enables the lender to prevent the debtor from selling the vehicle to a bona fide purchaser.

Case Study 2 Case Study 2 goes beyond Case Study 1 by including after-acquired equipment, i.e., a floating security right over equipment. In Germany, taking security over after-acquired equipment is possible by using the Sicherungsübereignung, the same device as described in Case Study 1 with respect to existing equipment. The only difference would be in the description of the collateral. In the Netherlands, there is likewise no difference between Case Study 1 and Case Study 2 other than the description of the collateral. In England, this would be possible using a floating charge to cover the after-acquired equipment (in addition to the fixed charge covering the existing equipment). This would be registrable in Companies House, like the fixed charge in Case Study 1. In practice, the charge instrument would likely contain a prohibition of the subsequent granting of a fixed charge (which would enjoy priority over the floating charge despite being later in time). So, in England, the primary difference between the two cases would be in the context of insolvency. In France, both the new gage sans dépossession and the gage sur fonds de commerce could include after-acquired equipment, again with special attention to the description of the collateral. In Belgium, we find the biggest contrast with Case Study 1, where there was no device available (other than in the context of acquisition finance) for a fixed security right in existing equipment. The gage sur fonds de commerce, a form of enterprise charge, would be available to create a security right on present and after-acquired equipment, although it would have to include as well all the other assets constituting the fonds de commerce, not just equipment. In Spain, after-acquired collateral cannot be covered by a nonpossessory pledge or a mortgage over movables. In Italy, a limited form

Introduction

17

of floating right over equipment may be achievable under the Art. 46 Bank Charge.

Case Study 3 Case Study 3 varies from Case Study 2 with respect to the type of collateral – here it is inventory not equipment that is the subject of a floating security right. In Germany and the Netherlands, there is no difference between Case Studies 2 and 3. In England, the only difference between Case Studies 2 and 3 would be that the entire inventory would be subjected to a floating charge (as even the existing inventory would be intended to be disposed of by the chargor in the ordinary course of business (the chargor would have a power to deal) and thus not amenable to a fixed charge). In France, taking a non-possessory right over present or future inventory was impossible prior to the recent reform. Now, it may be done under the gage sans dépossession, and it is also possible under the new gage sur stocks added to the Code de Commerce. The latter device, however, is available only to licensed credit institutions, and it is not clear whether they will be permitted to choose between these two devices or confined to the latter (which is less flexible). In Italy, such inventory financing is extremely difficult to achieve. An approximation might be possible under Art. 46 of the Banking Law and also possibly under Art. 2447bis C.c. Both devices are still to be tested in practice. The particular issue posed by the use of the Art. 46 Bank Charge to achieve a floating security right over inventory is the application of the strict provisions on description of the collateral, which would have to be loosely interpreted in order to permit a floating security over inventory. In Spain, there appears to be no confidence in inventory as collateral and a great concern about monitoring costs; as a consequence, little inventory financing occurs in practice, although it is theoretically possible under the existing available non-possessory security devices. Inventory not owned by the debtor (e.g., acquired under title retention) may not be pledged under the new French law on gages sur stocks and sans dépossession. In England, a debtor holding an item of equipment pursuant to a conditional sale, an operating lease or a financial lease would have no right in the asset that could be used as collateral for further credit, no matter what its potential economic value. In the Netherlands, the prevailing view is, likewise, that the buyer under a title retention acquisition does not have a proprietary right in the asset that can be disposed of or encumbered, although it is argued by some that the buyer has a form of conditional proprietary right that may be encumbered. By way of contrast to these predominant views, under German law, the

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buyer under retention of title can transfer its Anwartschaftsrecht according to the rules that apply to movables generally. Therefore, it can also transfer that right by way of a Sicherungsübereignung. It is clear, however, that the right obtained by the creditor by way of the security transfer is dependent on the buyer/transferor’s continuing to pay the purchase price to its seller. If the buyer defaults on the purchase contract, the Anwartschaftsrecht disappears. The creditor/transferee, however, may obtain, by contract, the right to pay the balance of the purchase price. Upon performance of the purchase contract, whether by the buyer or the creditor/transferee, title to the asset moves directly to the creditor/transferee. It is not yet clear how effective this new concept has been in practice to actually generate more credit. This raises the general point that the functional approach of UCC Article 9 automatically makes available for use as collateral the value of any asset in which the debtor has an interest (which need not be full ownership) over and above the amount of any indebtedness for which the asset is encumbered in favor of another person. Thus, for example, if a debtor has an operating lease in an item of equipment, the leasehold right, even though less than full ownership, has value simply by providing for a needed item of equipment in place and in use, and it may have additional value if the rental is below market rate. The leasehold right may be subjected to a security interest under UCC Article 9, despite the fact that the debtor is not the owner of the equipment. Further, if the debtor holds and uses an item of equipment pursuant to either a conditional sale contract (title retention) or a financial lease, both of which are treated under UCC Article 9 as security agreements, the debtor may further encumber the equipment by granting subsequent security interests (with priority among these persons normally being awarded to the one that filed first). The functional approach enables the debtor to maximize the benefit that may be derived from its assets (and also eliminates any concern about over-security). This contrasts sharply with the situation in most of the countries studied. It should be noted, however, recalling the discussion in the insolvency context in Case Study 1, that adoption of a functional approach does not require adoption of a unitary approach. What is achieved by the unitary approach is that automatically, because there is only one type of security right, all transactions that are functionally identical simply cannot be governed by different rules for secured transactions purposes. Put another way, because there is only one set of rules, the parties cannot (whether by choice of terminology or otherwise) evade those rules and invoke other rules instead. Consequently, the rules set forth in UCC Article 9 for the protection of debtors or third parties cannot be avoided, and all sources of secured credit must play by the same rules (again, for the benefit of debtors).

Introduction

19

It is possible, though more complicated, to achieve essentially the same result via a non-unitary approach (that is, retaining the different forms of transaction) by modifying the substantive rules so that all forms of transaction produce the same outcomes, thereby achieving functional equivalence. Examples of at least partial applications of this approach already exist. In insolvency, Germany treats fiduciary ownership as a pledge (pursuant to express statutory provision). In the Netherlands, the tax authorities distinguish between title-retaining sellers and “true” owners in enforcing the tax super-priority in insolvency. Likewise, France, recognizing explicitly in the new legislation that title-retention is a form of security and continuing in effect a rule that had already been developed judicially, forbids a title-retaining seller from keeping any value in excess of the amount of the unpaid purchase price (the same rule that always applies to gagistes). Similarly, in Quebec (a civil law jurisdiction), the requirement of registration and the enforcement regime are applicable not only to hypothecs but also to instalment sales, sales with a right of redemption, trusts and leases (i.e., title-based devices that can serve security purposes), and Canadian insolvency law equates reservation of ownership in an instalment sale to secure the purchase price with hypothecary security (n.b., the parallel treatment is not complete with respect to leases).

Case Study 4 Case Study 4 presents the subject of asset-acquisition finance, i.e., techniques to enable a person to obtain rights in tangibles that are tantamount to ownership on a deferred payment secured basis. These techniques may be broken down into three categories, although the terminology often differs from one legal system to another. Indeed, even within a given jurisdiction, not only is the terminology often somewhat muddled, but the lines separating these transactions from others that are similar but are not tantamount to ownership transfer are often blurred. For purposes of this analysis, the three categories that are tantamount to ownership transfer are the following. One: a transaction documented as a sale pursuant to which the buyer obtains a present right to possess and use the goods coupled with a deferment of the transfer of title subject to the condition precedent of full payment of specified obligations or a present transfer of title subject to a condition subsequent of divestment upon failure to make full payment. This category is referred to in this book as title retention (a form of conditional sale). Title retention is a form of credit provided by the vendor of the goods.

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Two: a transaction documented as a lease or hire contract pursuant to which the lessee obtains a present right to possess and use the leased item coupled with the effective transfer of the full economic value of the leased item so that there is no meaningful anticipated residual value for the lessor at the end of the non-cancelable lease term, whether or not title is ultimately transferred. Any of the following arrangements will produce those effects: (A) the non-cancelable lease term is not less than substantially all of the remaining useful life of the leased item so that the lessee will have enjoyed the full economic value of the item (and, thus, the lessee will typically have no interest in acquiring title); or (B) the lease is coupled with (i) an automatic transfer of title at the end of the non-cancelable term, or (ii) an option in the lease to become the owner at the end of the non-cancelable term (a) for no additional consideration, or (b) upon payment of a nominal sum or (c) upon payment of a sum that, though not nominal, is either less than the anticipated fair market value of the item at time of exercise or less than the cost of returning the item to the lessor, such that the exercise of the option is effectively economically compelled.15 It is not uncommon for such transactions to include a provision that, despite the fact that title is not transferred, allocates to the lessee all or virtually all of the proceeds received upon disposition of the goods – this reinforces the fact that the lessor has no expectation of enjoying any meaningful residual value. Transactions in this second category are herein referred to as financial leases.16 This definition of financial lease is intended to be independent of nomenclature used in any particular country, and the term is used herein independent of its qualification for tax benefits in any particular country. Many countries provide special tax benefits to a transaction (often denominated in the tax legislation as a “financial” or “finance” lease) in which title never passes and in which qualification focuses not on whether there is any meaningful anticipated residual value for the lessor but only on whether the lessee is obliged to pay an amount that in total is sufficient to allow the lessor to fully recoup its cost of acquisition of 15

16

In this last situation, the amount payable at the end of the term is in fact not nominal; it is, however, for purposes of analysis, treated not as an anticipated residual value for the lessor but rather, because it is known at the outset that it will be paid (due to the economic compulsion), it is treated effectively as part of the noncancelable rent. For an elaborate analysis of this issue, see UCC sec. 1-203, which provides sophisticated guidance for distinguishing between a “true” lease and a lease that is in effect a disguised conditional sale (and thus, under UCC Article 9, a security interest). UCC Article 9 does not use the term “financial” lease; UCC Article 2A, which deals with “true” leases, does use the term “finance lease (see footnote 18, infra).

Introduction

21

the leased item (often called a “full payout” lease). Whether or not the lease is a full payout lease is irrelevant to classification for secured transactions purposes, where the focus is on the existence vel non of an anticipated meaningful residual for the lessor. Thus, a lease that qualifies for tax benefits often will be but need not necessarily be a financial lease for secured transactions purposes. Likewise, treatment of the transaction for accounting purposes (which often describes the distinction as one between an “operating lease” and a “capital lease”) is irrelevant to classification for secured transactions purposes.17 Similarly, the relationship between the present value of the total obligation of the lessee and the fair market value of the leased item at the time the lease is entered into is irrelevant to classification for secured transactions purposes; this relationship suggests only that one of the parties may have made an economically unwise deal. Finally, also independent of the secured transactions treatment of the lease in situations where it is the lessee that specifies the item and selects the supplier and the third-party lessor is not the manufacturer or supplier of the item, are issues such as whether the lessor makes warranties or is otherwise liable for non-performance or nonconformity of the item and whether the lessee’s obligations are independent and irrevocable. These matters are unrelated to whether the lease is a financial lease for secured transactions purposes.18 Financial leasing, typically provided by an affiliate of either the vendor (often the manufacturer) of the goods or of a financial institution, has become a very common form of asset-acquisition finance during the past 40-50 years, stimulated by a desire for tax benefits (which, in principle, reduces the rent) or for a form of off-balance sheet financing, or, in some countries, because of the unavailability of a powerful and efficient title retention device or a powerful and efficient non-possessory security device. 17

18

Indeed, accounting rules in the United States recognize a “synthetic lease”, which is treated as a secured transaction (i.e., a UCC Article 9 security interest) for commercial law purposes, as a “finance lease” for tax purposes but as an operating lease for accounting purposes. See, in this regard, the current UNIDROIT Model Law project relating to equipment leasing, which uses the term “financial” lease in connection with such three-party transactions, at least when they are full payout leases (as do some of the tax provisions of various countries). It is anticipated that the UNIDROIT Model Law will defer to the Secured Transactions Legislative Guide (currently being prepared by UNCITRAL, see footnote 32) for the secured transactions effects of such “financial” leases. Also, see UCC sec. 2A-103(1)(l), which defines “finance lease” (in the context of “true” leases) in order to establish appropriate rules concerning warranty obligations, “hell or high water” consequences, etc. in the context of such three-party transactions.

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It can be seen from the national reports that in countries where financial leases are neither re-characterized as purchase-money security rights nor produce the same legal results as purchase-money security rights, often no attention is paid, for secured transactions purposes, to the special character of financial leases as acquisition credit devices (in effect, they are treated no differently from ordinary, i.e., “true”, leases). Thus, treatment of financial leases is, even within a particular country, not necessarily coordinated with treatment of either title retention or thirdparty purchase-money secured financing. This produces the simultaneous availability, for the same function, of different devices subject to different rules – different form requirements, different registration requirements, different rules in the event of default or in the event of insolvency – even though they are economically identical arrangements. This can have the effect of undermining the policies that underlie the rules applicable to security rights and distorting the economic playing field as between different providers of asset-acquisition finance. Three: a non-possessory security right in collateral that differs from other such rights in that it secures repayment of credit provided to enable the debtor to acquire the rights in or the use of the collateral, provided the credit was in fact so used (sometimes referred to as third-party purchase-money credit). In general, all three categories of transactions are available in the countries studied, subject to the following caveat – the rules governing the three categories and their legal effects are far from identical within the countries studied and are far from uniform across the countries studied.19 It is a common feature that in countries where the third category (security right, not title-based) is available, it is typically not given special treatment, i.e., the fact that the security right secures a purchasemoney credit does not differentiate it from ordinary non-acquisition security rights and it is not “elevated” to enjoy the same position as the first two categories of asset-acquisition credit.20 An exception is Belgium where only the title-based options are available. 19

20

UCC sec. 9-103 defines “purchase-money security interest”. The most important features of UCC Article 9 in this respect are that, by virtue of the functional approach: it treats all three asset-acquisition financing devices the same; it provides them, through the special provisions relating to purchase-money security interests, with special privileges that, balanced with debtor-protection elements, are no less than those bestowed in the countries studied on title-retaining vendors; and it extends this status to third-party purchase-money credit-providers. Under UCC Article 9, the “purchase-money security interest” is not a separate species of security right. It enjoys the flexible and efficient nature of the UCC Article 9 regime applicable to all security interests generally (e.g., simple private contract, easy notice filing that perfects with respect to multiple (future) transactions,

Introduction

23

In Italy and Spain, financial leasing is the most widely used option of the three categories. Although all countries studied recognize title retention to the extent of allowing ownership of the goods sold, while in their original state and while still in the buyer’s hands, to be kept until payment of the price of the goods, there are significant differences among them, e.g., whether the debt secured is restricted to the purchase price of the sold goods or can be extended beyond that and, if so, how far; whether there must be a writing, a data certa or a registration; whether loss of the ownership occurs upon processing (sometimes depending on the nature of the processing, e.g., loss of identity) or upon attachment/incorporation into another asset (sometimes depending on manner or reversibility of attachment/incorporation) or perhaps, effectively, upon the mere opening of the package (see Case Study 9, infra); whether the ownership can be extended into the claim resulting from subsale or any other form of proceeds; whether the “owner” is more or less likely to lose the goods to a bona fide purchaser (and whether marking the item makes a difference); and remedies for default by the obligor – is there forfeiture of amounts previously paid? For what elements of damage may the defaulting obligor be liable and how are they calculated? Is the value of the goods at time of revindication relevant and, if so, what role, if any, does it play in determining liability for a deficiency or obligation on the part of the owner to pay over any excess over the amount owed at the time of default? France has recognized title retention to be a security device and has codified the rule that the seller may not profit from the buyer’s default. In contrast, in England, the title-retaining seller and the financial lessor may keep any excess value after reclaiming the goods (although contractual provisions to the contrary are commonly found in “quasi-security” lease transactions). In Germany, the title-retaining seller and the financial lessor may terminate the contract, thus obtaining different rights from the third-party fiduciary title-holder. In France and the Netherlands, the title-retaining seller and crédit-bailleur may revindicate (in France limited to 3 months and provided the asset is unaltered, and in case of crédit-bail, the insolvency administrator has the right to continue the automatic coverage of proceeds and products, etc.) but has two very important additional features, of particular significance in asset-acquisition finance: (i) under specified conditions, it may enjoy a super-priority vis-à-vis an earlier perfected security interest (sec. 9-324), and (ii) it may have the benefit of a grace period of twenty days after delivery within which to achieve perfection (which will normally be by filing) (sec. 9-317(e)). Thus, it provides suppliers of asset-acquisition secured credit (of all types, equally) with a very strong tool.

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lease). In Belgium, all creditors in all three categories may seize the goods, but none may keep any surplus. In Italy, the insolvency administrator may elect to continue or terminate the transaction in both title retention and financial lease cases, but the lessor will have to return any surplus while seller may keep all monies theretofore paid. In Spain, the question whether a title-retaining seller and a financial lessor enjoy a proprietary claim entitling them to separate the asset out of the insolvency estate or whether they have “merely” the position of a holder of an non-possessory security right, is not yet settled. Some differences exist as to formalities, although it is universal practice to have some type of writing (often including the creditor’s standard terms and conditions). France and Belgium require a writing, and the title retention must be agreed prior to delivery. In Italy, the title retention must have a data certa (to be effective against subsequent purchasers) and registration is required in some instances in order to enjoy effectiveness against subsequent purchasers. In Spain, the title retention and third-party financing must be notarized and registered. In the Netherlands, there are no formalities for title retention, but if, because of its terms, it falls within the category of a hire-purchase (huurkoop), strict formalities requirements apply. In sum, it would appear that financial lessors, absent re-characterization, are in the best position in all the countries studied in that (i) they are treated as owners rather than secured creditors (which often makes the difference between getting much or getting nothing in the case of insolvency), (ii) their remedies are based on the lease provisions rather than on rules of law applicable to secured creditors (as noted above, this is true also in Quebec, despite the extension of the hypothecary enforcement regime to title-retention transactions) – except in Belgium with respect to the rule precluding forfeiture of any surplus – and (iii) leases need not be registered (except in France).

Case Study 5 Case Study 5 is the matter of bona fide acquisition. All of the countries studied have some degree of protection for certain bona fide subsequent acquirers with respect to goods subject to a security right, and in all of them delivery to the acquirer is essential to gain such protection. Nevertheless, the protection is far from identical in all the countries. In analyzing this issue, there may be distinctions both as to whether the bona fide purchaser is a buyer or a subsequent pledgee who takes possession or a seizing creditor and as to whether the goods in question were subject to a security interest, a retention of title in favor of the seller’s supplier or a financial lease in favor of the seller’s lessor. And, of course, there may be

Introduction

25

differences based on the nature of the goods, the “professional” status of the buyer, the extent of inquiry the buyer is obliged to make, the effect of the existence of a registration of the right being asserted and the effect of the buyer’s actual knowledge of the existence of the right being asserted. In addition, there are differences in the role of the courts in developing and applying the bona fide purchase doctrine. This Case Study is divided into two parts, the first dealing with inventory and the second with equipment. The distinction is made because in the inventory context, (i) there is usually express authorization to sell in the ordinary course of business (and, in England, where the security right would be a floating charge, “license to deal” is inherent in that device), and, even in the absence of express authorization to sell, (ii) both the secured party and the debtor expect (indeed, desire) the sale of the inventory, generally relying (at least in the economic sense) on the sale proceeds for repayment of the financing. Sale of inventory in the ordinary course comports with everyone’s expectations. In all the countries studied, the buyer of encumbered inventory that buys in an ordinary course of business transaction would likely be protected. However, because the rule is formulated as a general bona fide purchaser rule, to be applied by courts on a case-by-case basis, there might nevertheless be some differences in outcomes based on the content of “bona fides” in the particular country – which might vary, for example, based on whether the buyer had knowledge of the existence of the perfected security right, whether a registry exists and whether constructive notice is held to be imparted by a registration of the security right, or whether the buyer, if it is a professional buyer as in the Case Study, has a duty to search a registry or make other inquiries to discover the right.21 21

Under UCC Article 9, the rules are articulated as follows: sec. 9-315(a) provides that, except as otherwise provided elsewhere in Article 9, a security interest continues in collateral notwithstanding disposition unless “the secured party authorized the disposition free of the security interest” (droit de suite); and sec. 9-320(a) provides that “a buyer in ordinary course of business takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.” This latter rule must be read with sec. 1-201(b)(9), which defines “buyer in ordinary course of business” as “a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person … in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller’s own usual or customary practices ... A person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt is not a buyer in ordinary course.” The key difference, therefore, between the countries studied and UCC Article 9 derives from the fact that, under

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In the context of the sale of encumbered equipment (i.e., inventory), however, the content and applicability of the bona fide acquisition rule differs among the countries studied. In this context, there is rarely an authorization to sell, and it is not the expectation of the secured party that the equipment will be sold by the debtor, who holds it for use. Even if it might be normal to sell the equipment after it has begun to wear out or is becoming obsolete, the secured party expects the debtor to inform it of the sale and obtain its consent, which will typically involve payment of all or part of the sale price to the secured party or the assumption of the debt by the buyer. In some countries, bona fide acquisition is nevertheless possible, although it is likely to receive much more intense judicial scrutiny. In the equipment context, the buyer is more likely to be a professional and a higher standard of care, possibly a duty to inquire, might well preclude the buyer’s taking free of the security right. Even if there is not a duty of inquiry, would actual knowledge of the existence of the security right preclude bona fide acquisition? Would it be reasonable in all cases, or even in any case, for the buyer with knowledge of the existence of a security right to assume that its seller will pay the proceeds to the secured party? In France, both a gage sur fonds de commerce and the gage sans dépossession require registration for effectiveness of the right against third parties. For these devices, under an express statutory provision, registration precludes bona fide acquisition; for a nantissement d’outillage, a plate must be affixed to the machine in order to preclude bona fide acquisition (although such affixation is not, unlike registration, a requirement for effectiveness). In Italy, the general rule on bona fide acquisition is displaced in some instances when registration is required, e.g., mortgages on registrable assets and registrable title retention (though, in the latter case, if the collateral has moved from the jurisdiction of the Tribunale in which the registration was made, the registration will not have this effect). Registration of other security rights does not displace the bona fide purchase rule; this is notably true with respect to the Art. 46 Bank Charge. Since application of the bona fide acquisition rule takes into account of all the circumstances (type of assets, commercial nature of the parties, etc.), the financial lessor is less likely to lose to a subsequent purchaser. In England, the general rule is nemo dat quod non habet, in principle leaving the subsequent buyer unprotected, but this rule is impinged on by way of several specific statutory provisions. In the finanUCC Article 9, only a buyer meeting the statutory standard in the prescribed situation would be protected, while in the countries studied, there is no such precise limitation and, consequently, less certainty, as the courts have wider space within which they might allow loss of the collateral. This is of greater significance in the context of non-inventory collateral.

Introduction

27

cial lease context, there is no statutory provision and, thus, of the three categories of earlier right, the financial lessor is the least likely to lose to a bona fide purchaser.22

Case Study 6 Case Study 6 confirms that none of the countries studied allows a possessory pledge to be accomplished by the mere declaration that the pledgor holds the goods for the benefit of the pledgee. All require true, not fictitious, dispossession, i.e., that the pledgor be deprived of the unilateral ability to deliver possession to a third person. Of course, the secured party may have possession itself (directly) or through a designated third party subject to the sole control of pledgee or to the joint control of the pledgee and the pledgor (sometimes referred to as indirect possession). Of course, indirect possession is not fictitious, as the pledgor does not have exclusive control over the third party. Also, the matter of fictitious possession should be distinguished from the circumstance where goods are covered by a negotiable document of title, in which case one typically may perfect a security right in the goods either by taking possession of them directly or by taking possession of the document – this reflects not fictitious possession by the pledgee of the goods but rather actual possession of an item that constitutes legal control over the goods. Even in those countries that expressly permit, without loss of perfection, a temporary delivery of the document to the debtor under specified limited conditions for a specified short time, this is better understood as a temporary and limited exception to the requirement of possession rather than as a fictitious possession by the pledgee.23

22

23

In the context of equipment, UCC Article 9 does not have the buyer in ordinary course rule applicable to inventory set forth above. Thus, under sec. 9-315(a), quoted in footnote 21, supra, a perfected security interest continues in equipment unless a sale free of the security interest was authorized. The other relevant provision, which pertains to security interests that are not perfected, is sec. 9-317, which provides that a buyer and a lessee of goods “takes free of a security interest if the buyer [or lessee] gives value and receives delivery of the collateral without knowledge of the security interest and before it is perfected.” See, e.g., UCC sec. 9-312(c), (e) and (f), the latter two provisions permitting temporary perfection without filing or possession limited to a short list of categories of collateral, limited to twenty days and limited to specific conditions.

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Case Study 7 Case Study 7 relates to the doctrine of over-security. This doctrine, designed to protect a debtor from the loss of its ability to offer as collateral property in which it has some interest and that has some value but of which it is not the owner, exists essentially in only one country, Germany. Even there, its significance has been substantially diminished, having been reduced from a basis for avoiding a transaction in its entirety to an implied term that the debtor can demand the release of part of the collateral if it exceeds the amount of the secured obligation by 150%. Over-security, however, continues to be a ground for avoiding the transaction when the impermissible excessiveness exists at the outset. A 2005 amendment to the French insolvency law provides for liability of a secured party that takes “excessive” security. This has not yet been applied by the courts. Ring-fencing in England of a portion of the value of collateral subject to a floating charge, applies only in insolvency and is not based on the ratio of secured debt to collateral; this seems to reflect a rather different policy.

Case Study 8 Case Study 8 exposes the relatively low degree of protection provided in all the countries studied to sellers that deliver goods without having provided themselves with some form of security (by means of a security right or title retention). Although it is not a very practical or effective device, the privilegio del venditore di macchine provided in Art. 2762 C.c. is unique in that it benefits not only a seller but also a third-party provider of acquisition credit.

Case Study 9 Case Study 9 illustrates the limited categories of assets that are, in the various countries studied, subjected to special registries, and the relationship of such registries to the use of those assets as collateral.

Case Study 10 Case Study 10 presents issues that arise when collateral consists of materials that: (i) are later combined, without losing their character (i.e., not resulting in a different “thing”) but no longer separable, with like materials that are not collateral of the same secured party (e.g., oil encumbered

Introduction

29

in favor of SP-A put in a storage tank together with oil encumbered in favor of SP-B, with the additional possibility that the contents of the tank (as they exist from time to time) might be encumbered in favor of SP-C; sometimes called confusio); or (ii) are later combined, without losing their character, remaining physically separable but no longer identifiable by individual source, with identical materials that are not collateral of the same secured party (e.g., a pile of bricks encumbered in favor of SP-A added to a pile of identical bricks encumbered in favor of SP-B, with the additional possibility that the enlarged pile might be encumbered in favor of SP-C; sometimes called commixtio); or (iii) are later combined with other materials that are not collateral of the same secured party, losing their separate character (i.e., processing such as to result in a different “thing”) and no longer separable (e.g., flour encumbered in favor of SP-A and eggs encumbered in favor of SP-B are baked into cakes, with the additional possibility that the cakes might be encumbered in favor of SP-C; sometimes called specificatio); or (iv) are later attached to other assets (movables, in the context of this volume) that are not the collateral of the same secured party, without losing their character (e.g., an engine encumbered in favor of SP-A is installed in a tractor encumbered in favor of SP-B; sometimes called accessio).24 Instances (i) and (ii) take on special difficulty when, after the combination, oil has been removed from the tank or bricks have been removed from the enlarged pile, as there is no way to identify whose oil or bricks were removed. Instance (iii) takes on special difficulty when the value of the cake is different from the sum of the values of the ingredients (if it is less, how is the decrease allocated; if it is more, does it go to otherwise undersecured secured parties (and, if so, in what proportion) or to general creditors?). The reports do not attempt to present a comprehensive and detailed description of solutions responsive to all these issues, which are presented here to give the reader an appreciation of the complexities presented for secured financing and to suggest the need for rules that further the goals of a modern secured transactions regime. The reports do indicate that the outcomes are determined not by rules designed with the needs of secured financing in mind but rather by historical rules of property law having to do with loss/transfer of ownership. The reports also indicate that there is some variation as to the degree to which contractual provisions can affect outcomes. 24

Compare UCC sec. 9-336 (re “commingled goods”, defined as “goods that are physically united with other goods in such a manner that their identity is lost in a product or mass”; and sec. 9-335 (re “accessions”, defined as “goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.”).

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Case Study 11 Case Study 11 presents the private international law aspects of secured transactions – a problem of special importance in Europe as the single market becomes ever more of a reality. The Case Study involves a typical situation: a tangible asset located in State A that is subject to a security right created under the law of State A is subsequently brought to State B, where a competing interest of any type is created under the law of State B and, thus, a priority conflict arises, litigated in State B. There are three basic questions in such situations: (i) Does the law of state B require that acts taken while the asset was in State A be sufficient to effectively create the security interest under the law of state A (and is the sufficiency of those acts under the law of State B to create a right in any way relevant)? (ii) What conditions (e.g., perfection under the law of State A, similarity/equivalence of the right) must be met under the law of State B in order for State B to recognize the previously created security right? (iii) What steps, if any, can or must the secured party take after the asset has arrived in State B in order to win the priority contest? Among countries whose secured transactions law is harmonized or even substantially uniform (as, for example, among the states of the United States), it is easier to design private international law rules that can, at least implicitly, assume similarity or substantial equivalence of the type of security right and, thus, there would most likely be the possibility to recognize the security right created abroad. To the extent that under the law of State B registration or any other further act in State B is necessary for perfection, a grace period can be introduced into State B’s substantive law that provides, for a security right perfected under the law of State A, a time period within which perfection under the law of State B (the new situs of the tangible, or, if relevant, the debtor’s location within State B) must be completed in order to enjoy continuous perfection.25 It is, however, far more difficult, if not impossible, to reach results that conform to the needs of international business if the secured transactions laws of the countries involved are as diverse as is the case in Europe. Therefore, it comes as no surprise that some reporters (Spain, Italy) would discourage clients from relying on security rights over tangibles in cross-border transactions and would advise them to use personal securities instead. It is for the same reason that there is not a great deal of case law on these issues. It seems that international practice in fact does not rely on security over tangibles. All the countries studied start from the lex rei sitae rule. This means that, for recognition in State B of a right asserted to have been created by acts taken while the asset was in State A, those acts will be consid25

See UCC sec. 9-316.

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ered, as to their sufficiency to create the right, under the law of State A, not that of State B. It should be noted that Germany, perhaps uniquely, seems to accept also a variant of the lex rei sitae rule. Based on a finding that the parties anticipated the move of the goods from a different country to Germany, Germany will enforce the right, as a right created under German law, even if it is based on acts taken while the asset was still in the other country, as long as those acts would have sufficed to create the right under German law had the asset been in Germany when the acts were taken. If the right is found to have been effectively created under the law of State A, the next question is whether the right will be recognized in State B. Recognition of that right seems to be conditioned on the substantive law of State B knowing an “equivalent” security right. Given the great diversity among European jurisdictions, this condition to recognition proves to be a serious hurdle, especially in those legal systems whose general attitude towards secured transactions is relatively restrictive (Spain, Italy, Belgium, France). In contrast, those jurisdictions that are more creditor-friendly on a substantive level are also more easily prepared to accommodate foreign security rights (Germany, England, the Netherlands). Even if applicable conditions for recognition of the right are satisfied, the issue then to be considered is what priority that right will enjoy in State B. Typically, the right must also satisfy whatever is required under the law of the new situs in order to enjoy priority over the local competing claimant. In countries such as Germany, which have no requirement of a further act (beyond agreement) in order to enjoy priority, this presents no problem. In countries that require a further act in order to enjoy priority, e.g., registration, a local registration will probably be required (as noted above, this requirement could be softened by a grace period). In most of the countries studied, such a local further act in and under the law of the new situs would be required (Spain and Italy, and also, at least if the debtor is a domestic entity, France, England). By way of contrast, compliance with domestic registration rules (not truly registration) is not required under Dutch law. In the priority analysis, a court in State B might in addition consider whether it is also necessary that all acts necessary under the law of State A for the right to enjoy to priority over the competing claimant (e.g., registration or otherwise) were taken while the asset was still in State A. This might be an additional condition, under the conflicts rule of State B, to the enjoyment of priority in State B of the right created under the law of State A.

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Annex The German report has a very helpful Annex that discusses two matters that are important to lawyers handling secured transactions. The first presents issues that may arise in the course of a secured transaction but they arise under corporate law – issues relating to upstream security and financial assistance. The second relates to the increasingly common situation when secured credit is extended by more than one lender, and, particularly, when the syndicate of lenders is a changing group. The problem discussed, a doctrinal one, is the consequence of the accessory nature of a pledges (and suretyships and mortgages). The nature of some transactions, and a problem generated by a recent case, make difficult complete avoidance of the issue by use of non-accessory rights. It should be noted that the 2007 French legislation on fiducie included an unrelated provision that gives explicit recognition to the use of collateral agent in a syndicated financing. Both the parallel debt notion (mentioned in the Annex to the German report) and an alternative theory based on a joint and several relationship among the lenders including the collateral agent had been discussed in France, but neither had been tested in French courts. New Art. 2328-1 C. civ. provides that “any security interest may be inscribed, administered and enforced on behalf of creditors of the secured obligation by a person whom they appoint for such purpose in the deed which sets out such obligation”. This does not appear to give all the flexibility that might have been desired, and, at the least, requires each participant to be or become a party to the deed, but it does definitively authorize the utilization of a collateral agent.

III. Harmonisation The reports in this book and the foregoing summaries show once more,26 that some measure of harmonisation or coordination among the Member States of the European Union is urgently needed. The present diversity hinders the effective use of tangibles as collateral if there is the possibility that the assets will be moved across borders. This is especially detrimental to the financing of cross-border sales transactions which are – after all – at the heart of the idea of a Common Market. Despite agreement on the necessity of harmonisation, little has hitherto been achieved in practice. The EC made some attempts in the 1970’s 26

To the same effect see von Bar/Drobnig, The Interaction of Contract Law and Tort and Property Law in Europe (2004), para. 733; cf. also Kieninger, Introduction, in id. (ed.), Security Rights in Movable Property in European Private Law (2004), p. 6, at p. 20 et seq.

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to enact a directive on the recognition of security without dispossession but terminated work in this area in 1980.27 In the context of the Late Payment Directive of 2000,28 the European Commission tried to solve at least the problems associated with the third-party effectiveness of simple retention of title, but failed due to the opposition of a majority in the Council. The content of the final text of Art. 4 para. 1 of Directive 2000/35/EC is reduced to meaninglessness by its reference to the applicable national law as designated by private international law. This has recently been confirmed by the ECJ.29 The only area where the EU has achieved harmonisation is the area of financial collateral arrangements (generally, outside the scope of this volume).30 The extent of the impact, if any, of those implementing legislations on secured transactions law in general is at present far from clear. On an international, worldwide level, both UNIDROIT and UNCITRAL have been active. Under the auspices of UNIDROIT, the Cape Town Convention on International Interests in Mobile Equipment was concluded in 2001,31 and UNCITRAL is currently preparing a Legislative Guide on secured transactions, which is planned to be finalized and approved in 2007.32 The EU has only recently taken some interest in the second project, but has not yet turned into an active participant, although the draft

27

28 29 30

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See Kieninger, Introduction, id. (ed.), Security Rights in Movable Property in European Private Law (2004), p. 6, at p. 22. OJ 8 August 2000, L 200/35 et seq. ECJ 26 October 2006, Case C-302/05 Commission v. Italy. Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements, OJ 27 June 2002 L 168/43 et seq. Cape Town Convention on International Interests in Mobile Equipment (2001), Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (2001) and Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Railway Rolling Stock (2007). The texts of the convention and the protocols are available at UNIDROIT’s website at http://www.unidroit.org (1 August 2007). See also Goode, Official Commentary on the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment (2002); Kreuzer, Internationale Mobiliarsicherungsrechte an Luftfahrzeugausrüstung, in Hager/Schwenzer (eds.), Festschrift für Peter Schlechtriem zum 70. Geburtstag (2003), p. 869 et seq. The most recent available text is A/CN.9/631, to be found at http://www.uncitral. org (1 August 2007). See for background on the project Bazinas, The UNCITRAL Draft Legislative Guide on Secured Transactions, Unif. Law Rev./Rev. dr. unif. 2005, 141 at 141; also see Kieninger, Nationale, europäische und weltweite Reformen des Mobiliarsicherungsrechts – Teil II, WM 2005, 2353 et seq.

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Legislative Guide could certainly serve as a model or at least as a starting point for European countries. Suggestions as to possible means of harmonisation or coordination have been made in scholarly writing as well. There is agreement that a solution purely on the level of private international law is fruitless, because it is not the diversity of conflicts rules that creates the difficulties; in fact, as seen in Case Study 11, private international law in this area, at least in the countries studied, is already fairly similar. Rather, it is the diversity on the level of substantive law that hinders effective crossborder secured transactions. The most radical measure would be a European Regulation on secured transactions law, which would replace national law. This is not likely to find support among the Member States, especially given the fact that secured transactions law is closely interlinked with insolvency and execution law. Solutions that interfere less with domestic law would seem to have a better chance to be realized. Two options are discussed primarily. One is the introduction of a European Security Right (based on a regulation issued pursuant to Art. 308 ECT), which would be added to the existing national regimes and would allow parties to cross-border transactions to opt for a supranational model, recognized in all Member States.33 The other option would be to formulate a European Model Law to be presented as a recommendation to the national legislators. Both possible instruments have their advantages and disadvantages. The advantage of a truly European Security Right (ESR) would be its uniform character and its binding force. Yet, because of these two features, the scope of application and the relationship with co-existing national law must be given close scrutiny. We suggest that the ESR should be a device that is available for all secured transactions irrespective of their domestic or international character, for the simple reason that, since goods and grantors can easily and swiftly move across borders, no-one can know with certainty at the outset of a transaction, whether and when an international element might come into the picture. Because of this wide range of possible applicability, the relationship with conflicting national security interests is of utmost importance. In Member States where some kind of registration or notice-filing system is in place, the ESR and the national systems must be interlinked so that a single point for establishing priority may be found. In countries where no such system exists, e.g. Germany, possibly the only solution is to give priority to a registered ESR as against all unregistered national security interests, 33

This suggestion was first made by Kreuzer, Europäisches Mobiliarsicherungsrecht oder: Von den Grenzen des Internationalen Privatrechts, in Stoffel/Volken (eds.), Conflits et harmonisation: mélanges en l'honneur d'Alfred E. von Overbeck à l'occasion de son 65ème anniversaire (1990), p. 613 et seq.

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irrespective of their time of creation. Another issue is the treatment of the security right in the debtor’s insolvency. A pragmatic (in the sense of likely acceptability by the Member States) but perhaps not wholly satisfactory solution is simply to provide for the ESR’s effectiveness, but leave it to the national laws of the Member States to define the secured creditor’s rank in relation to privileged creditors, the mechanisms of enforcement, the possibilities of avoidance and the possibilities of the administrator to put a stay on enforcement in the interest of reorganisation; inclusion of a “most-favored-device” provision might mitigate some of the defects of this approach. Thus, a European Security Right would in fact be far from uniform. Its value for the parties would to a considerable extent depend on the underlying national laws. However, its introduction could still be an important contribution to the creation of a single market with respect to secured transactions, because, at the least, it would provide a single device the effectiveness of which would be recognized in and out of insolvency in all Member States. In contrast to a European Security Right based on a Regulation, a model law would be a mere recommendation, leaving to the respective legislators the question whether and to what extent to reform each country’s national law (this could be based on Art. 249 ECT). The American experience shows that uniformity can nevertheless be achieved, but it would remain to be seen what level of harmony Europe can reach given the differences between the European Member States with respect to the overall legal, political and social framework. The model law concept has the advantage that it does not add yet another security right to the already existing number of available security devices; instead it would invite reform within each national system, thereby (we hope) rationalising and simplifying the existing law. As more and more Member States would reform their national law according to the recommendations of such a model, the solution of cross border cases would become easier. As noted in the context of Case Study 11, private international law can solve the problem of “conflit mobile” through recognition and the introduction of grace periods far more easily when the law at the old and the new situs are relatively harmonious. The prospect that the recognition of security rights in other European jurisdictions will depend on following the model law could serve as an incentive to national legislators. Apart from the form, the substance of either a Regulation on a European Security Right or a model law must be considered. This Introduction can, of course, not discuss the topic in detail. At UNCITRAL, experts and working groups have worked intensively over several years seeking to develop a Legislative Guide for a modern secured transactions law. Yet, considering the national reports in this volume, several points come to the fore. A key issue is registration. Of the seven jurisdictions studied,

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only Germany and the Netherlands completely lack publicity for security rights by means of registration. The other five do have registration requirements in place, at least for security rights in the strict sense, although it appears that the majority do not function in a sufficiently effective manner. Recent reforms and reform proposals in Europe, however, indicate that a UCC Article 9-style notice filing system may well serve as the model for the future.34 Another key issue is the lack of a clear, comprehensive and coherent priority regime, coordinated with the insolvency law and designed to effectively encourage secured credit and support efficient business practices. In addition, form requirements and postdefault remedies should be reconsidered in order to ascertain that they too effectively encourage secured credit.

IV. Perfection and Priority under UCC Article 9 (with special focus on notice filing) This portion of the Introduction deals with two concepts that are important in any discussion of security rights: what is required to make a security right effective against third parties, erga omnes (sometimes herein, “perfection”), and the rules that determine the outcome (herein, “priority”) of a contest between a security right and any other competing claim to the collateral (i.e., whether the secured party will enjoy the economic benefit of its right in the collateral in preference to the right of a competing claimant). The focus will be, for comparative purposes, on the notice filing system and the priorities regime under UCC Article 9.

1.

Meaning of the term “perfection”

Some preliminary comments about “perfection.” This term is used in UCC Article 9. It is also used in international instruments35 and in numerous scholarly writings.36 The term is somewhat misleading to the extent that it suggests that a perfected security right always wins and that an unper34

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See in greater detail Kieninger, Nationale, europäische und weltweite Reformen des Mobiliarsicherungsrechts – Teil I, WM 2005, 2305 et seq. See, e.g., Art. 1(1)(i) of the Hague Securities Convention (Hague Convention on the law applicable to certain rights in respect of securities held with an intermediary (2006), available at http://www.hcch.net (1 August 2007)): “completion of any steps necessary to render a disposition effective against persons who are not parties to that disposition.” See, e.g., Goode, Commercial Law (3rd. edn. 2004), p. 624; Beale/Bridge/Gullifer/ Lomnicka, The Law of Personal Property Security (2007), para. 7.01 et seq.

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fected security right always loses. It is the priorities regime that determines whether in a particular contest, a security right (perfected or not) will prevail over or lose to a particular competing claimant. Perfection can mean whatever the particular legal system chooses to have it mean. It is not an essential term having a single inherent meaning from which results are derived by reasoning. In UCC Article 9, it is simply a tool of the priority regime. It is completely irrelevant as between the debtor and the secured party. The term perfection plays a very useful shorthand role in the drafting of UCC Article 9, as it permits the statement of many priority rules to be made more concisely by a simple reference to the status of the security interest as perfected or not and, in some cases, to the date of the perfection. In the UNCITRAL Legislative Guide, the term is avoided, and instead a stark dichotomy is presented – a security right either does have third party effects or it has none whatsoever (in which case, there is no priority contest at all). This is presented terminologically as whether or not a security right has achieved “third-party effectiveness.”37 That term as used in the UNCITRAL Legislative Guide is, thus, not synonymous with perfection under UCC Article 9. Under UCC Article 9 (and the UNCITRAL Legislative Guide as well), even a security right that is “unperfected”, or is not “effective against third parties”, has value. A security right not effective against third parties nevertheless constitutes a proprietary right in the collateral, which the secured party may enforce against the debtor pursuant to the rules of the secured transactions regime governing post-default rights and remedies. These remedies are not enjoyed by an unsecured creditor, who has no rights in any particular asset until after obtaining seizure by a judicial officer (usually preceded by obtaining a judgment). Moreover, under UCC Article 9, an unperfected security interest has even greater value, enjoying priority over certain competing claimants. Perfection is not defined in UCC Article 9 by a description of what perfection is. Instead, we are told when and how it may be achieved. Most importantly, its contours are delineated by its consequences for questions of priority – by a series of rules that prescribe a particular priority status (this really is multiple different statuses depending on the nature of the competitor), inter alia, by listing the competing rights that defeat (either subordinate or cut off completely) an unperfected security interest (e.g., certain buyers of the collateral and certain “lien creditors”; see UCC sec. 9-317)). Further, and this is true not only under UCC Article 9 and under the UNCITRAL Guide but also under most legal systems, being perfected does not mean being invulnerable – it is a relative not an absolute position. 37

See UNCITRAL Legislative Guide (footnote 32), Ch. V.

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For example. even a perfected security interest will be cut off by a “buyer in ordinary course” of inventory from a seller in the business of selling goods of that kind (similar but not identical to a “bona fide purchaser”) and will be subordinated to a subsequent purchase-money security interest. Likewise, a security right that is opposable aux tiers will in most legal systems be defeated by a bona fide purchaser (however defined) and will be subordinated in many systems to specified privileges, most importantly, in insolvency. Before describing how and when perfection is achieved, it is useful to jump ahead briefly to the topic of priority, since the key role of perfection is in the priority scheme.

2.

Meaning and importance of “priority”

The general point is that a clear and certain priorities regime is essential to achieving the goal of a modern secured transactions law. A creditprovider must know where it stands in the ranking scheme in order to evaluate its legal risk, to properly price credit and to determine whether and how much credit to extend. Although a priorities regime might be produced in other ways, providing, by legislation, a detailed comprehensive list of outcomes provides the maximum ex ante certainty, and does so at the earliest possible time, and, if these rules are carefully tailored to support sound business practices, does so in the most efficient manner – and thus is the approach most consistent with the goal of the secured transactions law to promote the availability of credit secured by movables. If development of priority rules is left to the courts, decades of uncertainty may ensue. Further, judges are not well-equipped to ascertain market practices and market needs so as to derive the most efficient rules and are not institutionally capable of drawing arbitrary lines. UCC Article 9 provides an elaborate array of very specific carefully nuanced rules that determine a definitive outcome for each contest. This minimizes the need for ex post fact-sensitive judicial determinations, minimizes litigation and provides the greatest possible ex ante certainty to the actors. Examination of particular priority rules under UCC Article 9 will illustrate these points. As noted above, a priority contest in the secured transactions field is not limited to merely a matter of ranking between two secured parties, and the first in time/first in right rule surely does not answer all questions. The term priority is used in this volume in the broad sense of any competition between any two persons both of which claim a proprietary right in the same asset. It is not limited to the contest between secured party A and secured party B. It must be observed that even under the unitary system of UCC

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Article 9, in which there is only one “type” of security interest, and thus only one type of secured party, there are nevertheless important distinctions to be made, and a far more sophisticated analysis is required. Either or both secured party A and B may or may not have perfected its security interest; either, both or neither may have filed in the public record a financing statement covering the collateral; either or neither may have possession of the collateral; either, neither or both may have provided acquisition financing that enabled the debtor to acquire rights in the collateral; one may base its right in the asset as its initial collateral while the other may base its right in the asset as its initial collateral or as proceeds of its initial collateral; and either may be claiming that its security interest secures an initial advance or a subsequent advance. Thus, it is clear that even this competition is far more complex than appears at first blush. In UCC Article 9, the concept of priority includes also the contests between each category of secured party and (i) the insolvency administrator of the debtor; (ii) a seizing creditor – one that has obtained a right in a specific asset by virtue of some judicial act (referred to in UCC Article 9 as a “lien creditor”); (iii) a buyer or other transferee from the debtor (the acquirer may or may not qualify to take free of the security interest); (iv) a secured party that was granted its security interest by a transferee from the debtor; (v) a person that repairs or stores the collateral; (vi) a donee from the debtor, etc. An unperfected security interest is subordinate to the trustee in bankruptcy.38 We mention the insolvency administrator first because the insolvency risk is generally the key risk that concerns secured parties. Most debtors are honest and do not, at least not knowingly, engage in inappropriate double financing. Even honest debtors, however, may become insolvent. Also, it is in insolvency, at least in many countries, that many of the supervening privileges come into the picture – in some countries making even the “perfected” security rights worthless. On the other hand, under UCC Article 9, a donee does not take free of an unperfected security interest, nor does a buyer that took delivery with knowledge39 of the unperfected security interest (UCC sec. 9-317). 38

39

Indeed, under U.S. bankruptcy law, an unperfected security interest is subject to avoidance by the trustee, reducing the holder of the unperfected security interest to the status of an unsecured (general) creditor. UCC sec. 1-202 defines “knowledge” as “actual knowledge” and explains that a person has “notice” of a fact if the person “has received a notice or notification of it; or from all the facts and circumstances known to the person at the time in question, has reason to know that it exists.” The same section elaborates on how a person “gives” a notice and when a person “receives” a notice and on how these concepts are applied in the case of an organization.

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3.

How perfection is achieved

Returning to the topic of perfection, the most common method of achieving perfection is by “filing” a “financing statement” under the UCC notice filing regime. Before presenting a description of the filing system under UCC Article 9, however, it is necessary first to provide some context. We begin with a discussion of the concept of publicity and the role that the filing system plays in the secured transactions regime. Then we discuss how perfection is achieved under UCC Article 9, after which we focus in detail on the UCC Article 9 filing system, highlighting the contrast between it and land or other registration systems. Secured transactions law has always recognized the possessory pledge, and it is traditionally explained that possession of the collateral by the pledgee provides “publicity”. But publicity is, of course, not an end in itself. And, it is important to consider what one learns from the publicity provided by dispossession of the pledgor – in fact, very little. From the fact that the purported owner of a tangible is no longer in possession of it, one is merely warned to inquire why the prospective borrower, claiming ownership, does not have possession. The fact of possession in a person other than the owner does not confirm that the possessor holds the asset as pledgee – it might instead hold the asset as a temporary user that has leased it, or borrowed it gratis, or hold it for safekeeping or to repair or improve it, etc. Even once it is learned that the asset is held in pledge, we learn nothing from the pledgee’s possession about the nature or amount of the secured obligation or other terms of the credit agreement. These points are important because they should inform the design of a registration system (which is, at least historically, explained as a substitute for dispossession of the pledgor). In addition to the very limited nature of the publicity provided by possession, it is also important to keep in mind that, as noted above, publicity is not an end in itself. Rather, it is simply a tool, and not an exclusive or overriding tool, in the structure of an efficient secured transactions regime. It provides an inexpensive and efficient method of reducing risk. It has historically played a role in attributing third party effectiveness to a security right , and, properly used, that role is extended into the matter of priorities (although, as we shall observe below, neither third-party effectiveness nor the quantum of information provided by publicity is necessarily a determinant in all priority contests). Under UCC Article 9, perfection is achieved, with respect to the security interest in a particular item of collateral, only when, in any sequence, (i) the security interest has attached to that item of collateral (see UCC sec. 9-203), and (ii) the perfection step (filing or other perfection method) has been accomplished. Attachment occurs with respect to a

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particular item of collateral when all of the following have occurred (a) a security agreement describing the collateral has been authenticated by the debtor; (b) the debtor has rights (which need not be full ownership) in the collateral or the legal power to transfer rights in the collateral; and (c) value has been given.40 Perfection can be achieved under UCC Article 9, depending on the nature of the collateral and other specified conditions, by one or more of the following: (i) possession. This must be actual, not constructive or fictive. It may be (a) directly by the secured party or its agent; or (b) indirectly through the possession of a third party that has agreed to hold for the benefit of the secured party (any person not subject to the exclusive control of the debtor, even a person that is acting for both the secured party and the debtor) – the key being dispossession of the debtor so that it is no longer in exclusive control of the asset able freely to deliver it to a third person; or (c) through possession of a negotiable document, or being the issuee of a non-negotiable document, issued by a bailee (e.g., a warehouseman or a carrier) and covering the goods. (See UCC secs. 9-313 and 9-312.) (ii) filing. discussed in detail below. (See, generally, Part 5 of UCC Article 9.) (iii) “control”. This is a defined term describing a mechanism for achieving perfection (UCC sec. 9-314) when the collateral is a deposit account,41 investment property (most importantly, a securities account),42 letter-ofcredit-rights,43 or electronic chattel paper.44 The key innovation is that the secured party’s control need not be exclusive, i.e., the debtor may have continued access to and the right to dispose of the collateral, e.g., spend the money in the deposit account or trade the securities in the securities account. Thus, this method of achieving perfection provides flexibility needed to support commercial practice. Control is usually 40

41

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44

Note that this does not mean “new value”, a term used in only two very narrow contexts. See UCC sec. 9-102(a)(57) and the related Official Comment. “Value”, defined in UCC sec. 1-204, includes, inter alia, taking as security for a preexisting claim and any consideration sufficient to support a simple contract. UCC sec. 9-104. Control is the exclusive method of perfection for a deposit account as initial collateral. UCC secs. 9-106 and 8-106. Control is an alternative method of perfection, depending on nature of the investment property. UCC sec. 9-107. Control is the exclusive method of perfection except when the letter-of-credit-right is a supporting obligation. UCC sec. 9-105.

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achieved by a private agreement (e.g., with the depositary bank or the securities intermediary). This provides a date certain but not publicity in its normal understanding, and it provides a highly effective enforcement mechanism in event of default (e.g., because the depositary bank has agreed to comply with instructions originated by the secured party directing disposition of the funds in the account without further consent by the debtor, speedy inexpensive enforcement by the secured party is enabled). (iv) automatic perfection, i.e., perfection is achieved without any of the foregoing methods, in specified instances with respect to particular types of collateral or particular types of transactions (UCC sec. 9-308–9-310). These exceptions reflect policy determinations that any benefit that might be derived from performance of one of the other methods of perfection is outweighed by the burden on particular desirable commercial practices or the taking of security interests in particular types of collateral. (v) temporary perfection, i.e., without any of the foregoing methods but for only a specified short period of time and only in specified instances under specified conditions (UCC sec. 9-312(e)-(h)). These temporary exceptions reflect the policy determination that accepting a short period in which the security interest may be undiscoverable due to absence of filing or possession is necessary to facilitate legitimate and sound commercial practices. Although this part of the Introduction focuses primarily on filing, the preceding discussion of other methods of perfection is presented to make the point that filing is simply one method of achieving perfection, and the further point that perfection can be achieved in certain instances with even less “publicity” than is provided by filing.

4.

Filing/registration

Let us now turn to filing. The UCC Article 9 filing system’s primary purpose is to provide a simple, inexpensive, easy-to-use and speedy perfection mechanism, compatible with efficient commercial practices, that plays a key role in the priority regime. It also performs two other important functions. First, it supports due diligence on the part of a prospective supplier of credit, as it serves efficiently to assist in the discovery of potentially competing security interests. It must be understood, however, that the filing system is not the exclusive or even primary source of such infor-

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mation. The primary sources of information for a prospective extender of commercial credit are the debtor’s loan application and the debtor’s books and records (including the loan documents of existing creditors); this is supplemented, as appropriate, by information obtained directly from other creditors and other public or private sources of credit information. Thus, in this respect, the secured transactions filing system serves mainly to confirm that the debtor has made full disclosure. It exists to provide warning of the need for further investigation, rather than as the source of data. Second, the filing system also provides a data certa to prevent backdating, without the need for notaries or other expensive formalities. It is equally essential to understand what filing is not. It does not create a security interest – that is done by a security agreement (no prescribed form or terminology or even necessarily all in a single document). Filing does not evidence the existence of a security interest – indeed, filing of the financing statement may occur even before a security agreement has been entered into. Filing, by itself, does not perfect a security interest. Filing can occur before or after the security interest is created, before or after there is a security agreement, before or after the debtor has any rights in the collateral, even before any collateral comes into existence. Filing does not establish the existence of (or provide any information about) a secured claim – a security interest may secure future obligations of any nature or amount. Filing does not establish the existence of the described collateral or that the debtor has or ever will have any rights with respect to it – a security interest may cover future as well as existing collateral. A filed financing statement is not connected to any particular transaction or any particular security agreement, but rather serves to perfect security interests in all collateral that falls within the financing statement’s description whenever and however the security interests arise. In sum, filing does not constitute the registration of an existing security right but rather is essentially a warning (much like the dispossession of the debtor), a form of advertisement; it indicates only that a security interest may then or thereafter exist in assets that fall within the description provided, in which the debtor then or thereafter may have an interest. The UCC Article 9 filing system does not result in “constructive notice” of the existence or contents of a filed financing statement. The priority regime is based on specific rules that determine outcomes. The rules may be expressed in terms of a perfected or unperfected security interest, but do not turn on the actual knowledge or presumed notice of the existence vel non of the filed statement on the part of competitors. Indeed, knowledge of the existence of the security interest is rarely relevant in the UCC Article 9 priority regime. It makes no difference whether the competing claimant did or did not search the public record, and courts are not in-

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vited to formulate rules based on whether the competing claimant should have a duty to search; it is the simple objective fact of filing that determines the outcome.

5.

Content of the filed financing statement

Whether filing achieves all of the purposes described above, and does so in the desired speedy, inexpensive and simple fashion, depends on the design of the system. The UCC Article 9 filing system (and likewise the systems in New Zealand and Canada) achieves those purposes in that fashion primarily because it is a notice filing system. It does not entail the presentation of either original documents or summaries, particulars or bordereaux. And, consequently, not only is electronic data entry facilitated, but, more importantly, it involves no vetting or examination by registry personnel – there is no need for a gatekeeper. Nothing “signed” by the debtor need be presented – the filing officials would have no way of determining the authenticity of the signature in any event. Such a requirement would only add cost and delay to the process, with no corresponding benefit. Instead, notice filing requires only the presentation, usually by electronic means, of only three items of data – name and/or other reliable identifier of the debtor and the secured party (or the latter’s representative) and a general description of the collateral. By confining the content of the filed financing statement to these three elements, the system serves the purposes described above at the lowest possible cost, the least likelihood of error by the filing person, no intervention by registry personnel and with minimal disclosure of what might be perceived as confidential information. Since the secured party identified in the financing statement may be a representative of the person that actually extends the credit, the identity of the credit-extender need not be put on the public record. This not only serves business needs for confidentiality that may exist in particular circumstances, but also avoids problems presented when syndicated loans (the common occurrence of financing being provided by a group of creditors, which may well involve subsequent changes in the composition of the syndicate) are secured by “accessory” security rights. The ability to use an agent or security trustee, both operationally and as the recipient of the security right (and, concomitantly, the person indicated as secured party on the filed financing statement) is very convenient for syndicated loans. As mentioned above and more fully discussed in the Annex to the German Report, this problem is currently dealt with in German and other Continental practice by the so-called “parallel debt” structure, in which the debtor agrees to owe the borrowed amount not only to the actual

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syndicate lenders but also (rather fictionally) to the security trustee. The use of a collateral agent has recently been the subject of a “fix” in the French 2007 fiducie legislation.45 This is not an issue at all under UCC Article 9. UCC sec. 9-102(a)(72)(E) defines “secured party” to include “a trustee, indenture trustee, agent, collateral agent, or other representative in whose favor a security interest…is created or provided for”, and UCC sec. 9-502, which specifies the required content of a financing statement, states that it is sufficient if it “provides the name of the secured party or a representative of the secured party.” Description of collateral seems to be a more difficult issue under many European legal systems than it is under UCC Article 9. Indeed, the matter of adequately describing the collateral seems to be the only significant issue in the use of the otherwise extremely flexible German Sicherungsübereignung. Under UCC Article 9, neither the security agreement nor the filed financing statement must identify collateral specifically. Collateral can be “described” (see UCC sec. 9-108) in any of various levels of generality (e.g., brown leather upholstered swivel chair of X cm height, Y cm width and Z cm depth/chair/office furniture/furniture). Even the most specific of these alternative descriptions would not necessarily enable a stranger to distinguish between two chairs that meet that description from among the hundreds or thousands that meet it, any number of which might at any time or from time to time be in the debtor’s possession). The description may also use legal categories used in UCC Article 9 (e.g., “equipment” or “inventory”) and, in the filed financing statement, the collateral may be indicated still more broadly by language such as “all present and future assets” or “all personal property.”46 It is not feasible specifically to identify most movables (excluding, of course, registered, and thus uniquely identifiable, assets such as ships and aircraft and, in many countries, motor vehicles) and the requirement of an effort to do so is likely to lead to under-inclusion or other types of error, to the assertion of need for a gatekeeper at the registry or to litigation. It is important to keep in mind that the indication of the collateral covered in the filed financing statement, however phrased, does not have the effect of creating a security interest in an asset not covered by the description in the security agreement, and that, in the event of a dispute, it will be the secured party that has the burden of proof to establish that a particular asset is covered by the security agreement (and, if the issue is perfection, also by the filed financing statement). 45

46

Art. 2328-1 C.civ. states that “any security interest may be inscribed, administered and enforced on behalf of creditors of the guaranteed obligation by a person whom they appoint for such purpose in the deed which sets out such obligation.” This issue is discussed in Leavy, In France We Trust, IFLR, April 2007, at p. 67. See UCC sec. 9-504.

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The land registry – typically slow, rigid and expensive – is not an appropriate model for the movables registry. Unfortunately, many of the existing movables registries in Europe are in many ways replications of the land registries. Land registries are ownership registries and in many countries are entitled to good faith – i.e., it is the registration that establishes ownership, notwithstanding external facts that might indicate ownership in someone else. Moreover, the need for absolute certainty with respect to land ownership requires that the registry be guarded by sturdy walls and vigilant gatekeepers. Mortgages were simply added to the existing ownership registries. With movables, however, there is no registry of ownership, and thus registration of security interests in movables entails a registration independent of ownership. Also, unlike the case of land, it is often difficult to provide a unique identification for movables. Further, land finance is usually longer term credit than that secured by movables and usually does not involve collateral of changing content. These essential differences explain the absence of a need for sturdy walls and vigilant gatekeepers at the movables registry, features that are inconsistent with the needs for low cost and speed, as to both filing and searching, that are essential to a modern movables secured transactions regime. It should also be noted that UCC Article 9 does not require that any information whatsoever about the nature or amount of the secured obligation be publicized, not even a maximum amount. Several reasons militate against imposing a requirement that a maximum amount be stated in the filed financing statement. First, it is likely to lead to inefficiency; when the debtor seeks more credit from the secured party, such a requirement would force the secured party to conduct a new search to determine whether there have been any financing statements filed by others subsequent to the initial filing and to amend the initial filing to raise the stated maximum. Second, such a requirement would likely often be satisfied by the insertion of an inflated amount (thereby defeating the asserted objective of the requirement). Third, such a requirement might tempt the enacting state to base the amount of the fee on the amount stated in response to the requirement. While requiring the statement of a maximum amount is routine in land mortgage registration, the shorterterm nature of financing secured by movables and the indefiniteness and volatility of valuation of movables collateral both make it a relatively rare case that subordinate financing will be extended in reliance on the stated maximum amount without subsequent financiers making some arrangement with the earlier-filed secured party. It is asserted that the requirement of a maximum amount will induce greater extension of credit by lenders that are willing to be subordinate to a fixed amount and are not willing to enter into an inter-creditor agreement with the earlier-filed secured party. While this may indeed be

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the case in unusual circumstances, such instances (where the junior creditor is sophisticated or is advised by sophisticated counsel, and the valuation of the collateral is so definite and so stable that the junior lender is prepared to rely on that stated maximum) are sufficiently rare that the burden of such a requirement outweighs the asserted benefit. Further, requiring the statement of a maximum amount would force the parties to discuss and agree on a maximum monetary amount – an issue that might not otherwise have been raised in the negotiation. Confronted with the need to state a maximum amount, the secured party will likely prefer to insert an amount greater than actually contemplated to be advanced in order to cover unforeseen events. Also, requiring the statement of a maximum amount would generate an additional required element on the financing statement the absence or lack of clarity of which might then be the basis for rejection of the filing by a gatekeeper. Although it is asserted that the first-to-file rule unaccompanied by a maximum amount requirement gives the earlier-filed secured party an unacceptable monopoly position, this has in fact not proved to be the case, at least not when there is active competition among sources of credit (the first-filed secured party can be paid off by a willing new lender). In fact, it will often be the case that the first-filed secured party may be the better source for additional credit, as it is already familiar with the debtor (avoiding investigation costs that would be incurred by a new lender) and likely to be eager to extend additional credit to a good customer. Also, stating a maximum amount in the public record may reveal information that the debtor would prefer to keep confidential. Given the rarity of the situation where movables collateral will have a definite and stable value substantially in excess of the stated maximum amount (valuation of movables, in contrast to land, is far less definitive, far less stable, and usually decreases rather than increases) and where negotiating an inter-creditor agreement will be unacceptably burdensome, requiring a maximum amount to be stated in the filed financing statement will rarely encourage junior lending. Thus, although there will certainly be some instances when having a maximum amount stated in the public record might benefit a debtor (and, of course, a debtor can always seek such inclusion if it believes that to be in its interest), a requirement that this be provided in all cases seems quite unjustified. Keeping the public notice simple and with minimum required items seems far more desirable. Indeed, UCC Article 9 also does not require that the security agreement specify a maximum amount secured. In fact, the obligation secured need not be a monetary sum – it may be performance of an obligation (and this obligation need not be capped by an agreed maximum liability).47 In 47

Many civil law systems are similarly permissive on this point.

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any event, this issue is taken care of by the basic requirement that the secured party has the burden of proving not only what constitutes its collateral but also what obligation is secured by the security interest. The desire to avoid dispute will normally be sufficient motivation for the parties to identify the secured obligation in the security agreement with some care, although this does not necessarily suggest the specification of a monetary amount; it is not uncommon that a security agreement will refer to “all monies owed” or “all present and future obligations of any nature owed by the debtor to the secured party.” Imposing a formal requirement beyond this seems inflexible and unjustified. The fact of granting a proprietary right in its assets (and, in the case of UCC Article 9, the requirement that the debtor authenticate a record providing for the security interest) is sufficient to apprise the debtor of the seriousness of its act. Notice filing and the minimal nature of the required data facilitates electronic filing and searching, allows the registry to be operated with virtually no personnel and at virtually no cost, and allows filing and searching to be accomplished on a virtually real-time basis; minimum human intervention also serves to minimize the risk of human error. As noted above, most of the countries studied (France, England, Belgium, Spain, Italy) have some sort of public registration for at least some types of security rights, although, regrettably, none of these has a modern electronic notice filing system; only Germany and the Netherlands have essentially totally secret rights. Opponents of filing often refer (usually without quantification) to costs that would be entailed to establish a registry. Experience in the United States (states are in the process of moving from paper to electronic systems), Canada and New Zealand has demonstrated repeatedly that the costs of creation and installation of an electronic notice filing system are low and quickly recouped, that costs of current operation of such a system are low and are covered by minimal filing fees, and that the business world adapts to the system easily and without great cost or dislocation, the internal costs incurred in performing searches and filings being typically only a small fraction of the due diligence and documentation costs routinely incurred in secured credit transactions. Indeed, if a country believes that the economic and social gains derived from facilitation of secured credit justify such measures, it might well consider subsidizing not only capital costs but even ongoing operating costs. The matter of costs, like all other matters concerning the legal and functional design of the system, should be determined based on its impact on the achievement of the ultimate goal of the secured transactions regime. In the United States, the filing fees generally run between $10 and $30 (keep in mind that a single filed financing statement may support millions in credit over an extended period of time), and search fees are also quite low (in-

Introduction

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deed, in many states, electronic access to the index is offered free of charge). In addition to assertions about costs, opponents of filing also claim that such publicity is unnecessary because “everyone knows” that buyers buy under title retention and that businesses encumber their assets to obtain credit. This argument has the perverse effect of producing the opposite of the “false wealth” effect sought to be negated by publicity when possession is separated from ownership – it produces in effect “false poverty”, i.e., everyone is told to assume that the assets in the debtor’s possession are not held free of encumbrances. It is difficult to see how this approach would maximize efficiency and reduce the cost of credit. In a “secret lien” regime, no creditor can ever be absolutely certain that it was the first to receive the security right. Uncertainty and the extra diligence performed to reduce uncertainty can only serve to increase the cost of credit. A final point about filing – should it be national or local? Because the United States is a federal nation and secured transactions law is, generally speaking, a matter of state rather than federal law, the UCC filing systems are necessarily creations of each state rather than a single national filing system. Regrettably, many of the other countries that have registries operate them on a local rather than a nationwide level, even though they are not compelled to do so by reason of federalism. This generates issues concerning submission and searching in the right place and the effect of movement of the collateral (or the debtor, if that is relevant connecting factor) after the initial registration – all of which would be avoided by a single national index. Modern technology negates any argument for local filing based on convenience. In the virtual world created by an electronic system, there is in effect a single registry located everywhere (location of the server being irrelevant and input being possible from everywhere).

6.

The UCC Article 9 priorities regime

It should be kept in mind that priority is not simply a matter of determining how the proceeds of post-default liquidation of the collateral are distributed. To properly assess risk (and properly price credit), the secured party must be able to determine at the outset the priority that its security right will enjoy. A well-designed regime will enable it to do so efficiently and with certainty. Furthermore, a well-designed regime provides two additional benefits. It better enables the debtor to maximize the collateral value of its assets by facilitating credit secured by subordinate security rights, and it facilitates good commercial practice by taking efficiency into account in the design of the priority rules. A well-designed regime

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should be comprehensive, covering a broad range of existing and future assets, existing and future secured obligations, and should provide predictable outcomes for priority contests between secured parties and a broad range of competing claimants. A brief digression for an important point – the impact of insolvency law on the priority of security rights. Because insolvency of the debtor is one of the primary concerns of the secured party, failure to recognize, or to give priority to, security rights in insolvency can have the effect of undermining even what might otherwise have been the best of secured transactions regimes. Thus, a key element of an effective secured transactions regime is the absence, or at least minimization, of privileges that in insolvency enjoy superiority over perfected security rights. It should be recognized that the existence of such privileges, especially when they are not capped by a determinable maximum amount, negates the collateral value of the debtor’s assets. While each country has to determine its own hierarchy of values, and, of course, the encouragement of more plentiful lower-cost credit is only one social goal, the legislator should do so transparently and rationally, with awareness and careful evaluation of the impact on that goal of decisions that are expressed as legal rules. In many countries, for example, the presence of overriding privileges has the effect of increasing the cost and decreasing the availability of credit, to the detriment especially of small and medium enterprises, because lenders know that in insolvency their security rights will be subordinated to various privileges, or, at the least, has the effect of distorting the marketplace by permitting title-based devices (e.g., financial leases and titleretention sales) to escape subordination to privileges in insolvency while not making it possible for lenders that provide identical acquisition credit to escape such subordination. UCC Article 9 provides a very elaborate list of specific priority rules. A review of secs. 9-317 – 9-339 will bring to the reader’s attention the great number of priority contests that can arise in the context of a comprehensive secured transactions regime that covers all kinds of collateral and all kinds of obligations and must take into account the full range of commercial activity and of types of potential competing claimants. All of these matters must be addressed in a modern secured transactions system. The key questions are whether they will be addressed by the legislator or the judiciary and whether they will be addressed in a coherent balanced manner and with a view to supporting the overall goal of the secured transactions law. While this Introduction is not intended to be a treatise on the UCC Article 9 priorities regime, a discussion of selected rules will be useful to emphasize the sophistication and nuance of the rules, their focus on sound commercial practice and the level of detail developed in order to provide maximum possible ex ante certainty.

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The UCC Article 9 priority rules take advantage of the fact that there exists an effective and reliable filing system. Nevertheless, because there are multiple methods to achieve perfection, the rules also take into account that not all competing secured parties will file. And because security rights may cover future collateral (but perfection is not achieved until the debtor has rights in the collateral), the rules also take into account that filing may occur before perfection is achieved. In addition, the rules are designed to balance competing interests and to support sound and efficient commercial practices. The basic rule as between two conflicting security interests in the same collateral is that the first to file or perfect prevails. This encourages filing at the earliest possible moment and allows a secured party that perfects by possession to discover the existence of an earlier in time filer by conducting a search. Nevertheless, there are numerous exceptions, based on type of the collateral, whether the collateral is claimed as initial collateral or as proceeds, method of achieving perfection, etc.48 An example of a special rule is the twenty-day grace period that protects purchase-money security interests against lien creditors of and subbuyers from the buyer whose rights arise between the time the seller’s security right attaches and the time of filing. This rule allows a seller to deliver goods to a new customer49 immediately without having to delay for filing in order to be protected against those competing claimants. Another very important exception to the first-to-file-or-perfect rule is the purchase-money super-priority. This rule not only reflects commercial needs but also demonstrates the ability of the legislator to carefully tailor rules and specify appropriate conditions. This rule enables a later in time acquisition financier to gain priority over an earlier filed secured party without the need to enter into an inter-creditor agreement. It reflects the arrangement that would have been made anyway – as the earlier-filed secured party would normally have expected the debtor to acquire new assets and would not have expected priority over the party

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For example, there are special rules that give priority to a secured party that takes control over a secured party that files. This is in line with expectations of the parties dealing with those types of collateral as to which control is an available method of perfection and with commercial practice that would normally involve taking control (and when a requirement to file or search would be unjustified); at the same time, it allows a secured party to achieve perfection, and thus priority over a trustee in bankruptcy, by a simple and inexpensive filing if that satisfies its needs under the circumstances. We mention “new” customer because, since a single filed financing statement can cover multiple transactions with the same customer, for sales to repeat customers there will be no additional filing required (and thus no need for a grace period).

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that enabled the debtor to do so by providing the purchase-money credit. The condition to enjoyment of such super-priority is that, in the case of goods other than inventory, the purchase-money security interest be perfected at the time the debtor receives possession or within twenty days thereafter. In the case of inventory, however, the conditions to superpriority differ. For inventory, the purchase-money security interest must be perfected when the debtor receives possession (no twenty-day grace period) and, in addition, the purchase-money secured party must have sent a notification to the earlier-filed secured party stating that it has or expects to have a purchase-money security interest in the inventory (a single search will suffice to discover all earlier filings and a single notification is effective for five years, so these conditions are not burdensome for sellers). These additional requirements are imposed in order to comport with efficient business practice; in the case of inventory financing, the first-filed lender will typically make ongoing advances against receipt of invoices reflecting newly-acquired inventory and does so without conducting a new search before each advance, in reliance on its priority based on its first-filed position. Thus, notification is the source of warning that the first-filer cannot so rely. This rule supports efficient inventory finance practice. A similar observation can be made about the special rule that the inventory super-priority does not carry forward into the receivables generated by the debtor’s sale of the inventory. This rule enables an earlierfiled receivables financier to rely on the priority based on its first-filed position and safely make advances against receivables without having to be concerned that it might be subordinated with respect to receivables generated by sales of inventory subject to inventory purchase-money super-priority claimants (this rule also avoids any need to allocate payments between those attributable to sales of goods that had been subject to a super-priority and those arising from sales of other goods). The absence of this rule would have a significant negative effect on the availability and cost of receivables financing. This rule maximizes efficiency and best supports sound commercial practices, since the advance rate (ratio of loan to collateral value) for receivables is usually higher than that for inventory, the amount of the receivables will be higher than the cost to the debtor of the inventory and, perhaps most important, it will usually be the advance by the receivables financier that enables the debtor to pay its inventory supplier. Another example of a carefully tailored rule that balances the expectations of the parties and supports sound commercial practices is the buyer in ordinary course rule. This rule enables a buyer that buys goods in the ordinary course (customary practices of the business in which the seller is engaged or that particular seller’s customary practices), and takes possession of the goods, from a person in the business of selling goods of that

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kind, takes free of a security interest created by his seller, even if the security interest is perfected and even if the buyer knows of its existence. Thus, the buyer in these specified circumstances will be protected unless it acted in bad faith in that it had knowledge that the sale violated the rights of the secured party. The buyer in these specified circumstances has no duty to search the record and no duty to inquire into the scope of his seller’s right to sell, and the existence of a filed financing statement would be irrelevant. This rule is in accord with the expectations of the secured party that finances inventory – it wants the debtor to sell. Efficiency militates against a rule that would burden the buyer with discovering, and dealing with (obtaining consent or paying off), a secured party. Note, however, that this rule applies only to a purchase from a person in the business of selling goods of that kind. Thus, a person that buys a used printing press not from a used machinery dealer but from a printer (who is in the business of doing printing and not in the business of selling presses) will not be protected under this rule (even if it is not unusual for such a business to sell off used machinery). The secured party that is financing a printer not a dealer (so it is financing its debtor’s equipment, not inventory) expects its security right to continue in the collateral until it is paid and society’s interest in facilitating the speedy sale of inventory is not applicable in the case of used equipment. Further, the buyer from the printer is either another printer or is a dealer in used machinery – in either case, it is quite appropriate to oblige such a buyer to search the public record. It should also be noted that virtually never do UCC Article 9 priority rules turn on a subjective element. Subjective elements introduce uncertainty and make fact-sensitive litigation more likely. Thus, even a secured party with knowledge of a prior unperfected security interest may gain priority by filing before its competitor does. Clear definitive rules preclude the introduction of uncertainty by judicial insertion of exceptions based on knowledge or notice. An objective pure race system eliminates downstream inquiry into who knew what and allows the first filer (having confirmed his position) to act knowing that it is not vulnerable to subsequent inquiry into knowledge or notice issues. More, generally, the consistent application of clear known specific rules reduces transaction costs.

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V. Some Guiding Principles for Reform Considering the national reports in this volume and taking into account common trends on the national and international level, especially the recent reforms and reform proposals in France and England, the extensive experiences in North America50 (and the recent reform in New Zealand51), the recommendations of the UNCITRAL Legislative Guide and the EBRD core principles for a secured transactions law,52 we suggest that national reform efforts and a European Model Law on Secured Transactions or a European Security Right should be guided by the following principles: • In formulating secured transactions legislation, the goal of producing an efficient and effective secured transactions regime that enhances the availability and reduces the cost of credit should be kept in mind. Every rule, as it is developed and as it is considered in light of other interests and policies, should be evaluated in terms of whether and to what extent it furthers or detracts from that goal. A single comprehensive law, rather than diffusion among various codes and freestanding laws, would minimize risks of incoherence and incompleteness. • Subject to consumer protection laws, parties should, as a matter of principle, be able to use all kinds of tangible and intangible property, present and future, as collateral, including aggregations of property and an enterprise as a whole. Particular care should be taken with respect to types of property for which a special (international or domestic) regime already exists or is being concurrently developed (e.g., aircraft, ships, railway rolling stock, certain types of financial collateral) – in some cases the special regimes may be totally pre-emptive while in others they may simply be supplementary; national special regimes should be reviewed to determine whether they can be modified to better facilitate secured transactions in such property.

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52

The first Official Text of the Uniform Commercial Code was promulgated in 1952; UCC Article 9 is in effect in all fifty states. The Personal Property Security Acts are in force in all the Canadian common law provinces and territories and Quebec’s Code Civil was substantially revised effective nearly fifteen years ago. In 2002, New Zealand enacted a Personal Property Security Act, largely modeled on the PPSA of Saskatchewan, Canada; cf. Gedye, A Distant Report: The New Zealand Experience with a North American Style Personal Property Security Regime, CanBusLJ 43 (2006), 208 et seq. See http://www.ebrd.com/country/sector/law/st/about/prin/index.htm (1 August 2007).

Introduction •

•

•

•

• •

•

•

•

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The collateral should be available to secure all obligations of any nature, present or future, fixed or contingent, monetary or nonmonetary. The reach of the regime should be defined functionally, embracing all transactions that serve a security purpose. This is most simply achieved by a unitary security right that encompasses all such transactions, regardless of form, and is subject to a single body of rules. Any deviation from this approach (e.g., treating retention of ownership for security purposes as a different type of right from a security right) should be carefully modeled to produce outcomes that are functionally equivalent to those produced with respect to security rights, notwithstanding formal distinctions. Thus, creation formalities, methods of achieving effectiveness against third parties (including registration requirements), priority rankings and enforcement rules need not be identical in process but must be sufficiently similar and produce sufficiently equivalent outcomes that no technique is substantially favored over any other. Taking into account the need for differing rules depending on the type of collateral and the special needs of providers of acquisition finance, all secured creditors should be treated equally (in and out of insolvency), so that, for the benefit of debtors, they compete in providing credit on the basis of the price; and all persons granting security rights should, subject to consumer protection laws, be given access to secured credit on the same legal basis. The security right should be created pursuant to the agreement of the parties, subject to minimum formal requirements, permitting simple, speedy and inexpensive creation and without depriving the grantor of the use and possession of its assets. The security right should be based on the concept of a charge, not on the transfer of ownership. While filing should be the most commonly used method of perfection, it should be supplemented by additional and alternative methods based on the nature of the collateral, in order to support efficient business practices and the needs and expectations of the actors. The filing system should be a notice filing system, requiring no formalities and only minimal information, rather than original documents or summaries. The system should utilise electronic access for both filing and searching. Special needs, e.g., those of asset acquisition financiers (providers of purchase-money credit), should be met by specially designed perfection and priority rules, not by special types of rights (e.g., retention of title). A detailed, carefully nuanced priority scheme based on efficiency (both in creating credit availability and in ease of administration) and

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•

•

support for sound business practices should be included in the legislation to maximize ex ante certainty. Post-default remedies should as far as possible be determined by the parties, subject only to rules necessary to protect legitimate interests of each of the transacting parties and of interested third parties. Court intervention should be kept to a minimum, and, when invoked, should be expeditious. Procedures should be designed to seek realization of value under existing market conditions. The insolvency regime should be reviewed with the purpose of minimizing the extent to which it is inconsistent with the goals of the secured transactions law. The security right must be effective in the debtor’s insolvency, subordinated in rank to no or only a very few privileges (or an aggregate maximum amount of such privileges), enabling the creditor to take into consideration the extent of the needed margin of security. The insolvency process should be expeditious and should be designed to protect the value of the collateral from being diminished during the course of the proceedings without payment or other compensation being provided for such diminishment. The security right should be subject to such rules as are generally applicable (e.g., avoidance of preferential transfers) and, so long as the value of the collateral is protected from diminishment, such rules as are required in the interests of reorganization (e.g., temporary stay of enforcement).

VI. Conclusion In the absence of the development of a supranational European Security Right or a European Model Secured Transactions Law accompanied by substantially uniform enactment in the Member States, neither of which appears very likely to occur in the near future, European businesses will continue to struggle with the great divergences that currently exist, as shown in the national reports. We hope that this volume will help practice, and the courts, to cope with the challenges presented by these divergences and will assist academia in instruction of national and comparative law, and that its analysis might serve in the modernisation and reform of secured transactions law generally and in the initiation of steps towards harmonisation.

The Case Studies Harry C. Sigman/Eva-Maria Kieninger A. General remarks Each author is requested to briefly introduce the basic structure of the relevant national law, including, as appropriate, remarks relating to items a), b) and c). Please provide Code, statutory and case citations – supplemented as necessary in the solutions to specific cases. a) For each case, please indicate whether it makes any difference (1) whether the debtor is a corporation/company; a sole proprietorship; other; and (2) whether the creditor is a regulated financial institution; other. For all cases, assume neither debtor nor creditor is a consumer. b) For each case, please indicate whether there is a registry for any of the described rights in the encumbered assets, and, if so, describe its characteristics (i.e., notice or document filing? how are parties identified (name, address, identification number, etc.)? how must/may encumbered assets be described on the registration? must the registration identify the secured obligation or subject it to a stated maximum? are there any content requirements in addition to identification of debtor, creditor, and a description of the encumbered assets? is the registry indexed and searchable by debtor name/asset identification number/other? are there any restrictions on public search access? electronic or paper – filing/searching? time/cost for filing/searching; duration of effectiveness of a registration and possibility for extension, etc.) c) For each case, please indicate whether there are any super-priority or super-privileged persons (whether prior or subsequent in time) that might outrank the holder of the security right.

B.

The Case studies

1.

Non-possessory security right in specific equipment

Manufacturer owns 200 machines (of varying description, value and useful life), acquired from 20 different suppliers during the preceding 3 years. The machines are used in Manufacturer’s business (so they are

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classified as equipment (tangibles held for use), not inventory (tangibles held for sale or lease)). Manufacturer offers these 200 machines as collateral to Lender to secure a single advance term loan repayable in monthly installments of principal and interest. a) Describe the documentation and formalities required to create a proprietary non-possessory security right in favor of Lender, and any additional steps (registration, stamp or other duties, notarization, etc.) required to perfect the right against third parties (perfection is used in the sense that the proprietary right can be asserted against third parties generally; this does not imply that its has priority over all competing rights). b) How does Lender ascertain whether there exist earlier-in-time nonpossessory rights in the machines that might be superior to or compete with Lender’s right or preclude it altogether? c) If Manufacturer sells an encumbered machine, what are Lender’s rights, if any, in either or both (1) the sold machine and (2) the “proceeds” received by Manufacturer (cash, check, open account receivable, title retention sale contract, tangible item received in exchange)? d) Does Lender have any rights in machines acquired by Manufacturer during the life of the loan that replace (although not received in exchange for) encumbered machines (maintaining a total number of 200 machines)? e) What are Lender’s remedies upon Manufacturer’s default (judicial, extrajudicial, and appropriation right (qualified or absolute)? Indicate approximate time/costs and briefly describe each process, including any legal pre-conditions. f) Describe Lender’s position in the event of commencement of an insolvency proceeding against Manufacturer. g) Describe how the responses to this case, and below with respect to cases 2 and 3, would be modified if the encumbered assets (equipment in cases 1 and 2, inventory in case 3) include motor vehicles.

2.

Non-possessory security right in present and future equipment (floating security right)

Same questions as case 1 except that the security agreement provides that the collateral is all of Manufacturer’s present and after-acquired machines (a floating security right).

The Case Studies

3.

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Non-possessory security right in present and future inventory (floating security right)

Same questions as case 2, and likewise a floating security right, except a) the debtor is Wholesaler and the collateral is all of its present and afteracquired inventory (which consists initially of 10,000 units, comprised of 50 different products (all of which are products with respect to which Wholesaler carries multiple competing brands) and which have been obtained from numerous different suppliers, and b) the credit is extended on a revolving basis, i.e., new advances are made upon acquisition of new inventory and repayments are made as inventory is sold. In what ways are the responses different from those in case 2 due to the collateral being inventory instead of equipment or due to the fact that the secured obligation includes future advances? Include description of issues relating to power/right of Wholesaler to sell the inventory and the effect of a sale on the credit provider’s rights in the sold inventory, and discussion of rights of each credit provider in proceeds of the inventory.

4.

Purchase-money financing – alternative sources

Manufacturer needs to finance the acquisition of a new high-value robotic machine. a) Does Manufacturer have available the options to obtain that financing from a (1) title-retaining seller, (2) financial lessor and (3) thirdparty secured lender? b) What differences exist between the three alternative sources with respect to (1) the documentation and formalities and additional steps required for creation and perfection of the credit provider’s proprietary rights against Manufacturer and third parties; (2) the priority position of the credit provider’s rights vis-à-vis competing claimants (both prior and subsequent in time); (3) the remedies (judicial and extra-judicial) available to each credit provider in the event of default by Manufacturer; and (4) the position of each credit provider in the event of commencement of an insolvency proceeding against Manufacturer.

5.

Bona fide acquisition

A company that sells at wholesale both goods it manufactures and goods that it buys from other manufacturers has encumbered all of its present and after-acquired inventory and equipment (a floating security interest) in favor of a lender that has perfected its security rights, either by means

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of a timely public filing/registration or by simple agreement if that is sufficient to produce third-party effectiveness. The company sells goods from its inventory in the ordinary course of its business to a retailer that buys at normal market price in the ordinary course of its business. Does it make any difference whether the retailer has knowledge of the existence of the lender’s perfected security right or could have obtained at least inquiry notice by checking the public registry? Having decided to upgrade its manufacturing capabilities, the company sells several of its used machines to a buyer that manufactures the same type of goods. That buyer makes its purchase in the ordinary course of its business for a normal market price for such used equipment. Does it make any difference whether that buyer has knowledge of the existence of the lender’s security right or could have obtained at least inquiry notice by checking the public registry? To determine whether the buyers take free of the lender’s security right, is the same rule applied to both buyers?

6.

Possessory pledge – constructive or fictive possession

In any of cases 1-4, could the financier take a pledge over the encumbered assets under traditional pledge law by obtaining, in lieu of actual possession, the agreement of the party being financed that it holds the encumbered assets on behalf of the financier?

7.

Over-security

Is there a doctrine of over-security and, if so, describe how and to whom it is applied.

8.

Legal (non-consensual) rights of unpaid seller

Does an unpaid seller of goods that has neither retained title to nor been granted a security right in the sold goods have any legal rights in the sold goods? If so, describe such rights and their position vis-à-vis competing claimants and in the event of buyer’s insolvency.

9.

Special property registries

Identify and describe the characteristics of any registries that deal only with particular categories of tangible property (e.g., ships, airplanes) and that are intended to record not only ownership but also security rights.

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10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment) Same questions as case 4 except the debtor is Processor and the credit providers finance the acquisition of various elements of raw materials, each of which is separately acquired and financed. What are the rights of the credit providers in the several elements of raw materials and in the final product? Assume the facts involve a) raw materials whose separate existence disappears when the are commingled in the manufacturing process, and b) elements whose separate identity can be discerned although they are physically connected or attached to each other to create the finished product.

11. Cross-border issues An item of equipment located in State A is made subject to a right (retained title, financial lease, non-possessory security interest). Assume, first, that that right has been perfected against third parties under the law of State A, and, second, that it has not been perfected. Six months later, the financed party moves the equipment into your country (State B). Indicate the requirements for perfection of such a right under the law of State B. Six months after the movement of the equipment into State B, two third parties (a new secured party and a seizing creditor) acquire and perfect (by doing whatever is required under the law of State B) their respective rights in the equipment. In priority litigation in a competent court in State B, will the initial secured party prevail over either or both of the later parties, and under which State’s law? Would it make any difference if the initial secured party had during the six months after the movement of the equipment into State B, perfected its right under the law of State B? If you are the counsel to the initial secured party, what advice would you give your client at the outset of the transaction with respect to the risk of movement of the equipment out of State A?

Germany Julia Rakob I.

Introduction

1.

General background; structure of national law re security over tangibles

a)

Historical development

As a civil law jurisdiction, Germany relies heavily on statutes and codifications as sources of law. Legal relations between citizens are primarily governed by the Civil Code (Bürgerliches Gesetzbuch), supplemented by the Commercial Code (Handelsgesetzbuch) for merchants and commercial transactions. A survey of the German law of secured transactions relying on these statutory sources, however, would miss the reality of granting and taking security in Germany entirely. The creation of security has come a long way since the Civil Code entered into force in 1900. The Civil Code only contains rules on retention of title1 and on pledges.2 Retention of title is a contractual security right of the unpaid seller in the sold goods. Retention of title is very popular; almost all written contracts for the sale of goods contain retention of title clauses in one form or another. For other creditors, the Civil Code provides for the traditional pledge which may be used to encumber both tangible movable assets3 (“movable things”, “bewegliche Sachen”) and rights4 (“Rechte”), including receivables (“Forderungen”). Pledges are public security devices in the sense that they may not be created confidentially without external evidence of their creation: the creation of a pledge in a “thing” requires a transfer of direct possession from the pledgor to the pledgee; the creation of a pledge over receivables requires that notice of the pledge be sent to the third party debtor. This, of course, made pledges unpopular – loss of possession deprives the pledgor of the chance to work with the collateral,

1 2 3 4

§ 449 BGB. §§ 1204 et seq. BGB. §§ 1204-1259 BGB. §§ 1273-1296 BGB.

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notice to third party debtors of receivables may damage the reputation and credit of the pledgor or may confuse the debtor about who to pay to. German legal practise found a way around these difficulties, not by stretching the statutory rules on pledges, but by using the rules on absolute transfer of assets – transfer of title in tangible movables, assignment of receivables and other rights – to create security rights by effect of party agreement. Under the Civil Code, a transfer of title in a “movable thing” may be achieved without transfer of actual possession.5 If, in a non-security situation, e.g. a sale, the parties agree that the buyer shall become the owner of the sold goods on 1 April, whereas the goods will only be delivered a month later on 1 May and will remain with the seller until delivery, this arrangement is possible and title will actually pass on 1 April. For the title to pass, it is sufficient if the parties agree that from 1 April on, the seller holds the goods on behalf of the buyer and thus create fictitious possession. Fictitious possession (“mittelbarer Besitz”) is sufficient to transfer title, but it would not suffice if the parties wanted to create a pledge in the goods. Pledges require actual possession,6 so in the circumstances above, the parties could not have created a pledge on a contractually agreed date which suited their needs, but only upon delivery when the pledgee acquires actual possession. This difference between pledges and transfer of title in the requirements regarding possession made title, taking the form of title transfer by way of security, an attractive security device in situations where the debtor needs possession of the collateral. The same development occurred regarding security over receivables: assignment of receivables for security was used to avoid the notice requirements7 for the creation of pledges in receivables. As with a transfer of title by way of security with respect to tangibles, it is easier to assign a receivable than to create a pledge in it, and therefore assignment for security became the dominant form of security over receivables rather than the pledge. After a transfer of title or assignment for security purposes, the secured creditor holds clean title to the movable assets or the assigned rights, just like someone who has acquired these assets by way of a sale. 5 6 7

§ 930 BGB. Arg. §§ 1205, 1206 BGB. To create a pledge over a receivable, the Civil Code requires that the third party debtor is notified of the pledge (§ 1280 BGB), whereas an absolute assignment of receivables is valid without notice to the debtor (§ 398 BGB). The debtor is protected not by a notice requirement as precondition for the validity of the transfer, but by rules stipulating that the debtor does not have to pay twice if he paid to the original creditor because he was not aware of the assignment (§ 407 sec. 1 BGB).

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In rem, as far the title is concerned, his position is not restricted. Contractually, however, the secured creditor is bound to use his rights in the assets exclusively for purposes of securing the relevant loan or other form of credit. Security thus created is called fiduciary security, because the secured creditor is holding more rights or better rights – full title – than he needs for the purposes the parties want to achieve with their transaction. The secured creditor holds the excess rights on trust („Treuhand”) for the borrower granting the security.8 The questions for the courts of course was whether the use of rules on absolute transfer to create a security right was to be considered a circumvention on the mandatory rules on pledges. Surprisingly, perhaps, the German Imperial Court (“Reichsgericht”), the predecessor of the Federal Supreme Court (“Bundesgerichtshof”), ruled that this practise was permissible.9 “Secret liens”, security rights without any external signs like transfer of possession, markings or labels, registration or other devices to notify or alert the public, were thus accepted. In spite of the “clean title subject only to contractual restrictions” doctrine, insolvency law recognised that assignment and transfer of title for security are essentially security devices and economically quite different from clean title in other circumstances. In the insolvency of the debtor, these security rights therefore do usually not entitle the secured creditor to demand delivery of the collateral, but only to preferential satisfaction out of the proceeds of the collateral.10

b)

Core Characteristics

The German law on secured transactions is in large part the result of the creative imagination of lawyers using concepts under the Civil Code originally meant for other purposes and the efforts of courts to control the process. It is therefore patchy, non-uniform and inconsistent. For different types of assets, different security devices are used. Security can only be granted strictly on an asset-by-asset basis, and very often the effectiveness of an agreement creating security will depend on how specifically the encumbered assets were described and how well the draftsperson envisaged possible later changes in the identifying factual circumstances. In spite of these flaws, German law makes it possible to create security over almost any type of asset, present and future, fixed or floating, and to secure all kinds of obligations. It is also not relevant 18 19

10

Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 624. RG 11 March 1904, RGZ 57, 175, at 177; RG 8 November 1904, RGZ 59, 146, at 147. §§ 50, 51 Nr. 1 InsO.

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whether creditor or debtor are regulated financial institutions,11 corporations or individuals. There are also no limitations to grant security for pre-existing debt. Security may be created simply by agreement between the parties; and with few exceptions, no form requirements apply. Usually, security rights will be created by way of written agreement; however, there is no such legal requirement and there are cases where the secured party indeed relied on an oral contract or at least on something short of a contract in writing.12 Again with very few exceptions,13 German security interests in personal property are privy to the parties who created them, and are not registered or otherwise notified to the public. The absence of any public debate or political lobbying in this respect suggests that German creditors in general and the banking industry in particular are happy with this system of unpublicised security interests. Discussions about registries for security interests arise only in the context of international unification of the law on secured transactions, never for the domestic system. German banks rely on representations of their prospective borrowers about encumbrances over their various assets instead of registries. Of course, a potential borrower may lie – but not everybody lies. In many circumstances lying will not work without the support of forged accounts, a threshold that is not easily crossed. Apparently German banks find that it is not worth the effort to establish, operate and use a registry to prevent damages that might be inflicted by the occasional crook. A different important group of creditors, the financing sellers, are protected against any adverse effects of prior existing security arrangements anyway, so this group also has no strong incentive to push for the introduction of a security registry. There is generally no right to trace proceeds from collateral that is sold, destroyed, commingled or lost due to processing.14 (A limited exception applies, in an insolvency, with respect to the receivable resulting from an unauthorised sale of goods held subject to a retention of title 11

12

13 14

Under the avoidance rules in § 130 InsO, there is a privilege for certain financial security interests (margin security) 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 are irrelvant. BGH 5 January 1966, BB 1966, 140 (acceptance of bank not in writing, but implied from disbursement of loan); OLG Oldenburg 19 October 2004, DAR 2005, 90 (car dealer kept title document until complete payment, evidence for oral retention of title agreement); BGH 10 October 1956, NJW 1956, 1918 (parties did not include identification of the collateral in the written contract; identification was done orally or even implied in the circumstances). On registered security interests in vessels and aircraft, see para. 9 infra. Lwowski, Recht der Kreditsicherung (8th edn. 2000), p. 88.

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arrangement.)15 Depending on the circumstances and in particular the form potential proceeds may take, the absence of a general right to proceeds can be addressed in the security agreement ab initio by creating security directly over future proceeds. Receivables from a future sale of the collateral, be it authorised or unauthorised, may be subjected to an assignment for security,16 or the parties may agree that in case that processing the collateral raw materials will result in the creation of new goods, the seller rather than the buyer shall be considered manufacturer and therefore the one who acquires title17 by processing.18 Cash proceeds, on the other hand, are much more difficult to encumber. This can usually only be achieved by creating security over the bank accounts in which cash proceeds might be paid into, an option realistically only available to banks who take security over all assets of the borrower, but hardy feasible for a financing seller who is concerned about the proceeds of a machine he delivered. German security law allows the creation of security over future assets, as long as they can be sufficiently described to meet the applicable tests. Security rights in future assets are generally effective in insolvency, subject only to the insolvency administrator’s power of avoidance if the security was created within the applicable time frames before insolvency proceedings were started.19

15

16

17 18

19

If the debtor or the insolvency administrator has sold to a bona fide purchaser an asset which does not belong to the insolvency estate (§ 47 InsO) without authorisation to do so, the party thus losing its asset has a right to the receivable owed by the buyer (§ 48 InsO). If the buyer has paid the purchase price, the original owner of the asset may claim the cash proceeds as long as they can be identified in the insolvency estate. However, collateral does usually belong to the insolvency estate and, thus, does not qualify under § 47 InsO. Only assets subject to a retention of title arrangement and leased assets fall under § 47 InsO, so their owners benefit from the tracing rules of § 48 InsO. So-called “prolonged retention of title” (“verlängerter Eigentumsvorbehalt”). See Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 318 et seq. § 950 BGB. “Processing clause” (“Verarbeitungsklausel”). See Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 317 et seq. §§ 129 et seq. InsO. For a discussion of the right of avoidance with respect to revolving security rights and a decision by the OLG Karlsruhe 8 April 2005, ZIP 2005, 1248, which seems to extend this right, see Kuder, Das Ende der Globalzession?, ZinsO 2006, 1065. If the Federal Supreme Court follows the rationale of this decision, many security interests over receivables created or goods acquired within the last three months before insolvency may become voidable.

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2.

Security devices denominated as such

a)

Possessory devices

The traditional security device for movable tangible assets (and rights) is the pledge (“Pfandrecht”), governed by §§ 1204 et seq. BGB. The creation of a pledge over a tangible asset requires transfer of actual possession to the pledgee. Pledges are still often used to take security over certain rights (securities not evidenced by a certificate, most importantly shares in limited liability companies (“Gesellschaft mit beschränkter Haftung (GmbH)”), IP rights, bank accounts), over certificated securities and – in humbler circumstances – at pawn shops, but have otherwise been replaced in practise by the non-possessory transfer of title. After the pledgor has defaulted on the secured claim and the pledgee has become entitled to enforce the pledge, the parties may agree on any enforcement mechanism they like; agreements concerning enforcement made prior to default are invalid.20 If the parties cannot agree after default on how the pledge is to be enforced, the asset must be liquidated by way of public auction. “Public” auction means an auction not only open to the general public, but conducted by a court clerk or a notary public.21 This cumbersome enforcement mechanism added to the unpopularity of pledges.

b)

Non-possessory devices

Other than the registered security interests in vessels, aircraft and – under certain circumstances – farming equipment discussed later in the report, there are no non-possessory security rights which are not title-based.

3.

Title-based security devices

The Civil Code provides for a rudimentary provision22 on retention of title as a non-possessory security interest of unpaid sellers. No form 20

21

22

An exception applies for commercial pledges were both parties are entrepreneurs and the assets are listed or otherwise have an established market price: under these circumstances, an agreement between the parties on the mode of enforcement may be made prior to default, § 1259 BGB. Münchener Kommentar zum Bürgerlichen Gesetzbuch (MünchKommBGB)/Wenzel, Vol. 2 (5th edn. 2007), § 383 n. 6. The German States may authorise additional categories of persons to conduct public auctions. § 449 BGB.

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requirements apply. Inside and outside of insolvency, the seller may reclaim the sold goods as a remedy for the buyer’s default on the payment of the purchase price. Although not expressly mentioned in the Civil Code, the reality of secured transactions is dominated by Sicherungsübereignungen – transfer of title for security purposes. Title may be transferred without any change in actual possession and is not otherwise made public. No form requirements apply. Sicherungsübereignung allows the parties to agree on their preferred enforcement mechanism outside of insolvency proceedings and gives the secured creditor a preferential right to the liquidation proceeds in the insolvency of the debtor.

4.

Existing registries

Registries exist only for security interests in vessels, aircraft, offshore cables, and (under certain circumstances and with very little practical relevance) for security interests in farming equipment.

5.

Issues beyond the scope of this survey

German law on security interests seems quite liberal and generally rather lender friendly, as taking security seems easy, cheap, and confidential; almost all possible obligations may be secured and almost any asset may be used as collateral. When lending to a group of companies, supplying debt capital for a corporate acquisition or setting up security structures for a capital markets transaction, the picture becomes less favourable. Inter alia German corporate law with its strict capital maintenance provisions and financial assistance rules and the threat of subordination for lenders deemed quasi-shareholders severely limits the possibility to take security at all or security which actually has material economic benefits. Quirks like the Akzessorietät of pledges – the rule that pledges are irresolvably tied to the obligation they secure – makes structuring a secured transaction more complex, in particular where the collateral package is multi-national and German assets form only a part of the collateral. Some of these issues are sketched in an Annex to this survey.

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II.

Case studies

General remarks on all case studies a)

Status of parties

In none of the case studies is the status of debtor or creditor as corporation, sole proprietorship or regulated financial institution relevant to the applicable rules or the outcome of the case.

b)

Registration

There are no registries for the entry of security rights or other property rights in Germany, with the exception of registries for land and land charges and for certain assets listed and described below in para. 9. (“Special Property Registries”) of the report.

c)

Super-priority

There are no super-priorities or super-privileges overriding the security interests in the cases discussed below. Even statutory liens for repairs or upkeep of the collateral23 or landlords’ liens24 will not impair the rights of the lender, because these liens only attach if the respective object belongs to the person who became party to the contract for the repair or the lease. In case of a retention of title or a security transfer of title, it is the secured lender who holds title to the object, not the holder of the object who entered into the contract for its repair. As there is no bona fide acquisition of these liens,25 the repairman remains unprotected and the secured creditor enjoys unrestricted rights to the collateral. Even though not really a super-priority, the Insolvency Code provides that unsecured creditors have a – very limited – share in the benefits of collateral that is realised and liquidated by the insolvency administrator. The code provides that the insolvency administrator will deduct 9% of the proceeds as a lump-sum compensation for his efforts to realise the collateral.26 If the secured creditor can show that actual costs of realisation were less than 9% of the proceeds, the compensation may be re23 24 25

26

“Werkunternehmerpfandrecht”, § 647 BGB. “Vermieterpfandrecht”, § 562 BGB. BGH 21 December 1960, BGHZ 34, 125; BGH 21 December 1960, BGHZ 34, 153 et seq. §§ 170, 171 InsO.

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duced.27 The deducted amount goes to the estate for distribution among all creditors.

1.

Non-possessory security right in specific existing items of equipment

a)

Documentation and formalities to achieve effectiveness against grantor and against third parties

Security rights in the equipment may be created by a Sicherungsübereignung, a transfer of title for security. A transfer of title for security is created by a simple agreement between Manufacturer and Lender. No requirements as to form apply; even an oral agreement is sufficient.28 The Civil Code allows a transfer of title without a transfer of actual possession.29 The parties may agree that title shall pass to Lender and Manufacturer shall hold the assets on behalf of Lender. The security right becomes effective against third parties at the time when the agreement is entered into. No specific requirements apply to fix the time of perfection or to discourage fraudulent pre-dating. The agreement has to specifically identify the assets it refers to. The identification has to meet certain standards. The assets must be identified in a way that enables anyone aware of the agreement to determine which individual assets are affected, without reference to documents or other sources outside the agreement.30 A clause like “50 machines” would not work, because Manufacturer owns 200 machines and you could not tell which machines out of the 200 were meant by the clause. An agreement like “all machines not subject to a retention of title clause” would also not meet the test, because, in addition to the agreement, you would have to check the books of Manufacturer to find out which of the machines were delivered under a retention of title clause and which ones not. To 27 28 29 30

§ 171 sec. 2 sentence 2 InsO. MünchKommBGB/Oechsler, Vol. 6 (4th edn. 2004), Anh. §§ 929-936 n. 25. § 930 BGB. BGH 3 July 2000, NJW 2000, 2898; BGH 31 January 1979, BGHZ 73, 253, at 254; BGH 24 June 1958, BGHZ 28, 16, at 19; BGH 13 June 1956, BGHZ 21, 52, at 55; Reinicke/Tiedtke, Kreditsicherung, (5th edn. 2006), p. 218 et seq.; MünchKommBGB/ Oechsler, Vol. 6 (4th edn. 2004), Anh. §§ 929-936 n. 5 (with further references). For cases where the description was held to be insufficient, see BGH 19 September 1994, NJW-RR 1994, 1537, at 1538; BGH 18 April 1991, NJW 1991, 2144; BGH 3 Dezember 1987, DNotZ 1988, 366 = NJW-RR 1988, 565; BGH 21 November 1983, NJW 1984, 103; OLG Frankfurt 21 June 1994, ZIP 1994, 1438, at 1439; OLG Düsseldorf 10 June 1992, OLGR Düsseldorf 1993, 125.

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create a security interest in the machines of Manufacturer, the parties may add a list with descriptions and serial numbers to the agreement, or may describe the machines as “all machines currently on the premises of Manufacturer”.31 There is no gold standard for proper identification; methods of identification strongly depend on the facts in each case. The identification has to be specific at the time the agreement is entered into.32 Later confusion, on the other hand, does not affect the validity:33 if Manufacturer should later acquire more machines also located on the premises and identification becomes difficult, this does not render the security interest in the original 200 machines invalid, even though it makes it harder for Lender to prove its security interest in the original machines.

b)

Discoverability of earlier-created rights in the collateral

Except for the specialised registries for certain assets (see below para. 9) German law does not provide for any mechanism to obtain reliable information whether movable assets have already been encumbered. Lenders rely on representations of their borrowers, request statements by banks (for reasons of banking confidentiality, subject to permission by the prospective borrower) or other lenders known to be extending credit to the borrower or ask to see evidence that the purchase price for the assets has been paid and any retention of title arrangement in respect of the assets has expired. These business measures may lead to greater confidence in the value of the security, but do not create certainty in a legal sense. An exception applies for charges on immovables (“Grundschulden” or “Hypotheken”): charges on immovables may extend to goods located on the property34 and those charges will usually take priority over later transfers of title to those goods for security. Such charges are reflected in the land register. Interested parties may obtain an excerpt. If there is indeed a retention of title arrangement or a prior in time transfer of title for security in favour of another creditor, the security transfer by Manufacturer to the Lender will not be effective. Even if the Lender does not know about the earlier rights, it will usually not acquire any rights by way of a bona fide acquisition. The rules on bona fide acquisition require that the person trying to grant the rights delivers the

31 32 33 34

BGH 18 April 1991, NJW 1991, 2144, at 2146 (“Raumsicherungsübereignung”). Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 642. BGH 31 January 1979, BGHZ 73, 253. § 1120 BGB.

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goods to the bona fide purchaser.35 This will usually not happen in a security transfer of title situation. However, if the tangibles have been previously encumbered, it is possible presently to create a security interest that will automatically take effect later, once these prior interests have terminated.

c)

Rights of secured creditor upon sale

aa) Rights in the sold collateral

Title to the machines has passed to Lender (if only for security purposes) and Manufacturer is no longer the owner. Manufacturer therefore does not have the power to transfer title to the machines to any buyer. However, a buyer may still acquire title by effect of law as a bona fide purchaser, usually under § 932 sec. 1 BGB. If the buyer does not know that the seller is not the owner of the respective asset, and his ignorance is not due to gross negligence, the buyer acquires title to the asset. Bona fide acquisition, however, generally requires delivery the object to the bona fide purchaser.36 If Manufacturer sells machines to a third party, the third party will only become the owner of the assets when they are delivered to him.

bb) Rights in the proceeds of the sold collateral

The transfer of title in itself does not give Lender any right to the proceeds of a sale. It is possible to create a security interest over proceeds, if Lender thinks ahead and enters into a sufficient agreement with Manufacturer. The parties may create a pledge over all bank accounts of Manufacturer, in case proceeds end up in a bank account, or could enter into an assignment for security over any receivables resulting from any – prohibited – sale of the machines. The effectiveness of these devices in capturing the proceeds will depend on whether they are the right type of agreement with the right description of the assets for the form the proceeds do in fact take.

35 36

§§ 932, 933 BGB. §§ 932, 933 BGB.

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d)

Rights of secured creditor in replacement collateral (real subrogation)

If the agreement provides for a transfer of title in the current machines only, it does not automatically extend to any replacement machines. However, security interests under security transfer agreements are creatures of contract and can be tailored to the purposes of the parties. It is possible to extend the transfer of title to machines acquired later as replacement of the original machines, if the agreement says so. The description of the new assets has to be sufficiently specific. If Manufacturer and Lender use a clause like “all present and future machines of Manufacturer”, any replacement machines will be covered. This clause, however, will also cover additional machines in excess of the original 200 and may therefore not reflect the commercial deal between Manufacturer and Lender. A clause “200 machines listed in Annex 1 and any machine acquired as a replacement” may be ineffective, because an observer may not be able to determine which new machines are replacements and which are not. The parties may resort to an undertaking by Manufacturer to submit specific information to Lender when he acquires replacement machines. However, if the Manufactures fails to meet this obligation and does not provide the required information, no security interest attaches.

e)

Remedies upon default

Lender may enforce its rights under the transfer of title for security when the secured claims fall due.37 The enforcement mechanism is usually set out in the agreement between the parties.38 It usually provides for enforcement by private sale after a deadline of several days has expired and Manufacturer has not satisfied the secured obligation. Notice requirements and notice periods are subject to party agreement. Clauses providing, however, that no notice shall be required for enforcement are not effective.39 When realising the collateral, Lender has to reasonably and

37 38

39

MünchKommBGB/Oechsler, Vol. 6 (4th edn. 2004), Anh. §§ 929-936 n. 48. BGH 9 July 1953, BGHZ 10, 228; MünchKommBGB/Oechsler, Vol. 6 (4th edn. 2004), Anh. §§ 929-936 n. 49. MünchKommBGB/Oechsler, Vol. 6 (4th edn. 2004), Anh. § 929-936 n. 50; Palandt/ Bassenge (66th edn. 2007), § 930 BGB n. 30; reasonable notice required in BGH 7 July 1992, NJW 1992, 2626, at 2627 (case on security assignment of receivables); question left open in case on Sicherungsübereignung BGH 13 January 1994, NJW 1994, 864, at 866.

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adequately protect the interest of Manufacturer.40 A sale at dumping price may trigger liability for damages caused to the debtor as well as to competing creditors who have an economic interest in the proceeds of the collateral.41 If the security agreement does not explicitly specify how the security interests may be realised, courts will look to whether implied agreements on realisation can be found in the contract. The rules on enforcement of pledges in the Civil Code may be deemed as impliedly agreed to by the parties if they are in line with modern business practises.42 The fundamental enforcement rule for pledges43 – sale by public auction – no longer corresponds to business practise and will therefore usually not be assumed to be the parties’ implicit choice of enforcement mechanism.44 Lender may request that the encumbered items be handed over for realisation. If Manufacturer does not do so voluntarily, Lender must go to court and sue Manufacturer for delivery. Repossession by force is illegal and would entitle Manufacturer to use force to defend against it. If Manufacturer cooperates with the sale, enforcement is quick and costs moderate. Enforcement costs have to be borne by Manufacturer.45 If the parties included the reimbursement claim for enforcement costs in the secured obligations clause of the security agreement, Lender may deduct his enforcement costs from the proceeds of the realisation. The procedure need not take longer than several days to a few weeks. Depending on the nature of the collateral, Lender may want to obtain an accountant’s opinion on the value of the goods, in order to be protected against the charge of having made a sale under value and Lender may incur internal costs to organise the sale. Other than that, there are no enforcement costs. If Manufacturer does not cooperate, Lender has to sue for delivery of the machines. (A judgement on the obligation is not required.) Depending on the workload of the local court, it may take several months up to over a year to obtain a first instance judgement. Court and attorneys’ fees depend on the value of the machines. If Lender wins, he may claim these costs from Manufacturer under the general rules for the distribution of court costs and lawyers fees in civil cases.46 40

41 42 43 44 45

46

BGH 1 March 1962, WM 1962, 673, at 674; BGH 9 January 1997, WM 1997, 432, at 433; BGH 5 October 1999, NJW 2000, 352, at 353; MünchKommBGB/Oechsler, Vol. 6 (4th edn. 2004), Anh. §§ 929-936 n. 49. MünchKommBGB/Oechsler, Vol. 6 (4th edn. 2004), Anh § 929-936 n. 49. Reinicke/Tiedke, Kreditsicherung (5th edn. 2006), p. 716. § 1235 BGB. Reinicke/Tiedke, Kreditsicherung (5th edn. 2006), p. 716. BGH 24 January 1962, WM 1962, 393; Lwowski, Recht der Kreditsicherung (8th edn. 2000), p. 259. § 91 ZPO.

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Proceeds of the sale will be applied to the secured claim. Depending on the definition of “secured claims” in the security agreement, enforcement costs may also be recouped from the proceeds of enforcement of the security interest. Surplus, if any, has to be paid out to Manufacturer.

f)

Insolvency of the grantor

In case of insolvency proceedings, the insolvency administrator will liquidate all assets on behalf of all creditors. Proceeds from the sale of the Machines will be paid out to Lender, subject to a fee of 9 %47 which goes to the bankrupt’s estate48 for distribution among all creditors. If the proceeds exceed the secured claims, any surplus will also go to the estate; if the proceeds are insufficient to discharge the secured claim, Lender will be treated like an unsecured creditor for the remaining claim.49

g)

Motor vehicles collateral

No differences apply, with one practical exception: for each motor vehicle, there is a title document (“Fahrzeugbrief”).50 This Brief is not essential for a transfer of title, but nonetheless serves as evidence of ownership. In case of a transfer of title for security over motor vehicles, lenders will request that the title documents are handed over (usually, however, lenders will not have their name entered into the Brief). Should the borrower attempt to sell the vehicle to a third party without authorisation, bona fide acquisition will almost certainly fail, because the purchase will not be considered to be acting in good faith if he has not asked to see the title document. So, with motor vehicles, protection against unauthorised sales of the encumbered assets is somewhat more effective than with assets of a different kind.

2.

Non-possessory security right in present and after-acquired equipment (floating security right)

A transfer of title for security can easily be expanded to cover afteracquired property. The practical difficulty usually lies in providing a 47 48 49 50

§§ 170, 171 InsO. § 170 sec. 1 sentence 1 InsO. § 52 InsO. For relevance of the title document, see Bülow, Recht der Kreditsicherheiten (7th edn. 2007), n. 1357.

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legally sufficient description of the future assets. In this case, however, a simple clause like “all present and future machines” is sufficient.

3.

Non-possessory security right in present and after-acquired inventory (floating security right)

Whether collateral is classified as equipment or as inventory is irrelevant to the analysis under German law. Both types can be subjected to a transfer of title for security. In case the secured lender is willing to allow the borrower to sell collateral – inevitable for inventory as collateral, but also not unusual for depreciated or obsolete equipment – the agreement may authorise the borrower to freely dispose of the collateral. It is not required that the secured lender exercises any kind of control over the collateral. Usually, such an authorisation to dispose is combined with the creation of a security interest (“Sicherungsabtretung”) in the receivables resulting from the disposal. Unless the parties have agreed upon a security interest in the receivables, the secured lender does not have rights in the proceeds of the original collateral. The parties are also free to determine the obligations secured by the transfer of title. It does not make a difference whether the loan is a term loan or a revolving credit line, as long as the agreement makes it clear which obligations – present and future – are secured.

4.

Purchase-money (asset-acquisition) financing – alternative sources

a)

General remarks

All three asset financing options addressed in the case studies are viable under German law. First, if the seller is willing to finance the purchase price, he will retain title to the machine until the purchase price is paid (“Eigentumsvorbehalt”). Second, under a lease arrangement, the lessor will usually acquire the machine from its manufacturer or from a different source and will thus become the owner of the machine with unrestricted title. It will then lease the machine to Manufacturer as lessee, who in turn will pay the agreed leasing rates. Manufacturers’ rights to the machines under the lease will be purely contractual; the position of the lessor as owner and holder of unrestricted title is no affected by the lease agreement. Third, if a third party lender is willing to finance the acquisition of the machines by lending the purchase price to Manufacturer, the loan may be secured by a transfer of title for security (“Sicherungsübereignung”) in the machine.

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No special rules exist regarding the formalities of creation or perfection of these arrangements. Simple agreements between the parties suffice; agreements in writing are standard, but not required by law. In the insolvency of Manufacturer, a title-retaining seller and a lessor may – unless the insolvency administrator decides to fulfil the respective contracts and meets the resulting payment obligations51 – request that the insolvency administrator deliver the machine to them.52 A third party lender who financed the acquisition of a machine and holds title for security to it usually has a right to the proceeds resulting from the insolvency administrators’ liquidation of the machine, subject only to the 9% deduction mentioned earlier as liquidated compensation for enforcement costs.53 Due to their structure, the first two arrangements, retention of title and leasing, give the secured creditor or lessor priority over all other creditors of Manufacturer, even if Manufacturer should have entered into an agreement with a different creditor transferring title of all his present and future machines to him prior to the purchase of the machine in question. Under these arrangements, prior-in-time security interests have no chance to attach, because Manufacturer does not acquire title to the machine until the credited purchase price is paid or – if at all – the term of the lease has expired. Without title, Manufacturer is not able to grant security over the machine to a different creditor whose claims to the machine or its liquidation proceeds may compete with the claims of the party financing the acquisition.54 Even though title-retaining sellers and lessors are protected against adverse effects of prior transfer of title agreements, German law does not embrace a general concept of super-priority for a creditor who finances the acquisition of an asset: under the third option, financing by a third party lender, where Manufacturer will acquire title to the purchased machine and transfers it by way of security to the third party creditor, it is possible that the acquired machine is caught by a pre-existing transfer of title arrangement with a different creditor: if Manufacturer has entered into an agreement under which he transfers title to all his present and future machines to Bank A, and later signed an agreement transferring 51 52

53 54

§ 103 InsO. § 47 InsO. For leasing, see BGH 27 February 1995, BGHZ 94, 44, at 49; MünchKomm/Habersack, Vol. 3 (4th edn. 2004), Leasing, n. 136. §§ 50, 51 InsO. As mentioned supra, bona fide acquisition of title (including title for security) is possible under German law, but requires transfer of actual possession to the bona fide purchaser (see § 930 BGB). With a transfer for security, the borrower will almost inevitably remain in possession of the collateral and thus, a bona fide acquisition will almost certainly fail.

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title to Bank B as security for the financing provided for the acquisition of a new machine, title to the machine will pass to Bank A rather than Bank B the moment Manufacturer acquires the machine. Bank B will remain unsecured. In this situation, an honest borrower will ask Bank A for a release of the machine the acquisition of which Bank B is willing to finance. Should the request be denied, Manufacturer will have to inform Bank B that he is not able to grant effective security over the machine to be acquired. Apparently, German law shows a certain preference for the financing seller or lessor compared to a third party financing the acquisition of an asset. In insolvency, a financing seller (or lessor) may ask for delivery of the goods rather than for preferential satisfaction out of the liquidation proceeds, and he is protected against the effect of a pre-existing transfer of title agreement a buyer may have in place which may take priority over a third party financing seller. At first glance, the reason for this preference lies in the dogmatic structure of the different security devices available to sellers and third-party financiers. Functionally, the difference is more difficult to justify. I believe there are good reasons to argue that a creditor who financed the acquisition of an asset should be no better or no worse off than a creditor who, for example, provided working capital to cover running expenses and thus enabling the borrower to pay for new machines out of its cash flow.55 The position under the UCC, for instance, is the direct opposite. All purchase money financing is privileged and gives the financier a security interest which takes priority over all pre-existing security rights in the purchased good. The difficulty of a concept, it seems to me, where all purchase money financing is (equally) privileged lies in the necessity to determine if a loan extended to a borrower was indeed used for the acquisition of an asset. 56 This requirement triggers all kinds of difficult questions: loans are usually disbursed by crediting the loan amount to a bank account and typically all kinds of payments are made out of these accounts. Does it matter if the borrowers’ account went into overdraft between disbursement of the loan and the acquisition of the collateral? Plans about an intended purchase discussed with and approved by the financier might be changed and may lead to an acquisition of a machine that is not quite of the same type, brand, price or making that was originally 55

56

Rakob, Ausländische Mobiliarsicherungsrechte im Inland (2001), p. 269-272; see also Grunsky, Sicherungsübereignung, Sicherungsabtretung und Eigentumsvorbehalt in der Zwangsvollstreckung und im Konkurs des Schuldners, JuS 1984, 497, at 503. Compare UCC §§ 9-107 (b) “if such value is in fact so used”. For a discussion of the concept, see White/Summers, Uniform Commercial Code, Practitioner Treatise Series, Vol. 4 (4th edn. 1995), §§ 33-5.

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agreed upon. And what if the borrower buys something completely different with the funds? Original financing may be repaid and replaced by a new loan. Can this still be secured with a privileged PMSI, even though if obviously did not enable the buyer to make the purchase? The line seems hard to draw, distinctions sometimes arbitrary, and in cases that are less then clear cut, the justification for the PMSI privilege over other creditors becomes blurred and far less obvious. Considering the practical difficulties the universal PMSI privilege model inevitably runs into, German law may be understood as embracing a concept of purchase money privilege in clear cut cases only. In retention of title and leasing cases, there is no real question whether the seller or lessor financed the acquisition of a certain machine or involuntarily ended up financing something else.

b)

Asset acquisition financing from seller: retention of title

aa) Basic structure

If the acquisition of an asset is financed by the seller – usually by crediting the purchase price – the seller will retain title to the respective asset. If Manufacturer defaults, the financing seller may terminate the sale contract57 and demand that the machine subject to the retention of title arrangement be returned to him. If Manufacturer does not do so voluntarily, the seller must go to court and sue Manufacturer for delivery. Repossession by force is illegal and would entitle Manufacturer to use force to defend it. Once insolvency proceedings have commenced, the position of a seller relying on a retention of title arrangement is somewhat stronger than that of a lender secured by a transfer of title for security.58 The insolvency administrator has the right to chose whether to fulfil the contract or terminate it. If he chooses to keep the contract alive, he has to pay the purchase price and no question of enforcement of the retention of title arises. If the administrator chooses not to fulfil the sales contract (and consequently does not pay the agreed purchase price),59 the unpaid seller may request that the sold goods are returned to him.60 Title based on a retention of title arrangement is treated as “real title” under insolvency law and the seller may reclaim the sold goods just like someone who has 57 58 59 60

§ 323 sec. 1 or § 324 BGB. See Reinicke/Tiedke, Kreditsicherung (5th edn. 2006), p. 296. § 103 InsO. § 47 InsO; BGH 21 November 1991, BGHZ 116, 156, at 158; Münchner Kommentar zur Insolvenzordnung (MünchKommInsO)/Ganter, Vol. 1 (2001), § 47 n. 72.

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accidentally parked his car on the premises of the insolvent debtor. This difference between Eigentumsvorbehalt and other security devices shows that in the intrinsic logic of German civil and insolvency law, Eigentumsvorbehalt is essentially not a right which secures the payment of the purchase price – rather, it secures the unpaid seller’s right for a return of the sold goods if the buyer does not meet its payment obligations under the sale contract.61 In addition to his right to demand return of the sold asset, the seller may also ask for damages62 as compensation for the buyer’s breach of contract – including damages for wear and tear of the sold asset, and lost profits. The buyer (or the insolvency administrator on his behalf) may demand repayment of the instalments of the purchase price,63 if any. The buyer’s and seller’s claims for repayment of damages are included in a calculation of the parties’ rights and obligations against each other.64 Only the holder of a positive balance may ask for payment from the other party. This means that the buyer may only ask for repayment of its partial payments if this claim is higher than the claim for damages the seller may assert against the buyer.65 There is very little case law on the issue of calculation of damages in title retention cases, and legal scholars have equally shown little interest.

61

62 63 64 65

Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 289. Under German law, the scenario without Eigentumsvorbehalt looks like this: if the buyer does not pay the purchase price as agreed, the seller may terminate the sale contract under § 323 sec. 1 or § 324 BGB. Consequently, the claim for the purchase price lapses and the right of the buyer to the sold asset lapses as well. The seller may therefore demand that the buyer returns the asset to him. In the buyers’ insolvency, this claim for the return of the sold asset is treated like any other claim for the delivery of goods – converted into a payment claim and satisfied with the respective quota. If there is an Eigentumsvorbehalt, the insolvency code allows the seller to claim the sold asset. The downside to this treatment of the Eigentumsvorbehalt as “real title” is the effect on the sale contract: other than with a genuine security interest securing a payment claim, the unpaid seller may only ask for the return of the sold goods if he terminates the sale contract. He must therefore choose if he wants to hold on to the contract and demand payment of the purchase price or to terminate the contract and ask for return of the goods. The concept underlying the Eigentumsvorbehalt under German law is therefore quite different from other security devices; in essence it is not a security for credit extended, but for the right of the seller to have his goods returned to him. MünchKommInsO/Ganter, Vol. 1 (2001), § 47 n. 72. BGH 5 May 1977, BGHZ 68, 379, at 381. MünchKommInsO/Ganter, Vol. 1 (2001), § 47 n. 72. BGH 5 May 1977, BGHZ 68, 379, at 381.

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bb) Competing secured creditors: Security transfer of purchased goods and security assignment of receivables resulting from a sale of the purchased goods

If Manufacturer buys a machine under a standard retention of title agreement, he will only become the owner of the purchased machine when the purchase price is fully paid. If Manufacturer attempts to transfer title to a third party, i.e. fiduciary title for security to a second creditor, the transfer will usually fail: Manufacturer may not transfer title if he does not hold title himself, and a bona fide acquisition would require a transfer of direct possession which in case of a security transfer will usually not take place. German courts and legal doctrine have long accepted, however, that even before full payment, the buyer holds a right in nature, but not in effect similar to full ownership: an expectancy right (“Anwartschaftsrecht”), which allows to create limited security over the purchased asset in favour of a second creditor. The test whether the chance to acquire a property right has become concrete enough to be deemed an Anwartschaftsrecht is usually whether, in a multi-step acquisition process, so many steps have been completed that the transferor can no longer stop the acquisition of the right unilaterally.66 In case of retention of title agreement this is usually the case: the buyer will acquire title when he makes the final payment, and as long as the buyer does not default on its obligations, there is no way the seller could prevent this. It is widely accepted that a buyer under a retention of title scheme may transfer its expectancy right just like full title. The expectancy right may be used as collateral and subjected to a transfer of title for security67 to a second creditor. In practise, standard security transfer agreements will contain such a clause as a fallback provision and provide that in case the transferor does not hold full title, the transfer under the agreement shall extend to any expectancy rights the transferor might have. If Manufacturer pays the last instalment, the expectancy right in the hands of the second creditor will grow into full ownership. The second creditor will then hold ordinary fiduciary title (“Sicherungseigentum”), which will be treated according to the general rules. If, on the other hand, Manufacturer defaults on his payments to the seller, the seller may terminate the sale and demand return of the machine. In this case, the expectancy right terminates and the second creditor loses its security right. The second creditor has no right against the seller for a turnover of 66 67

BGH 5 January 1955, NJW 1955, 544. Leading case BGH 22 February 1956, BGHZ 20, 88 (for further references, see MünchKommBGB/H.P.Westermann, Vol. 3 (4th edn. 2004), § 449 n. 55); MünchKomm BGB/Oechsler, Vol. 6 (4th edn. 2004), Anh. §§ 929-936, n. 20.

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proceeds in case the value of the returned machine exceeds the value of the outstanding purchase price or any other right a creditor with a second ranking pledge, for example, may have. In this latter situation the second creditor may protect his security interest by paying the outstanding purchase price to the seller.68 The expectancy right will then grow into full title in the hands of the second creditor, and he may proceed as any holder of fiduciary title may. Even though the Anwartschaftsrechte doctrine does not allow creating second ranking security interests in the strict sense, the economic effect of the combination of the expectancy right with a second secured creditor’s right to pay the outstanding purchase price is in some respects similar. If, however, the second creditor would like to enforce its security over the expectancy right while the purchase price is not yet due, there is nothing he can do but wait. His position is not better than the position of the buyer who transferred the expectancy right to him. If the buyer may not cause the retention of title to terminate because he may not yet pay the outstanding purchase price, neither may the second creditor. The recognition of expectancy rights gives the buyer under a retention of title agreement the option to use the equity value in the purchased goods which has accrued due to the partial payment of the purchase price as collateral. The value of the collateral is restricted, as shown above, and in any conflict of interest of the financing seller and the second creditor, the mechanics ensure that the seller prevails. The second situation where the interests of financing sellers secured by retention of title arrangements and a financial creditor may clash is the following: Dealer buys goods subject to an extended retention of title arrangement which combines title reservation with an assignment for security of any receivables which may result from a sale of the goods. Earlier, however, Dealer has entered into an assignment for security over all present and future receivables resulting from the sale of goods (a socalled “global” assignment) to secure his general corporate loan from a bank. Under the general rules of priority of German law, one would think that the transfer first in time, i.e. to the bank, is effective, and the second one to Dealer void for lack of anything to transfer. The Federal Supreme Court has come to a different view69 and has stuck to that ever since:70 it found that the bank acted unconscionable when it accepted the global 68

69 70

Though there is some dispute about the correct rationale, it is accepted that (contrary to the wording of § 267 BGB) the purchaser has no right to oppose such payment by a third party creditor who holds a fiduciary expectancy right. See MünchKommBGB/Krüger, Vol. 2 (5th edn. 2007), § 267 n. 17. 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 footnote 170.

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security assignment, because it had been aware that its customer would not be able to obtain further deliveries without agreeing to retention of title clauses in their extended form, and thus induced the customer to breach its future contracts with suppliers.71 From a purely rational point of view, the argument may have worked the other way as well – suppliers know that their customers will not receive bank credit without global assignments of receivables and extended retention of title clauses will therefore oblige them to breach their contracts with financing banks – but the Federal Supreme Court did chose to argue in the opposite direction. There are of course a lot of voices who have remained unconvinced by this reasoning. The underlying rationale for the views of the Federal Supreme Court, as many suspect, is probably 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 who are perceived as powerful big business, well able to protect their interests themselves.

c)

Asset-acquisition financing by leasing

The second option for asset acquisition financing is leasing.72 Under a system in which security interests are registered or otherwise made public, or which restricts the admissibility of security interests altogether, the distinction between “true” leases and “financial” leases is vital, because the latter qualify as secured transactions and therefore trigger registration requirements or otherwise raise questions of validity. Under German law with its nonchalant acceptance of secret security interests, these issues do not exist. The question whether a certain arrangement qualifies as true lease or financial lease is relevant only for accounting and tax reasons73 or for the question how far the parties’ agreement may deviate from the lease provisions of the civil code or which rules to apply to answer questions the parties have not considered in their agreement. For 71 72

73

BGH 30 April 1959, BGHZ 30, 149, at 153. A lease arrangement will qualify as financial lease if the risk for the amortisation the investment in the leased object is placed on the lessor rather than the lessee (BGH 11 January 1995, NJW 1995, 1019 at 1021; MünchKomm/Habersack, Vol. 3 (4th edn. 2004), Leasing, n. 4). This is deemed to be the case if the leasing payments of the lessor over the agreed time of the lease will amortise the investment of the lessee completely or predominantly. (Ibid.) A different approach looks to the value of the lessor’s claim for the return of the leased item. Zero or close to zero-value is a sign for a financial rather than a true lease. MünchKomm/Habersack, Vol. 3 (4th edn. 2004), Leasing, n. 14 et seq.

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the issues discussed in this report – rights upon default and in the insolvency of the lessee – the distinction is irrelevant. The rights of a lessee under a financial lease are no different from the rights of a lessee under an arrangement qualified as true lease for accounting and tax purposes. If Manufacturer fails to meet its obligations under the lease agreement, including a failure to pay the agreed leasing rents, the lessor may terminate the lease agreement and demand delivery of the leased machines. If Manufacturer goes into insolvency, the insolvency administrator may choose whether he wants to continue the lease or terminate it.74 If he opts for continuation, he has to meet all payment and other obligations under the lease agreement.75 Only if he fails to do so may the lessor terminate the lease unilaterally.76 If the lease is terminated, either by choice of the administrator or by termination by the lessor, the right to possession of the lessee terminates and the lessor may reclaim its assets.77 Under insolvency law, title of a lessor (regardless whether the lease is qualified as true of financial lease) is qualified as “real” title, giving the right to reclaim the leasing goods, rather as title for security, which only reserves a preferential right to the proceeds of the collateral.

d)

Asset-acquisition credit furnished by a third-party lender: transfer of title for security

The rights of third party lender secured by a transfer of title for security will depend on the agreement between Manufacturer and third party lender in the agreement creating the security right.78 Usually, the agreements will provide for a right to demand delivery of the collateral and a right to conduct a private realisation sale, if Manufacturer defaults on its payments.79 In the insolvency of Manufacturer, the administrator would gather all assets of Manufacturer to liquidate them. Under a transfer of title arrangement, title to the machine has passed to the lender and therefore one might argue that the machine is no longer part of the assets of Manufacturer and should therefore not be subject to an administrator’s right to liquidate, but the insolvency code takes a different view: assets encumbered with a transfer of title or assignment for security are part of the insolvent’s estate and may usually be liquidated by the administra-

74 75 76 77 78 79

§ 103 InsO; Obermüller, Insolvenzrecht in der Bankpraxis (6th edn. 2002), § 7.15. MünchKommBGB/Habersack, Vol. 3 (4th edn. 2004), Leasing, n. 136. MünchKommBGB/Habersack, Vol. 3 (4th edn. 2004), Leasing, n. 136. § 47 InsO; BGH 27 February 1985, BGHZ 94, 44, at 49. Reinicke/Tiedtke Kreditsicherung (5th edn. 2006), p. 243. Reinicke/Tiedtke Kreditsicherung (5th edn. 2006), p. 241.

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tor.80 The Lender is merely entitled to preferential satisfaction of its secured claims81 out of the liquidation proceeds of the machine. Thus, the rights and position of the third party lender are in no way enhanced by the fact that it provided acquisition finance which enabled Manufacturer the acquire the asset.

5.

Bona fide acquisition

In the case of inventory, the security agreement (either a transfer of title for security or a retention of title agreement) will usually allow the borrower/buyer to sell the goods in the ordinary course of its business (usually combined with the creation of a security interest (“Sicherungsabtretung”) in the resulting receivables).82 Thus, the retailer buying inventory acquires title to the inventory from an authorised seller and the question of a bona fide acquisition does not arise. In the absence of an authorisation to sell – rare with inventory, but standard for security agreements regarding equipment – the borrower/buyer does not have the right to transfer title to a buyer of the respective goods, but the buyer may still acquire title if he meets the requirements for a bona fide acquisition,83 in which case title passes by effect of law. The buyer must have acted in good faith84 and the goods must have been delivered to him. As there are no public registries or other formal notice mechanisms, there is no easy way for the secured lender or title retaining seller to prevent a loss of his rights to a bona fide buyer. Signs or labels on machines or other collateral suitable to be marked this way are an option to make bona fide acquisition much harder (unless, of course, the borrower took them off again), however, even though many security agreements contain a right of the creditor to mark the collateral if he chooses, it is not a standard thing to do.

80 81 82 83 84

§ 166 sec. 1 InsO. § 51 No. 1 InsO. “Verlängerter Eigentumsvorbehalt”. §§ 932 et seq. BGB § 932 sec. 2 BGB. Under this standard, a buyer or other acquirer is be acting in good faith unless a) he knows that the seller is not the owner of the transferred object, or b) he doesn’t know it, but his ignorance is due to gross negligence.

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Possessory pledge – constructive or fictitious possession

The traditional pledge usually requires a transfer of actual possession from the pledgor to the pledgee. The Civil Code provides for an exception and allows the transfer of constructive (indirect) possession (“mittelbarer Besitz”), but only when a third party – and not the pledgor – is holding the asset.85 If a third party has actual physical possession of the asset (“unmittelbarer Besitz”, direct possession), and the owner only indirect possession (e.g. when the object is stored with a third party), the owner may create a pledge in the object by transferring such indirect possession to the pledgee.86 This is done by instructing the party in direct possession (e.g. the warehouse) to hold the item now for the pledgee. Usually, however, the parties want to create security over items the borrower wishes to retain in its direct possession. Under these circumstances, there is no accepted way to evade the requirement of a transfer of direct possession to the pledgee. On the other hand, fictitious delivery, i.e., delivery achieved by the mere agreement of the transferor to hold for the transferee, is sufficient to satisfy the delivery requirement for a transfer of title for security.

7.

Over-security

German law maintains that taking security in obvious excess of what is accepted as reasonable to ensure satisfaction of the secured claims is unconscionable and thus the security right created is void.87 The concept of over-collateralisation used to be a dangerous pitfall for secured lenders in situations when the secured claims were reduced over time – e.g. in the case of amortised loans – but the value of the collateral remained unchanged. Case law provided that the agreements creating the security right had to take this future development into account and had to contain elaborate clauses giving the borrower the right to reclaim collateral (i.e., obtain the release from the security right) when certain ratios of the realisation value of the collateral and the amount of the secured obligations have been exceeded. The question when this was the case and how the value of collateral should be calculated gave rise to a lot of litigation.88 In the absence of such release clauses, the agreement was consid85 86 87 88

§ 1205 sec. 2 BGB. § 1205 sec. 2 BGB. Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 732 et seq. The question was highly disputed even among different senates of the Federal Supreme Court. For an excellent overview see Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 737.

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ered a violation of public morals (“gute Sitten”) and thus rendered void.89 The courts changed their view and adopted principles which were more lender-friendly: since a leading case of the Federal Supreme Court,90 security agreements are considered to imply a right of the borrower to ask for the release of excessive security. Because this release right is now considered inherent in any security agreement, the lack of an explicit clause dealing with the release of excess security developing over time no longer renders the agreement invalid.91 However, if the realisation value of the collateral exceeds the value of the secured claim already when the security agreement is entered into (initial over-collaterisation, “anfängliche Übersicherung”), the inherent right to obtain the release of excess security does not help: a lender taking excessive security from the outset is still considered to act unconscionably92 – even if the agreement provided an explicit a right to demand release.93 The Federal Supreme Court still maintains that a security agreement violates public morals if the value of the collateral ab initio exceeds the value of the secured claim excessively and therefore exceeds the legitimate interest of the lender in securing its claims.94 There is no bright line indicator establishing when this is the case: The Federal Supreme Court holds that there cannot be a fixed threshold when collateral is to be considered excessive, but that it will consider the factual circumstances of each individual case. There are good reasons95 to look to the threshold suggested by § 237 sec. 1 BGB for guidance. The rule of that provision applies when there is a legal obligation (e.g. procedural) obligation to provide security. The rule suggests that the realisable value of the collateral may – indeed must – exceed the secured claim by 150%. Even though the Federal Supreme Court explicitly refused96 to adopt this threshold as binding, it still gives some guideline what may still be acceptable.

89 90 91 92

93 94 95 96

§ 138 BGB; BGH 12 March 1998, NJW 1998, 2047. BGH 14 May 1996, NJW 1996, 2092. MünchKommBGB/Armbrüster, Vol. 1 (5th edn. 2006), § 138 n. 100. BGH 12 March 1998, NJW 1998, 2047; Reinicke/Tiedtke, Kreditsicherung (5th edn. 2006), p. 732-735. BGH 27 November 1997, BGHZ 137, 212, at 223. BGH 12 March 1998, NJW 1998, 2047. MünchKommBGB/Armbrüster, Vol. 1 (5th edn. 2006), § 138 n. 101. BGH 12 March 1998, NJW 1998, 2047.

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8.

89

Legal (non-consensual) rights of unpaid seller

Under German law, there are several legal liens protecting landlords, innkeepers, manufacturers, shippers, warehouse keepers and the like, but there is no legal lien or other privilege protecting unpaid sellers.

9.

Special property registries

As set out in the general remarks at the beginning, there are no registries for security rights – other than security over real estate – in general. For some categories of assets, however, registries exist which allow the registration of security interests. Such registries exist for aircraft, vessels, offshore cables (“Hochseekabel”)97 and, under certain circumstances, farming equipment.98

a)

Vessels

Ships registered in either the German inland navigation vessel registry or in the registry for seagoing vessels and ships under construction may be subjected to a Schiffshypothek,99 a mortgage under the Statute on Rights in Registered Vessels and Vessels under Construction.100 To create a mortgage in a qualifying ship, the mortgage has to be entered into the registry.101 Several pledges in the same vessel are possible; they rank according to the order of registration.102 The pledge in vessels is a strictly accessory security right.103 The secured creditor may not 197

However, the relevant act (Kabelpfandgesetz, 31 March 1925, RGBl. I, 37) was revoked in 1995 (Art. 13 Postneuordnungsgesetz, BGBl. I 1994, 2325, at 2396), and thus new registered pledges in offshore cables may no longer be created. 198 Pachtkreditgesetz, 9 July 1926, RGBl. I, 399, allows depositing a pledge agreement over farming equipment pledged in connection with a lease of the farm with the local court. Interested parties may request to see the pledge agreement. For an example see BGHZ, 7 October 1970, 54, at 319, but the option is rarely used. 199 § 1 SchRG (Gesetz über Rechte an eingetragenen Schiffen und Schiffsbauwerken, 15 November 1940, RGBl. I, 1499). 100 See Baur/Stürner, Sachenrecht (17th edn. 1999), § 14 I.2. 101 § 8 sec. 2, § 3 SchRG. To transfer title in a seagoing vessel, registration is not required (§ 2 SchRG). The rule on the creation of pledges in all vessels points to § 3 SchRG, the provision on transfer of title in barges, which requires registration in order for the transfer to be effective. 102 § 25 sec. 1 SchRG. 103 § 51 SchRG.

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enforce the security interest itself, realisation by way of formal foreclosure proceedings is mandatory.104

b)

Aircraft

Registered pledges in aircraft are governed by a special statute, the Gesetz über Rechte an Luftfahrzeugen.105 The registry for pledges in aircraft is kept by the local court (“Amtsgericht”) of Braunschweig. The registry is open to the public; anyone can check its content or ask for excerpts.106 The pledge in aircraft is designed after the mortgage in vessels and follows very similar rules. To create a pledge in an aircraft, it has to be entered into the registry.107 The following information is required: identification of the aircraft by reference to the registry for aircraft (“Luftfahrzeugrolle”), nationality, type, registration number of cabin, name and domicile of owner of the aircraft, the name of secured party, identification and amount of the secured claim, interest rate and total amount of additional fees (if any).108 Several pledges in the same aircraft are permissible; they rank according to the order of registration.109 The pledge in aircraft is a strictly accessory security right. The secured creditor may not enforce the security interest himself, realisation by way of formal foreclosure proceedings is mandatory.110 The registered pledge is the only security device available with respect to aircraft listed in the German aircraft registry. The parties may not subject a registered aircraft to a transfer of title for security arrangement or any other security right other than the registered pledge under the LuftFzgG.111

10. Non-possessory security rights in raw materials – effect of processing (commingling, attachment/accession) As a financial lease of raw materials would be highly unusual, this paragraph focuses on financing sellers and third party secured creditors.

104

§ 47 sec. 1 SchRG. 26 February 1959, BGBl. I, 57 (LuftFzgG), see Wendt, Dingliche Rechte an Luftfahrzeugen, MDR 1963, 448. 106 § 85 LuftFzgG. 107 § 5 sec. 1 LuftFzgG. 108 § 24 sec. 1 LuftFzgG. 109 § 25 sec. 1 LuftFzgG. 110 § 47 sec. 1 LuftFzgG. 111 § 9 sec. 1 LuftFzgG. 105

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Under German law, combining with other goods,112 commingling113 and processing114 can affect the title to the combined, commingled or processed goods. A secured creditor – either a seller secured by a retention of title arrangement, or a third party creditor secured by a transfer of title for security – may lose its security right under these circumstances. If raw materials are combined with others so that they are no longer separate objects but part of a single new object, all rights to the raw materials terminate. The rights in the new product of the previous owners of the raw materials depend on the relative value of the materials: if one of the raw materials is considered the “main thing”, and other raw materials only additions to that main thing, the owner of the main material will become the sole owner of the resulting product.115 The other owners will be compensated in money for their loss of title.116 If the raw materials are of substantially equal value, the owners of the vanished raw materials will become co-owners of the resulting product.117 If the owners only held title for security, joint title for security is the result of the combination. The same principles apply when goods are inseparably commingled.118 If goods are used as raw material in the manufacturing of a new product, and the value of the conversion (i.e. the labour applied to effect the conversion) is not significantly lower than the value of the raw products, the owners of the raw products will lose title to their goods and the manufacturer will acquire exclusive title to the new product.119 Again, the previous owners will be compensated in money for their loss of title.120 In Case 10, the outcome would be the same for a financing seller or a financing third party. Depending on the relative value of the combined or commingled raw materials and the value of the work done to convert the material to a new product, a creditor may have exclusive title (for security) to the resulting product, hold title jointly with the previous owner of other raw materials or lose its rights entirely. Secured creditors will try to prevent a loss of their rights by contractual arrangements. While the application of the processing rules cannot 112

§ § 114 § 115 § 116 § 117 § 118 § 119 § 120 § 113

947 948 950 947 951 947 948 950 951

BGB. BGB. BGB. sec. 2 sec. 1 sec. 1 BGB. sec. 1 sec. 1

BGB. BGB. BGB. BGB. BGB.

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be excluded by party agreement, courts allow stipulations that the secured seller or third party creditor shall be considered manufacturer (“Herstellerklausel”) of the new product, and therefore title to the new product is vested in the secured creditor.121

11. Cross-border issues a)

General rules

If the item of equipment crosses the border and enters Germany, it comes encumbered with whatever rights have been created at the prior situs.122 So, if goods are subject to a foreign security interest which has been validly created according to the rules at the place where the goods were situated at the time the rights were created, these rights do not cease when the goods cross the border. Germany maintains a principle called numerus clausus of rights in rem, which implies that under German law, one may only create rights in rem123 which fall within one of the types already prescribed by law. Foreign security interest (unless identical to the domestic ones) do not conform to the accepted local types and are therefore at odds with the numerus clausus principle. To be recognised, the foreign security interests must be integrated into the local system of rights in rem.124 The current view – which has been criticized but is probably still prevailing – on how to do this is a “transposition” of the foreign security right into the equivalent right according to the accepted German categories.125 A different approach looks to the domestic rules which particular rights and obligations a security interest confers upon its holder and decides in this context whether a foreign security interest meets the criteria set out by these rules and therefore gives a right to preferential satisfaction out of the proceeds or a right to repossession.126 A foreign security interest may be treated like its German equivalent, if the features of the foreign law right are basically compatible with German law. As German law permits

121

BGH 19 October 1966, BGHZ 46, 118 et seq. Art. 43 sec. 1 EGBGB. 123 Rights in rem (“Sachenrechte”) are effective against third parties (e.g. other creditors) and not only among the parties who created them contractually. 124 Art. 43 sec. 2 EGBGB. 125 For an overwiew over different approaches see MünchKommBGB/Wendehorst, Vol. 10 (4th edn. 2006), Art. 43 EGBGB n. 147 et seq. 126 Rakob, Ausländische Mobiliarsicherungsrechte im Inland (2001), p. 76 et seq., for further reference see p. 34. 122

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secret security rights, lack of registration or other public notice devices is no impediment. There has been a number of cases in which the effect of foreign security interests in Germany was decisive, and all courts have come to the view, albeit based on varying rationales, that the foreign security right at hand was compatible with German law and gave it the desired effect. The first case decided by the Federal Supreme Court127 concerned a French lorry encumbered with a French registered pledge in favour of a French bank. The lorry was owned by a Lorraine scrap metal dealer and operated both on the French and the German side of the border. While on its way in Germany, the lorry was caught up in German foreclosure proceedings. The Federal Supreme Court held that the French bank was entitled to preferential satisfaction out of the proceeds of the liquidation (§ 805 ZPO). The court stated that the asset came into Germany with the “imprinting” received under the foreign lex situs. It then asked whether the foreign security right was at odds with the German ordre public, a theory the court very decisively rejected: German law knew registered pledges in certain types of assets (vessels, aircraft) and even recognised security transfers of ownership without registration or any other signs of publicity, and therefore a French registered pledge could not be considered to violate the German ordre public. The next decision128 concerned a knitting machine that was delivered from Italy to the German buyer subject to a retention of title agreement. Under Italian law – the lex situs at the time when the contract with the retention clause was made – the retention of title was only effective among the parties, for lack of a data certa. The Federal Supreme Court held that the retention of title was nonetheless fully effective against third parties from the time the machine crossed the border. The parties had intended a retention of title effective in Germany and the court allowed the parties to reach ahead in time and effectively agree on a security interest under the prospective future lex situs, i.e. under German law. There are a number of cases by lower courts following the ruling that in a cross border sale situation, the parties may create security rights under the laws of the envisaged future situs.129 A third decision130 deals with an Italian security right – a motor vehicle hypothec – in a Ferrari. The Italian owner drove the car to Germany and sold it to a German buyer. The Federal Supreme Court had to decide 127

BGH 20 March 1963, BGHZ 39, 173. BGH 2 February 1966, BGHZ 45, 95; discussed in Kegel, Der Griff in die Zukunft, JuS 1968, 162. 129 LG Hamburg 20 November 1980, IPRspr. 1980, p. 162; OLG Hamm 13 July 1989, NJW-RR 1990, 488; OLG Koblenz 16 January 1992, IPRax 1994, 46. 130 BGH 11 March 1991, IPRax 1993, 176. 128

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whether the German buyer had acquired clean title – by way of a bona fide acquisition or otherwise. The Federal Supreme Court held that the Italian motor vehicle hypothec was functionally equivalent to a German security transfer of title and would be treated as such in Germany. In the same year, the Federal Supreme Court131 decided that a US mortgage in a sporting airplane that was registered in the United States was effective in Germany and was to be treated like a German registered pledge in an aircraft. The survey of Federal Supreme Court decisions shows that, even though rationales vary and decisions do not always seem consistent, the outcome of the cases is always the same (and usually detrimental to the German party): the foreign security interest is effective in Germany and its effect is similar to its closest German equivalent.

b)

Perfection of security interests in a cross-border situation

German law does not distinguish between attachment and perfection of security rights, i.e., under German law there is no such thing as a right that has attached to collateral but is not effective erga omnes. The closest equivalent is probably a contractual promise to grant a security right, and the granting of the right itself. In the case of a foreign security interest which has attached but not yet been perfected under the applicable law, German courts would look to the effects a security right with this status would have in its home jurisdiction. If its lacks effect against third parties, courts would probably find that it is not equivalent to any German security interest. Its effect in Germany would probably be only contractual and would not give the secured lender any rights in insolvency or against third parties. The case of the Italian knitting machine132 mentioned above looks like a case on point – the retention of title was agreed upon while the machine was still in Italy, where it had effect only inter partes. To be effective against third parties, title retention required a data certa, which could be achieved by notarisation by a notary public. However, the way the Federal Supreme Court looked at the case avoided the problem of unperfected foreign security interests: the court asserted that the parties had intended a German retention of title and wanted that to be effective from the time on when the machine crossed the border to Germany. In the court’s view, the question was therefore not: is an unperfected Italian security right effective in Germany, but rather: can the parties reach ahead in time and agree on a security interest under German law, the law of the place of the machines destination, effective upon 131 132

BGH 7 October 1991, IPRax 1993, 178. BGH 2 February 1966, BGHZ 45, 95.

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its arrival in Germany, even though the machine is still in Italy at the time of contracting. The second question was answered affirmatively; the first one was never discussed. Art. 43 sec. 3 EGBGB deals with situations where the creation of a security interest (or any change in a right in rem) is a more-than-one-step process. The rule states that for an asset that has entered Germany, steps which had already been completed abroad shall be taken into account for the creation of the respective right. This rule (introduced in 1999) seems to support the outcome of the knitting machine case with a different rationale; however, it raises the question if the same principles shall apply if the parties had, for whatever reason, intentionally refrained from perfecting the security interest. Assuming that the seller and the buyer of the knitting machine intentionally avoided the notarisation and did not want a fully effective retention of title, it seems absurd to apply Art. 43 sec. 3 EGBGB to the scenario and claim that what the parties did in Italy was enough to create a perfected right in Germany. Art. 43 sec. 3 EGBGB makes sense with respect to facts – the passing of time for a question of acquisition by adverse possession, the delivery of goods or transfer of possession, the question of notice. With respect to party agreements, it seems necessary to consider what result the parties wanted to achieve, and to consider all steps taken here or abroad necessary to achieve this aim. The rule may not be applied without consideration of the intentions of the parties. The approach the Federal Supreme Court took – that the parties created a German retention of title which took effect after the machine has crossed the border – seems more convincing than a decision based on Art. 43 sec. 3 EGBGB. However, a security interest which had been perfected and effective against third parties in its home jurisdiction will remain “perfected” after crossing the German border. No particular steps to achieve or maintain “perfection” in Germany are required.

c)

Priorities

In case of a dispute about priorities involving a later secured party or a seizing creditor, courts will treat the foreign security interest like its closest equivalent under German law – a German retention of title, a German transfer of title for security or a German lease arrangement (the latter will not even be considered a question of recognition of foreign security interest, because title of a lessor is simply considered title and recognition not an issue). In all three cases, a later secured creditor could acquire a security right only as a bona fide purchaser; otherwise the security interest of the foreign secured party would prevail. The foreign security interest would also give the secured creditor the right to either

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stop any enforcement proceedings of a seizing creditor („Drittwiderspruchsklage”, § 771 ZPO) or at least to claim preferential satisfaction out of the proceeds of the seizure and realisation (“Klage auf vorzugsweise Befriedigung”, § 805 ZPO), depending on whether the foreign security interest resembles more closely a German retention of title arrangement or real title, on the one hand, or a German pledge or transfer of title for security, on the other hand.

d)

Advice to foreign secured creditors

As counsel to the foreign secured creditor, I would have advised that a relocation of the equipment to Germany was unlikely to diminish the legal effectiveness of the security interest. It would, however, create a certain degree of uncertainty and a higher likelihood of disputes and litigation, because competing creditors and insolvency administrators – and to some degree courts as well – in Germany will generally be inexperienced in dealing with foreign security interests. To avoid any uncertainty, the secured creditor could enter into a German transfer of title for security agreement over the equipment, taking effect when the equipment crosses the border to Germany.

Annex – Limitations on granting and holding security under German law 1.

Corporate Law Issues: upstream security and financial assistance

If the borrower is a member of a group of companies, or an acquisition vehicle looking to finance an acquisition with bank debt, lenders will usually ask for security not only over the assets of the borrower itself, but also over those of other members of the group or, in case of an acquisition, over the assets of the target. German corporate law imposes serious restrictions on the ability of stock companies and limited liability companies to grant security for debt of their parent companies (upstream security) or to grant security for a loan that was used to finance its own acquisition (financial assistance).133 133

See generally Maier-Reimer, Das Recht der konzernexternen Fremdfinanzierung, in Lutter (ed.), Handbuch der Konzernfinanzierung (1998), p. 484; Bastuck, Kreditbesicherung im Konzern, WM 2000, 1091, 1097; Rakob, in Kronke/Melis/Schnyder (eds.), Handbuch internationales Wirtschaftsrecht (2005), p. 630 et seq.

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Upstream/cross-stream security

§ 57 AktG prohibits the repayment of equity capital to the shareholders. The rule is broadly construed and also prohibits other benefits conferred upon shareholders like the granting of security for their debts.134 Therefore, German stock corporations (“Aktiengesellschaft (AG)”) may not grant security for debt of any parent (upstream) or sister company (crossstream) at all.135 Any security granted in violation of this rule is void.136 German limited liability companies (“Gesellschaft mit beschränkter Haftung (GmbH)”) may grant upstream or cross-stream security, but only to the extent doing so does not violate its obligation to maintain its stated share capital (“Stammkapital”). The capital maintenance rules provide that a GmbH may not make payments to its shareholders which affect its stated share capital.137 The term “payment” is construed broadly and includes providing security for debt of the shareholders such as the granting of guarantees, pledges or mortgages. The stated share capital of a GmbH is affected if its net assets (which is its total assets less its liabilities as shown on its balance sheet) are less than the amount of its stated share capital. A violation of these principles will usually not affect the validity of the security, but will result in personal liability138 and possibly even criminal charges against the managing director of the GmbH. Due to these consequences, it is common for upstream and/or cross stream security to be limited to an amount equal to the guarantor’s free net assets (i.e. its total assets less its liabilities and less its stated share capital). If security is limited in accordance with the capital maintenance rules, a secured lender can only recover amounts which would be left once the direct creditors of the company have been paid in full and the amount of the stated share capital is set aside. Thus, a secured creditor with security rights limited according to the capital maintenance rules is in effect subordinated to the direct creditors of the GmbH. The capital maintenance rules apply mutatis mutandis to limited partnerships where the general partner is a limited liability company (“GmbH & Co KG”).

134

Hüffer, Aktiengesetz (7th edn. 2006), § 57 n. 3. OLG Düsseldorf 24 October 1979, AG 1980, 273, 274; OLG Hamburg 23 May 1980, AG 1980, 275, 279; OLG Koblenz 10 February 1977, AG 1977, 231, 232; Hüffer, Aktiengesetz (7th edn. 2006), § 57 n. 12. 136 Hüffer, Aktiengesetz (7th edn. 2006), § 57 n. 23, however, the issue remains disputed. 137 § 30 GmbHG. 138 § 43 sec. 3 GmbHG. 135

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Currently, the German Act on Companies with Limited Liability (GmbHG) is under review and will probably change considerably in the near future.139 Changes will probably also affect the capital maintenance rules and may make granting up- or cross-stream security easier in the future.

b)

Financial assistance

The German Stock Corporation Act (AktG) prohibits financial assistance (including the provision of security) in connection with an acquisition of shares in a German stock corporation.140 The target company of the acquisition may not assist (before or after) the acquisition by granting security for the loan which was used to finance the purchase price for the shares. The prohibition extends to financial assistance given by any related entity of the stock corporation, including any subsidiary. Any security granted in violation of this rule will be void or at least subject to a claim for unjust enrichment and therefore in effect unenforceable.141 There are no whitewash-procedures less costly or less time-consuming than a merger of the acquired stock corporation with the acquisition vehicle (so the emerging entity secures its own debt) or a change of corporate form from a stock corporation to a limited liability company (so the financial assistance rules for stock corporations no longer apply). German law does not prohibit financial assistance in connection with the acquisition of shares in a GmbH. However, any such agreement entered into by a GmbH will be subject to the capital maintenance rules as set out above, and thus the secured creditor will in effect be subordinated to direct creditors of the GmbH.

2.

Holding accessory security for several lenders

In the case of a secured syndicated loan agreement (or secured bonds), it is usually desirable to have all security held by a security trustee on behalf of the lenders. In particular when the identity of the creditors changes, e.g. when rights under the syndicated loan agreement are traded, it seems advisable to avoid the need to transfer security from an 139

See draft Gesetz zur Modernisierung des GmbH-Rechts und zur Bekämpfung von Missbräuchen (MoMiG), 23 May 2007, available at http://www.bmj.bund.de (1 August 2007). 140 § 71a AktG. See Hüffer, Aktiengesetz (7th edn. 2006), § 71a n. 1. 141 Lutter, in Claussen/Zöllner (eds.), Kölner Kommentar zum Aktiengesetz, Vol. 1 (2nd edn. 1988), § 71a n. 5, 8.

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old lender to a new lender. The idea is to grant all security in favour of the security trustee, securing the claims of all lenders under the loan agreement. The lenders and the security trustee enter into a security trust agreement under which the security trustee holds the security rights for the lenders and which spells out how decisions on realisation of the security etc. are taken. New lenders simply accede to the security trust agreement, thus avoiding a transfer of security rights. This internationally accepted standard structure for securing syndicated loan agreements meets with difficulties when German accessory security rights are part of the security package. Pledges („Pfandrecht”), suretyships (“Bürgschaft”) and mortgages (“Hypothek”) are accessory security rights. An accessory security interest is irresolvably tied to the claim it secures. It cannot exist without the secured claim;142 it may be transferred only together with the secured claim, and – and this makes it difficult – it may be granted only to and may be held only by the owner of the secured claim. An accessory pledge granted to a security trustee can secure only obligations owed to the security trustee itself, and not, as required by the structure described above, secure the obligations owed to all syndicate lenders under the loan agreement. Most assets may be validly and effectively subjected to non-accessory security rights and the problem thus avoided. Instead of accessory pledges, security transfer of title or security assignment can be used, non-accessory land charges (“Grundschuld”) instead of mortgages, guarantees (“Garantie”) instead of suretyships. With these non-accessory security interests, no problem arises.143 However, if the security package for the loan calls for security over shares in subsidiaries, this can only be achieved by encumbering the shares with a pledge. A security assignment of the shares is an option only in theory, but never done in practise, because it would make the security trustee a shareholder and therefore lead to a whole armful of undesirable consequences. If German law pledges can’t be avoided, one – and I believe the most widely used – way to address the issue is by introducing a “parallel debt structure”. Under the parallel debt structure, the borrower agrees to “owe 142

However, as accessory security rights may be created for future claims, no problem is posed when the secured claims do not exist yet – e.g. because the secured loan has not yet been disbursed – or are temporarily reduced to zero, e.g. under a revolving loan or a current account. 143 The confidence in the viability of the structure with non-accessory security interest has recently been affected by a decision of the Federal Supreme Court (BGH 2 June 2005, NJW-RR 2005, 1636) which challenged the notion that non-accessory security interests may be granted to a trustee on behalf of other lenders, securing the claims of the other lenders. The relevance and weight of this solitary decision is still open.

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any amount owed to the lenders also to the security trustee”. This duplicates the secured obligations and gives the security trustee his own claim against the borrower, equal in amount to the aggregate amount of all obligations owed to the lenders. Of course the borrower cannot be obliged to pay twice the amount that he owed the lenders without the parallel debt. The duplication of the claims is therefore combined with the provision that payment made on the original debt reduces the parallel debt claim and vice versa. The parallel debt concept makes the security trustee and each lender joint creditors (“Gesamtgläubiger”). The pledges can now be created in favour of the security trustee, securing the parallel debt claim. I am not aware that this structure has ever been tested in a courtroom, but the German law security over substantial assets in countless domestic and international loan transactions depends on it.

France James Leavy1 I.

Introduction

French law on security over tangibles has recently undergone some important changes as part of an effort to modernize the Civil Code. Traditionally, security over tangibles required dispossession of the grantor and the security could only be enforced through a judicial sale of the pledged collateral. Over the years some specific exceptions to the general rule were created in order to permit security without dispossession of the grantor, most notably for automobiles, for machinery and equipment purchased with financing, for certain tangibles included in the pledgor's business as a going concern (“fonds de commerce”) and even for motion picture reels. However, the basic rules of the Civil Code concerning security over tangibles remained unchanged. A committee of experts appointed by the government and chaired by Professor Michel Grimaldi recommended important changes to the provisions of the Civil Code concerning security interests but it decided against recommending the adoption of a unitary security interest over moveables such as exists in North America, including Quebec whose law is based on French law. The experts considered that such a unified security interest was incompatible with the underlying principles of French civil law and did not offer clear-cut solutions where conflict might exist between various secured creditors. Only some of the committee’s recommendations were translated into law.2 In particular, the law concerning privilèges (liens created by operation of law) was left largely untouched and it remains largely impenetrable.3 However, the legislator added to the Commercial Code a special 1

2 3

The author acknowledges the assistance of Arnaud Briand and Arnaud Rainfray, stagiaires (trainees) in the Paris office of Weil, Gotshal & Manges in connection with the preparation of this paper. Ordonnance No. 2006-346 of 23 March 2006, JO 24 March 2006. There are privileges which cover all moveable property (general privileges) and privileges covering only specific items of property (special privileges). Some privileges are created by the Civil Code; others are created in specific legislation. Some privileges must be published in order to be enforceable. Other privileges are not

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security interest on inventories (stocks) which neither the Grimaldi Commission, nor apparently the banks (who are its exclusive beneficiaries), had requested. French civil law now recognises pledges of tangible moveables with or without dispossession of the grantor. It now recognises the possibility of granting a pledge over future property and also the granting of a pledge over a group (“ensemble”) of property although there is still no recognition of the types of general security or charge which exists in US or English law. Pledges without dispossession of the grantor are opposable to third parties upon publication in a special register maintained at the commercial court registry.4 The recent changes to the Civil Code also broaden the scope of the methods of realisation available to the beneficiary of the security interest. In addition to the traditional methods of a judicially ordered sale and attribution of the pledged property to the beneficiary by order of the court, it is now possible for the parties to the pledge agreement to agree that the pledge can be realised by having the beneficiary directly assume ownership of the pledged property i.e, without having to obtain a judgment for such purpose. There is no requirement of any pre- or postrealisation notice being given. It remains to be seen whether this form of realisation will prove to be popular. The reform did not authorize the socalled “clause de voie parée”, which is the creditor’s right to sell the pledged collateral by private sale. Three other aspects of the reform are worth noting in connection with security over moveables generally, and more particularly in respect of tangibles. Firstly, the Civil Code now formally recognizes title retention as a security device. Secondly, the Civil Code now establishes general principles applicable to the right of retention – a right which is a powerful weapon in the hands of the creditor who is entitled to such right. A right of retention is recognized to a) the person who received possession of a thing until complete satisfaction of his claim, b) the person whose unpaid claim arises from the contract which obliges him to deliver the thing retained and c) the person whose unpaid claim arises by reason of his possession of the thing retained.

4

subject to any formalities. The recent changes to the Civil Code establish the principle that, as a general rule, the special privileges take precedence over the general privileges. The new legislation also sets out the priorities of the general privileges amongst themselves. However, there is no legislative text which sets out the order of priority amongst the various special Civil Code and non Civil Code privileges which may apply to the same specific property. Art. 2338 C. civ. as amended by Decree 2006-1804 of 23 December 2006, JO 31 December 2006.

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The practical consequences of these changes will be examined in the context of the Case Studies. Thirdly, an important issue which is not addressed by the new legislation on security interests is whether a pledgee who can benefit from a specific type of pledge over a property (such as the special nonpossessory pledge over financed equipment or the new pledge over inventory) can opt instead for the new general non-possessory pledge under the Civil Code. The Civil Code simply states that the new provisions on pledges do not prevent the application of the specific rules in commercial matters or in favour of licensed credit institutions. While it could be argued that the pledgee should be able to choose between the types of security interest available to it unless it is specifically forbidden to do so, it might also be argued that the more detailed and specific requirements of the special pledges exist for reasons of public interest including protection of third party creditors or purchasers and should therefore be followed, where applicable, in preference to the more general rules of the Civil Code. This issue, which results from the decision not to create a unitary general security interest, will undoubtedly come before the courts. Even more recently, and in a move which took many in both the financial and legal communities by surprise, the government gave its support to a modified version of a bill, sponsored by Senator Philippe Marini, to introduce a form of trust mechanism (“fiducie”) into 5 French law. The legislation, adopted in February 2007, permits commercial entities (but not individuals) to transfer "property, rights and security interests" to a trustee (“fiduciaire”) which will hold them in a patrimony of appropriation (“patrimoine d'affectation”) which is separate from that of the trustee itself. Only banks, insurance companies and other recognized financial institutions can be trustees. The trustee can also be the beneficiary of the fiducie. Every fiducie must be registered with the tax authorities and there will also be a public register of fiducies. However, at the time of writing this report, the decree which will set out the rules governing the register has not yet been published. The legislation sets out the legal framework for the fiducie but leaves a great deal of freedom to the parties concerning the way in which each specific fiducie will operate, in particular the powers to be given to the trustee in connection with administration of the trust property. One of the principal uses which is expected for the new fiducie is that of having the trust property transferred to the patrimony of appropriation as security for performance of an obligation, whether owed by the settlor or by

5

Law No. 2007-211 of 19 February 2007, JO 21 February 2007, introducing the fiducie as Art. 2011-2031 C. civ.

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another person, a device commonly referred to as fiducie-sûreté (the new legislation does not itself use this expression). Some commentators view the fiducie-sûreté as at least functionally equivalent to the transfer of ownership by way of security provided for in German law and believe it will be possible for a fiducie-sûreté to operate without dispossession of the settlor (who could use and manage the trust property on behalf of the trustee).6 The legislation on the fiducie states that the insolvency of the trustee does not affect the trust property (which is in the separate patrimoine d'affectation) but it does not say anything about the consequences of the insolvency of the settlor (other than that the creation of the fiducie at a time when the settlor is legally presumed to be insolvent – the so-called 7 “suspect period” – can be challenged in court). Even at this early stage, the generally accepted view is that through the fiducie-sûreté the property of the settlor which is subject to the fiducie is put effectively beyond the scope of any insolvency proceedings involving the settlor. The 2006 changes to the Civil Code and the introduction of the fiducie-sûreté do not affect the other specific pledges of tangibles provided by law. These include the pledge of machinery and equipment purchased with financing, the pledge of tangibles as part of the pledge of a going concern (“nantissement de fonds de commerce”), the new inventory pledge, pledges of equipment and material associated with motion pictures, etc. To these can be added retention of title, which the Civil Code now recognises as a security interest, and, by analogy, the financial lease (“crédit-bail”). Each of the security interests has its own set of rules concerning creation, publicity and enforcement. There are, therefore, many opportunities for conflict among creditors claiming security (either by contract or by operation of law) over the same pledged property.

6

7

Cf. R. Dammann/G. Podeur, Fiducie, sûreté et droit des procédures collectives: évolution ou révolution?, D. 2007, 1359. Art. 18 Law No. 2007-211 of 19 February 2007, JO 21 February 2007, which amends Art. L. 362-1 C. com. for such purpose. The "suspect period" begins on the date on which the court which opens the insolvency procedure declares that the debtor became unable to meet its payments as and when they became due (“cessation des paiements”). This date can be as much as 18 months prior to commencement of the insolvency proceedings.

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Case studies

Preliminary Remarks to the Case Studies In the following discussion, it makes no difference whether the debtor is a corporation, a partnership or a sole proprietorship, except in the case of the fiducie-sûreté, which cannot be created by an individual but only by a legal entity which is subject to corporation tax. With some very limited exceptions, only licensed credit institutions may provide financing to 8 French entities, including by way of crédit-bail. However, if an unlicensed institution provides financing, the transaction itself is not automatically invalid (at least according to the most recent decision on the 9 subject by the Cour de Cassation ). The new inventory pledge, discussed 10 in Case 3, can be granted only to a licensed credit institution and only such institutions (as well as insurance companies) can be trustees (“fidu11 ciaires”) in the context of a fiducie-sûreté.

1.

Non-possessory security right in specific existing items of equipment

a) Until the 2006 reform of the Civil Code described in the introduction, the only non-possessory pledge available for such machines was as part of a pledge of a going concern (“nantissement de fonds de commerce”).12 Such a pledge requires a deed, which can be made before a notary or as a private deed, payment of a nominal amount of stamp duty and registration at the commercial registry in every district in which the concern has a place of business. Such registration (which is effective for 10 years) must be carried out within 15 days of the date of the pledge agreement and failure to abide by the registration deadline results in the nullity of the pledge.13 18

19

10 11 12 13

Art. L. 511-5 C. mon. fin. Licensed credit institutions are those which are created under French law and meet the requirements of the law in such matters as capitalisation in order to be authorised to carry out credit transactions. Entities which are similarly licensed in other EU countries can carry out credit transactions in France through branches without having to be separately licensed in France. Cass. 4 March 2005 Van Haar Heijmeijer & Sté Lauga Limited c/Sté Axa Bank ANHYP, JCP G 2005, II 10062. The lender could be subject to the fine imposed by the law for breach of the banking monopoly. Art. L. 527-1 C. com. Art. 2015 C. civ. Art. L. 142-1 C. com. to Art. L. 143-23 C. com. Art. L. 142-4 C. com.

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With the 2006 reform, it is now possible to create a non-possessory pledge under the Civil Code over a class or group (“ensemble”) of move14 ables; this could cover the 200 machines. The pledge must be set out in a written contract, which is the only form requirement. The contract does not have to be made before a notary. In order to be opposable to third parties, the pledge must be registered at the Commercial Registry. There is no deadline for registration and registration is effective for 5 years.15 Many commentators believe that the new fiducie-sûreté can be structured in such away that while ownership of the property subject to the fiducie is transferred from the settlor (“constituent”) to the trust patrimony (“patrimoine d'affectation”) held by the trustee, effective possession and use of the property remains with the settlor. The trust arrangements must be set out in writing and the fiducie must be registered with the tax authorities, as well with a special register of fiducies (which does not yet exist).16 b) Both the register of nantissements de fonds de commerce and the new register of non-possessory pledges can be accessed electronically by any person on payment of a small fee. Any credit-bail affecting machinery must also be registered and that register too is accessible electronically.17 However, there is no register for title retention security. In addition, many of the privilèges (liens created by operation of law) do not require registration or publicity. This category includes the privilege of the unpaid seller of a moveable. While there is as yet no specific information on the register of fiducies, it is expected that that register too will be accessible electronically. c) For the purposes of this Case 1, we will assume that the lender benefits from either a duly registered nantissement de fonds de commerce or a duly registered new Civil Code non-possessory pledge. In either case, the lender will benefit from a droit de suite, i.e., the purchaser will acquire the machines subject to the lender’s rights under the pledge.18 In the case of the nantissement de fonds de commerce, the relevant legislation states specifically that the lien (privilege) of the pledgee follows the fonds de commerce into whatever hands it passes. In the case of the new Civil Code pledge without dispossession, once the pledge has been registered no one can rely on the defense of good faith possession in order to op-

14 15 16 17 18

Art. Art. Art. Art. Art.

2333 C. civ. 7 Decree 2006-1804 of 23 December 2006, JO 31 December 2006. 2020 C. civ. L. 313-10 C. mon. fin. L. 143-12 C. com.; Art. 2337 C. civ.

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pose the pledgee’s rights19 (this aspect is further discussed in the answer to Case 5 below). In the case of a fiducie-sûreté, the effect of publication in the (yet to be created) register of fiducies will be to serve notice on third parties that the property subject to the fiducie is not part of the settlor's patrimony. d) In the case of a nantissement de fonds de commerce it is usually stipulated that the pledge will cover any replacements for the machinery and equipment initially pledged. However, even without such stipulation the pledge will cover such replacement equipment, provided that the nantissement de fonds de commerce has been registered and such registration remains effective at the time the replacement is made. The new Civil Code pledge can also be drafted so as to cover replacement equipment and machinery, since the pledge can cover both a group (“ensemble”) of property and future property. It is possible to include future property in a fiducie-sûreté, as well as an ensemble of both present and "future property rights and security interests", provided they are identifiable.20 e) In the case of a nantissement de fonds de commerce, the lender can enforce the pledge on default of the debtor if, after giving notice to pay to the debtor and the grantor of the pledge, the default is not cured within 8 days. Enforcement is by judicial sale, it requires a court order and the court will set the delay within which the sale would take place. At least 15 days before the sale, any other creditors whose claims have been registered must be given notice of the sale. There are also specific publicity and notice requirements to be observed at least 10 days prior to the sale. The lender cannot enforce by applying to the court to have the ownership of the fonds de commerce attributed to the lender,21 nor does the lender have the right to foreclose on the property pledged. If the pledge is granted under the new provisions of the Civil Code, enforcement can be either by a judicial sale (carried out in accordance with rules of the Code of Civil Procedure) or by applying to the court for ownership of the pledged property to be attributed to the lender or, if the grantor and the beneficiary of the pledge have so agreed, by having the beneficiary directly assume ownership of the pledged property. In this latter case, the property must be evaluated as of the date of transfer of ownership by an independent expert chosen either by agreement among the parties or by the Court, unless the property is traded publicly on a regulated market. If the value of the collateral is greater than the amount 19 20 21

Art. 2337 C. civ. Art. 2295 C. civ. Art. L. 142-1 C. com.

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of the debt, the surplus is paid to the debtor (or is consigned if there are other secured creditors over such property).22 Enforcement of a fiducie-sûreté is essentially a matter for the contract which creates the specific fiducie. The law creating the fiducie does not give any guidelines as to what happens if the value of the property transferred to the patrimoine d'affectation substantially exceeds the amount of the unfulfilled obligation guaranteed by the fiducie-sûreté. It could be expected that the court would apply the general principle that the creditor of a security interest should not, upon realization, retain property or proceeds whose value exceeds that of the obligation secured.23 f) Whether the Lender has taken security under a nantissement de fonds de commerce or under a Civil Code pledge, his position would be the same in the case of insolvency proceedings against the manufacturer. The lender could not enforce his security while the manufacturer is under the protection of the court, either as part of the new procédure de sauvegarde (similar in some respects to US Chapter 11) or judicially-supervised reorganization (“redressement judiciaire”).24 The lender would have to register his claim with the Court in order to preserve his rights in the context of the insolvency proceeding. Property subject to security interests can be disposed of as part of a court-approved reorganisation but the proceeds of such disposition are deposited with the Caisse des Dépôts et Consignations for distribution to secured creditors, to the extent of their respective entitlement. In the case of the new procédure de sauvegarde, the court can order provisional payment of all or a portion of secured creditors’ claims but, in such case, the secured creditor will usually have to provide a bank guarantee which could be called if it were decided at a later stage in the procedure that such provisional payments had to be recalled.25 If Manufacturer goes into liquidation, secured creditors are entitled to enforce their security,26 but in such case, they will find that certain types 22 23

24 25

26

Art. 2348 C. civ. The Grimaldi Commission had proposed to insert this principle as an article of the Civil Code. This suggestion was not acted on although it is reflected in the code provisions dealing with the pacte commissoire (Art. 2348 C. civ.) and title retention as security (Art. 2371 C. civ.). Art. L. 622-8 C. com. (“procédure de sauvegarde”). The procédure de sauvegarde can be instituted even while the debtor is still solvent and will usually result in the debtor retaining possession and control of its business. Redressement judiciaire is court-imposed protection of a debtor which is already insolvent (“en cessation des paiements”) and usually results in the appointment of an administrator (“mandataire judiciaire”) over the debtor’s assets and activity. Art. L. 643-2 C. com.

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of privileged claims (particularly those of unpaid employees, the social security administration and providers of new money while the insolvent debtor was under court protection) will rank ahead of them. In addition, if in the context of the insolvency procedure, the court were to determine that the lender had benefited from excessive security from Manufacturer and such security had been prejudicial to Manufacturer, the entire security would be invalid.27 This provision, which was introduced only in 2005, has not yet been the subject of a court decision concerning the criteria for determining what would constitute excessive security. As already noted, the beneficiary of a fiducie-sûreté is, in principle, fully insulated, in respect of the trust property, from the effects of insolvency of the settlor (“constituent”). The property transferred to the patrimoine d'affectation is no longer a part of the settlor's patrimony and, under the general principles of civil law, is not subject to any action by or on behalf of settlors creditors. If the property transferred by the settlor to the patrimoine d'affectation is itself subject to a security interest at the time of such transfer, the security interest continues in force and will have the same effect in the context of the settlor's insolvency as if the fiducie had not been created. The fiducie-sûreté should be subject to the rule against excessive security already mentioned. In addition, the creation of a fiducie by a settlor who is legally presumed to be insolvent (i.e., during the so-called "suspect period") can be challenged in court. Other security interests can be so challenged only where they have been created during the suspect period to guarantee pre-existing debts of the insolvent debtor. g) At the moment, security granted over motor vehicles, other than in the context of financing granted for the purchase of the vehicle, is governed by the general rules discussed above. There is a special register for security granted to a lender who has financed the purchase of a motor vehicle. Under new provisions of the Civil Code, which have not yet come into force (but must do so no later than 1 January 2008),28 in principle, any pledge over a motor vehicle will be effective against third parties only when a declaration (the form of which has yet to be determined) is filed 27

28

Art. L. 650-1 C. com. This provision, which was included as part of the 2005 revisions to the insolvency legislation, may have been adopted as a sort of counterweight to the many provisions of the 2005 revisions to the insolvency legislation which are favourable to banks (such as their role on creditors' committees and the favourable treatment given to "new money" loaned by banks to a debtor operating under the new procédure de sauvegarde). Art. 2351 C. civ.

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with the (as yet unnamed) "administrative authority". However, the same article of the Code states that upon filing, the pledgee will be deemed to have retained possession of the pledged vehicle, which seems to indicate that this section is principally designed to apply to purchase money financing.

2.

Non-possesory security right in present and after-acquired equipment (floating security right)

As already indicated in Case 1, it is possible, in the context of a nantissement de fonds de commerce, or the new Civil Code pledge, or the new fiducie-sûreté, to include future equipment. In all three instances, the future property must be sufficiently identified. In the case of the nantissement de fonds de commerce, such identification is done by reference to the description of the business concern itself;29 in the case of the Civil Code pledge, it is done by reference to the nature, colour, quantity or place and, as the case may be, make and serial number of the property).30 The criteria for identificability of property subject to a fiducie-sûreté have not yet been published but they should be similar to those already adopted for pledges over moveables. If these criteria are fulfilled, then the answers in Case 1 would, in principle, apply here. Beyond these rules, French law does not, in principle, recognise a purely floating security over property generally or even over categories of property. Since the Civil Code rules on pledges of future property and groups (“ensembles”) of property are so new, it has yet to be seen how they will be interpreted by the courts.

3.

Non-possessory security right in present and after-acquired inventory (floating security right)

Until the recent reform of the law governing security interests, it was considered very difficult, if not impossible, to take non-possessory security over revolving inventory. Now the law offers two, and possibly three, methods of taking such security: a) under the general pledge rules of the Civil Code, which permit security to be taken over groups (“ensembles”) of property and over future property (and, in the case of fungible property, specifically per-

29 30

Art. 24 Law of 17 May 1909. Art. 2, 4° Decree 2006-1804 of 23 December 2006, JO 31 December 2006.

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mit the pledged property to be disposed of and replaced with property of the same kind);31 or b) under the specific pledge over inventory which has been added to the Commercial Code.32 The rules governing the pledge over inventory under the Commercial Code are much more specific than those of the Civil Code and there is some uncertainty as to whether a commercial entity can grant a pledge over its inventory other than by the new (and unwanted) specific pledge over inventory under the Commercial Code; or c) possibly, through the fiducie-sûreté mechanism. The pledge of inventory under the Commercial Code can only be granted in favour of a licensed credit institution. It requires the signature of a deed entitled acte de gage de stocks setting out the details of the secured obligation, a description which permits identification of present and future property pledged (nature, quality, quantity, value, location) and the term of the pledge. Inventory subject to title retention cannot be included in the pledge but, with this exception, the pledge can cover raw materials and other inputs, intermediate products and finished products. The pledge must, as a condition of validity, be registered at the Commercial Court registry at the place of domicile of the pledgor within 15 days of signature of the deed of pledge. Where several credit institutions have registered pledges of inventory, priority is determined by the respective dates of registration. The pledge extends automatically to new inventory. The pledgor must make available to the pledgee a detailed list of the inventory and the pledgee can inspect such inventory at any time. If the pledged inventory loses at least 20% of its value when compared to that declared at the time the deed of pledge is signed, the pledgee can put the pledgor on notice either to restore the value of the inventory or to reimburse the corresponding portion of the credit. Further, the parties can also agree that the amount of inventory pledged will be reduced as and when the credit facility is repaid. One important difference from the Civil Code pledge is that the parties cannot agree in advance that, on default of the pledgor, the pledgee will automatically become the owner of the pledged inventory. The pledgee must either have the pledged inventory sold by judicial sale or apply to the court to have the pledged property attributed to it. A Civil Code pledge can be given to cover a future obligation but the decree concerning registration of non-possessory pledges requires that the amount of the guaranteed obligation be stated or, in the case of future obligations, that elements of information which will enable them to 31 32

Art. 2342 C. civ. Art. L. 527-1 C. com. to Art. L. 527-11 C. com.

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be identified be stated.33 Likewise, in the case of the new pledge over inventory, the amount of the secured obligation must be set out in the deed as registered or, if the pledge over inventory secures future obligations, details of such obligations sufficient to enable them to be identified must be given.34 Could the fiducie-sûreté be used for the purpose of taking security over inventory? The legislation on the fiducie seems flexible enough to permit the settlor to transfer title over its inventory to the patrimoine d'affectation and then deal with the inventory on behalf of the trustee. However, the settlor would not be able to deal with the inventory as its own property but as that of the patrimoine d'affectation.

4.

Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third-party secured lender

All three options mentioned are available. Title-retention is now officially recognized in the Civil Code as a secu35 rity interest. It must be agreed in writing but there is no requirement of registration or notification in order to perfect the title retaining seller’s rights. A financial lease (“credit-bail”) can be granted only by a licensed credit institution. It must be set out in writing and, in order to be opposable to third parties, must be registered with the commercial registry. Registration protects the rights of the lessor for 5 years from the date of registration (this period can be extended through successive renewals of registration). In the case of a third-party secured lender, there is a specific pledge available (“gage de l’outillage et du matériel d’équipement”)36 as well as, possibly, the new Civil Code non-possessory pledge. The gage d’outillage, which was created in 1951, is specifically designed to facilitate financing of the purchase of new equipment. It can be granted either to the seller (if it has not retained title) or to the lender, whichever financed the purchase. It must be created by a written instrument. It must be granted at the latest within two months of the date on which the equipment was delivered to the place in which it is to be used 33 34 35 36

Art. 2, 3° Decree 2006-1804 of 23 December 2006, JO 31 December 2006. Art. 2, 3° Decree 2006-1803 of 23 December 2006, JO 31 December 2006. Art. 2367-2372 C. civ. Art. L. 525-1 C. com. to Art. L. 525-20 C. com. (this device was called a nantissement: under the new nomenclature introduced in 2006 to distinguish the pledge of intangibles (“nantissement”) from that of tangibles (“gage”), it is now called a “gage”.

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and it must be registered in the registry of the Commercial Court within 15 days of the date on which the pledge is created. Failure to meet both of these requirements will result in the invalidity of the pledge.37 The title-retaining seller is in a very strong position in the case of default by its buyer, provided that at the time of default the property sold has not been or incorporated into something else from which it cannot be 38 separated without causing damage, and provided further that the property has not been sold to a third party acting in good faith and without notice of the title retention. In those circumstances the title-retaining seller can take proceedings to reclaim possession of the property. On the basis of the general rule that a pledge granted on the property of another 39 is void, the title-retaining seller’s rights should take precedence over competing liens and security interests. However, since title retention is not published, a third party might be able to rely on Art. 2279 C. civ. (the article of the Civil Code which protects good faith purchasers without notice). There are no court decisions which have determined priority as between the title retaining seller and the beneficiary of a gage d’outillage (probably because a lender will have made sure, before lending (even though there is no register which it can consult for the purpose), that the goods to be financed are not subject to title retention). All three asset-acquisition financiers (title-retaining seller, financial lessor and a lender benefiting from a gage d’outillage) are in a relatively favourable position in terms of priority when compared to the pledgee of a Civil Code non-possessory pledge or the pledgee of a fonds de commerce, and the purchase-money lender which benefits from a gage d’outillage will take precedence over the lien of the unpaid seller (cf. question 8 below). The title-retaining seller may revindicate (reclaim) the property provided it is still in the possession of the buyer and provided it has not been incorporated into another property such that it cannot be separated from it without causing damage.40 The financial lessor in his capacity as owner of the leased property will be entitled, both under law and, generally, also under the specific terms of the lease, to claim restoration of the property if the lessee is in default. The purchase-money lender which benefits from a gage d’outillage can, upon giving 8 days notice to the defaulting debtor, move to have the collateral sold at public auction.41 If Manufacturer seeks court protection from its creditors, the titleretaining seller can claim the property provided it is still in Manufac37 38 39 40 41

Art. Art. Art. Art. Art.

L. 525-3 C. com. 2370 C. civ. 2335 C. civ. 2370 C. civ. L. 525-14 C. com. and Art. L. 521-3 C. com.

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turer’s possession and has not been altered (or if it has been incorporated into something else, it can be separated without causing damage).42 If the insolvency administrator does not agree to the claim, the matter will be decided by the court.43 In any case, the property cannot be revindicated by the title-retaining seller if more than three months have passed since Manufacturer was placed under court protection.44 The financial lessor’s position will depend on whether Manufacturer has continued to pay the rentals and, if not, when it stopped paying. The fact of Manufacturer being placed under court protection does not in itself entitle the lessor to terminate the lease and reclaim the property. It is at the discretion of the judicially appointed administrator of the insolvent manufacturer to continue or not with the lease. The administrator has a delay of 30 days in which to decide on continuation of the contract after having been put on notice by the other party to the contract. If it does not continue, then the financial lessor can recover the property on essentially the same conditions as the title retaining seller. If the administrator decides to continue the lease and then defaults, the lessor can recover the property even without the administrator’s consent (the three months delay runs from default).45 The lender which benefits from a gage d’outillage is in the same position as any other secured lender. It cannot enforce its security while Manufacturer is under court protection. If the property subject to the security interest is sold in the context of a reorganization of the debtor, the proceeds of such sale are set aside with the Caisse des Dépôts et Consignations and when they are distributed, the lender will be entitled to assert its priority. It is possible to imagine purchase money financing being provided on the basis of a fiducie-sûreté arrangement under which title to the relevant equipment would, simultaneously with the sale, be transferred from the buyer to the lender, acting as trustee and beneficiary of the fiducie-sûreté to guarantee repayment of the purchase-money financing. In such case, the lender could effectively insulate the financed equipment from the effects of the buyer's insolvency. However, if the buyer has the use of the equipment during the period of the fiducie-sûreté under an arrangement with the trustee, such arrangement might be characterized as an executory contract, similar to a financial lease arrangement, in which case the position of the lender, as trustee and beneficiary of the fiducie-sûreté, might be essentially similar to that of the financial lessor, as discussed above, in the case of the buyer's insolvency. 42 43 44 45

Art. L. 624-9 C. com. to Art. L. 624-18 C. com. Art. L. 624-17 C. com. Art. L. 624-9 C. com. Art. L. 622-13 C. com.

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Bona fide acquisition

For the purposes of this Case Study (and bearing in mind that French law does not provide for a general floating charge), it will be assumed that in the case of machinery there is either a pledge as part of the pledge of a fonds de commerce or a pledge in accordance with the new rules of the Civil Code. In the case of inventory, it will be assumed that there is a pledge granted under the new rules applicable to pledges of inventory. By way of background, the right of the third party bona fide purchaser, or beneficiary of a security interest granted by such purchaser, to oppose the rights of the original owner (or those of a secured creditor of the original owner) are based on Art. 2279 C. civ. which provides that in the case of moveables possession is equivalent to ownership. Cases had held that at least in respect of some forms of security interest requiring publicity for opposability to third parties, the fact that such publicity was carried out did not prevent the third party purchaser from asserting bona fide ignorance of the rights of the genuine owner or its secured creditor. In the case of the pledge of a fonds de commerce, the position of a third party purchaser is different. We have already seen that registration of the pledge of a fonds de commerce within 15 days of the grant of the pledge is a requirement for validity (and not merely for opposability) of the pledge. If the pledge is not so registered, the pledgee has no rights under the pledge which it could assert against third party purchasers. Conversely, if the pledge is registered, the Commercial Code provides that the rights of the pledgee follow the goods pledged. There are also specific provisions in the Commercial Code (which will however be abrogated in the near future) requiring the purchaser at a judicial sale of a pledged fonds de commerce to give notice to creditors of the vendor and "purge" security interests on the fonds de commerce. A third party purchaser would therefore appear to have no possibility (or at least only a very limited possibility) of relying on the protection of Art. 2279 C. civ. – although there do not appear to be any decided cases on this issue. If the pledge is granted under the new rules of the Civil Code concerning non-possessory pledge, and if the pledge has been registered, the Civil Code itself provides that no one may rely on Art. 2279 C. civ. to assert rights against the pledgee. This, in effect, places an obligation on a subsequent buyer to check whether there is a pledge registered against 46 the seller in respect of the good sold. It also means that if the pledge has not been registered, the subsequent buyer should be able to rely on 46

He will be able to check the existence of a pledge by reference not only to the pledgor but also by reference to the type of property which may have been pledged (Art. 11 Decree 2006-1804 of 23 December 2006, JO 31 December 2006) in accordance with a nomenclature set out in an Order (“arrêté”) of 1 February 2007.

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Art. 2279 C. civ.. What is not clear is whether a buyer from a person that had acquired the asset from a prior seller takes subject to a pledge granted by and registered against the prior seller. Since the register of non-possessory pledges is organised primarily by reference to the pledgors, it seems difficult to deny the benefit of Art. 2279 C. civ. to the good faith buyer whose seller was not the party against which the pledge had been registered. Note that if the machinery sold is subject to a gage d’outillage, the buyer from the pledgor can rely on Art. 2279 C. civ. even if the pledge is registered, unless the pledgee had also affixed to the equipment a plaque attesting that the equipment is pledged. The Commercial Code permits (but does not require) such plaque to be affixed.47 In the case of inventory pledged under the new specific pledge of inventory, the pledgor is entitled to deal with specific items of the pledged inventory: his obligation is to ensure that at all times the value of the inventory subject to pledge is sufficient. Although there is no specific reference in the new rules to the position of third parties, they should be able to rely either on the general principles underlying the new pledge of inventory, or more specifically on Art. 2279 C. civ., to protect their position against the pledgee, even where the pledge is registered. If the pledge of inventory is not registered within 15 days of creation it becomes ineffective for all purposes. If the inventory is subject to a fiducie-sûreté which is published (assuming that the use of the fiducie-sûreté for such purpose will be permitted as an alternative to the special pledge of inventory), the rights of a bona-fide subsequent buyer are uncertain. There is no equivalent in the portion of the Civil Code dealing with fiducie to the rule against relying on Art. 2279 C. civ. that is expressly stated in the case of a registered pledge without dispossession. Therefore, as a rule, the general principles of civil law should apply and these would tend to favour the position of the bona fide buyer, even where there is a registered fiducie-sûreté in respect of the inventory, i.e., there would not be any obligation on a bona fide buyer to verify if a fiducie-sûreté is registered in respect of the property it acquires. However, the courts might be tempted to apply, by analogy, the rules on nonpossessory pledges and in such case, publication of the fiducie-sûreté will serve to prevent any third-party acquiror from being able to rely on Art. 2279 C. civ. to defeat the rights of the trustee.

47

Art. L. 525-4 C. com.

France

6.

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Possessory pledge – constructive or fictive possession

In the case of tangibles, French law has not traditionally recognized any concept of constructive or fictive possession. The only exception to this rule concerns automobiles whose purchase is financed by a recognized credit institution. In such case, if the financed vehicle is pledged to the lender, the lender is deemed by law to have retained possession of the vehicle.48 As already mentioned in the introduction, the Civil Code has recently been amended in order to clarify the circumstances in which a right of retention will be recognised and enforced. The significance of this fictitious possession, however, is not in its serving to perfect a possessory pledge (which, for example, in an insolvency would rank behind substantial privileges), but in its supporting a right of retention that effectively makes that subordinate ranking irrelevant.

7.

Over-security

In France, there is no general doctrine of over-security. However, where creditors take excessive (disproportionate) security and such act is prejudicial to the debtor, such creditors could be held liable for the debtor’s debts in the context of the debtor’s insolvency. If such liability is held to exist, the security interests will be considered to be void. There has not yet been any court interpretation of the provisions of the Commercial Code adopted in 2005 which introduce this concept of excessive security.49

8.

Legal (non-consensual) rights of unpaid seller

The unpaid seller of a tangible to which it has not retained title has a lien (“privilège”) over the tangible so long as it is in the possession of the purchaser.50 If the goods have not been purchased on the basis of delayed payment (e.g. on credit), the unpaid seller may revindicate them within 8 days of their delivery to the purchaser provided they are still in the possession of the purchaser and have not been altered from their condition at the time of sale. If the goods have been sold on the basis of delayed payment, the seller’s privileged right is that of being preferred on the proceeds of the sale of the property (this is also the case, even where the 48

49 50

Art. 2352 C. civ. (this provision will only enter into force during 2007. However the legislation it will replace, which dates from 1953, contains a similar provision). Art. L. 650-1 C. com., cf. footnote 31 supra. Art. 2332 C. civ.

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goods have been sold on the basis of immediate payment, if the delay for revindication has expired). The unpaid seller’s lien ranks after the rights of the lender which has a gage d’outillage, the lien of the state for tax debts, the lien of the landlord for unpaid rentals (if the landlord does not have notice of the seller’s rights) and the lien of employees for unpaid salaries. It should rank ahead of the ordinary Civil Code pledge but the courts have not yet had the chance to rule on this issue. If the buyer becomes subject to court protection by reason of insolvency, the unpaid seller’s right of revindication, if it still exists, can be exercised only in respect of shipped merchandise which is in transit and 51 has not yet been placed in the possession of the buyer or its agent (the 52 unpaid seller can retain merchandise which has not been shipped). The unpaid seller can also revindicate if the sale was cancelled either by court decision or by the operation of a resolutory condition prior to the court 53 decision opening insolvency proceedings.

9.

Special property registries

There are special registries for security interests on: a) ships (there is a special register at the customs house at the port of registry of the ship),54 b) boats (there is a register at the commercial court),55 c) airplanes (a single special national register is kept by the Civil Aviation Authority),56 d) motor vehicles (the current register is maintained at each prefecture: by 1 July 2008 a new system will be established, as a consequence of the pledge on motor vehicles being integrated into the Civil Code),57 e) all tangible and intangible property rights connected with the production and distribution of motion pictures (at a special register maintained by the National Centre of Cinematography),58 and 51

52 53 54 55 56 57

58

Art. L. 624-13 C. com. Note however that revindication is no longer possible if prior to their arrival at the debtor’s premises, they have been resold "without fraud", based on invoices or transport documents in proper form. Art. L. 624-14 C. com. Art. L. 624-12 C. com. Sec. 43, 48 Law of 3 January 1967. Law of 5 July 1917. Art. 121-2 C. aviat. and Art. 122-7 C. aviat. Decree No. 53-968 of 30 September 1953 (existing law): Art. 2351-2353 C. civ. (new law, to be in force prior to 1 July 2008, cf. Art. 58 Ordonnance No. 2006-346 of 23 March 2006, JO 24 March 2006). Art. 33 C. ind. cin.

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f) patents, trademarks and rights in computer software (the register is kept by the French Patent and Trademark Office – INPI).59

10. Non-possessory security rights in raw materials – effect of processing The title-retaining seller can still claim sold goods even if they are commingled or processed, provided that the property sold can be separated from that with which it is co-mingled or incorporated, without causing damage to the property.60 Under the new rules contained in the Civil Code, where the raw material is fungible, the title-retention security will attach to property of the same nature if the debtor has such property.61 The title-retaining seller would not have any real rights in respect of the final product in to which the raw material is inseparably incorporated. It would be somewhat unusual for a financial lessor to lease raw materials and financial leases generally prohibit the lessee from dealing in any way with the equipment or material leased in a manner which would prevent the lessor from recovering possession of it if the lessee is in default (or chooses not to exercise the option to become the owner of the leased property at the end of the lease). Raw materials would not be the subject of the special pledge on machinery and equipment (“gage d’outillage”) referred to in the answer to question 4. Instead, under the 2006 changes to the law on security interests, they could form the subject-matter of the new pledge of inventory included in the Commercial Code and could, perhaps, also be the subjectmatter of a pledge without dispossession under the Civil Code. In neither case does the law set out any rules concerning the consequences of commingling or processing of the pledged property. In the case of the special pledge of inventory, the intent of the legislation would not appear to favour the idea that the pledgee would have security over processed goods or finished product. The new rules expressly state that the pledge automatically ceases to cover inventory disposed of and automatically attaches to substituted inventory.62 In addition, any significant depletion of inventory (more than 20%) would have to be rectified at the pledgee’s request and failure by the pledgor to do so would entitle the pledgee to require immediate repayment of the loan.63 59

60 61 62 63

Art. 613-8 C. propr. intel. (patents), Art. L. 714-7 C. propr. intel. (trademarks), Art. L. 132 para. 34 C. propr. intel. (software). Art. 2370 C. civ. Art. 2369 C. civ. Art. L. 527-5 C. com. Art. L. 527-7 C. com.

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In the case of the new general Civil Code pledge (assuming it is available for financing inventory), it would not appear to be the case that the non-possessory pledge would survive co-mingling or processing or that it would extend to finished product. Instead, if the raw materials are considered to be fungible (which would usually be the case) the pledge could 64 cover new raw materials replacing those initially pledged. In addition, the pledgor may be subject to an obligation to conserve the pledged property. Processing or attachment might constitute a violation of such obligation. In such case, the new Civil Code rules permit the creditor to accelerate payment of the obligation guaranteed by the pledge or to 65 require that additional property be pledged. A fiducie-sûreté over inventory (on the assumption that a fiduciesûreté for such purpose is possible, as an alternative to the new Commercial Code pledge over inventory) would, in order to be workable, probably require that the settlor retain possession of the inventory, under an arrangement with the trustee, in order to be able to sell the inventory or use it in its activity. Alternatively a third party warehouser could be entrusted with such task. In either case, there are no specific rules covering the consequences of commingling or processing of the raw material subject to a fiducie-sûreté. These subjects could be covered in the trust agreement and the settlor might be required to replace commingled or processed inventory. In the absence of any such provisions in the trust agreement, the courts might consider the trustee as being in a position analogous to the title-retaining seller, since the title to the inventory is held by the trustee in the patrimoine d'affectation, or they might seek to apply the general rules of the Civil Code pledge, on the basis that the fiducie-sûreté should, in the absence of special provisions to the contrary, be treated as a pledge.

11. Cross-border issues This subject is somewhat difficult because, although the general principles of French private international law applicable to recognition of foreign security interests have been established for some time, there are not many cases dealing with the issues presented in this Case Study and many of the practical consequences of such general principles are still matters of speculation. As a general rule, France applies the principle of lex rei sitae to determine what security interests can be created over a moveable. Whether such security interests will be recognized and enforced in France depends 64 65

Art. 2342 C. civ. Art. 2344 C. civ.

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on several factors. The first is whether French law recognizes a security interest which is identical or essentially similar to the foreign security interest. French courts will not enforce against property located in France rights of a type which French law does not itself recognise. The question of whether any special publicity or other formality would be required in France for the validity or opposability of the French equivalent of such foreign security interest is also relevant. If French law would require that for purposes of opposability a formality be carried out at a place which, in the circumstances (e.g., the grantor of the security interest is a French entity), is in France, then failure to carry out such formality in France in respect of a foreign security interest would be fatal to its opposability in France. If French law requires that a formality be carried out at a place which, in the circumstances, is in another country, then, in principle, French law would accept such opposability if the requirements of such other country’s rules have been complied with. If French law does not require that any particular formality be carried out for the purposes of opposability, then (although the matter does not appear to have ever been considered by French courts) it appears that opposability would require compliance with the formalities required in the country of origin 66 of the security interest. For the purpose of answering the questions raised by this Case Study, we will assume that the security interest created in State A is of a type which would be recognised and given effect by the courts in France if that security interest had been created in France. Taking as a starting point that the security interest has not been perfected against third parties in the country of origin (State A), then, in any of the three circumstances mentioned in the question (title retention, financial lease, non-possessory security interest), French courts would not uphold the original security interest over a subsequent security interest duly created and perfected under French law, and this would be the case even if French law itself would not have required any particular formality for the purposes of perfection (for example, in the case of title retention). In such circumstances, security could be granted in France purely on the basis of French law and without reference to the law of State A. If we now assume that at the time the property is moved from State A to France, it is subject to a security interest which has been perfected in accordance with the requirements of the law of State A, we would still need to know whether, under the law of France, perfection of the equivalent security interest involves a formality being carried out in France. In the present case, which concerns security granted exclusively over tangi66

For a summary of French law concerning the conflicts of law aspects of security interests on moveables, cf. P. Mayer/V. Heuzé, Droit international privé (2004), p. 469-483.

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bles, no formality would be required under French law for retention of title, a financial lease or a non-possessory pledge granted in respect of a moveable located outside France at the time of the grant, unless the grantor was a French entity, in which case French law would require that a financial lease or a non-possessory pledge be registered with the Commercial Court registry at the domicile of the grantor. Therefore, assuming that perfection had been carried out in State A in accordance with the law of State A before the property was moved to France (and that if necessary in the circumstances, any formalities required in France had also been carried out), such prior security interest should be opposable before French courts to a subsequent security interest created in France. However, the French court might still have to determine if, in the circumstances, a party in France such as a seizing creditor in possession of the property pledged under the law of State A could nonetheless rely on Art. 2279 C. civ. and, in such context, the answers to question 5 above would be relevant. It will be recalled that registration of a nonpossessory Civil Code Pledge will deprive third parties of the right, pursuant to Art. 2279 C. civ., to rely on the possession of the person from whom they derive their rights in respect of the goods and to consider such possession as being equivalent to unrestricted ownership of such goods. However, in other cases such as a financial lease or a pledge of inventory or a pledge of machinery to secure purchase money financing, registration by itself may not be sufficient to defeat the rights of a person who is otherwise entitled to rely on Art. 2279 C. civ.. Since the position of the third party depends, in French law, on the type of security interest to which the relevant property is subject, the position of such third party, before French courts, in respect of a security interest validly created abroad and recognized by French law should depend on whether the court will consider the foreign security interest to be equivalent to a French security interest (Civil Code pledge, “nantissement de fonds de commerce”) to which Art. 2279 C. civ. does not (or might not) apply. If the security interest is perfected in State A after the property is transferred to France but before a security interest is perfected in France, that security interest would in principle prevail over the subsequent security interest perfected in France. This answer assumes not only that French law will recognize by equivalence the security interest perfected under the law of State A but also that if the security interest is of a kind which requires registration in France if granted by a French entity (which would be the case for a financial lease and a non-possessory pledge), that such formality has been carried out in France prior to perfection of the second security interest granted in France, if the grantor is indeed a French entity. If either of these conditions is not met, the security interest perfected under the law of State A will still not be opposable to a subsequently perfected security interest created under the law of France.

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The answer to this question has not considered what would be the position if the security interest granted in State A is equivalent to the fiducie-sûreté. France already gives limited recognition to foreign trusts but the sort of recognition required for the purposes of giving full effect in France to a foreign fiducie-sûreté may depend on France ratifying the Hague Convention of 1985 on the Law Applicable to Trusts and on their Recognition. France signed the Convention in 1991 but, in accordance with a declaration made at the time, it has not ratified it, pending creation in French law of a mechanism equivalent to the trust. There is now speculation that, as a consequence of the introduction of the fiducie, France will ratify the Hague Convention. The following are some measures which could be adopted to reduce the risks related to validity of a security interest over a moveable resulting from transfer of the moveable to another jurisdiction. a) create a security interest of a kind which is likely to be recognised in the other jurisdiction to which the moveable might be expected to be moved. Continental European countries have fairly similar types of security interests over moveables, but those similarities should not be exaggerated. An Art. 9 UCC security interest or an English law floating charge is unlikely to benefit from equivalence in France – although as a consequence of the changes to the rules concerning security interests over moveables, including the fiducie-sûreté, discussed in this paper, "anglo-saxon" security interests, as well as German style security interests involving transfer of ownership of collateral, may stand a better chance than in the past of benefiting from equivalence; b) in the security document, condition the right to move the collateral on the prior consent of the secured party; c) make sure that the security is perfected as soon as possible in the country of origin (i.e. the country where the moveable is located at the time the security interest is granted); d) if the grantor of the security is “located” in a country other than the country in which the moveable is located at the time of the grant of security right, perfect (if possible) in the grantor’s country in accordance with the rules applicable to perfection in the grantor’s country, even if the moveable has not been moved to the grantor’s country.

England and Wales Michael Bridge I.

Introduction

1.

The statutory schemes

The most striking feature of the English1 approach to security over tangibles2 is the way that it divides the treatment of registration and formal requirements according to whether the security grantor (hereinafter referred to as the chargor, to cover both chargors in the strict sense and mortgagors) is a company or an individual (a category that includes sole traders). The registration of company charges (we shall see that few formal requirements are exacted) is a matter for the Companies Act 2006, which supersedes the Companies Act 1985. Individuals, on the other hand, are dealt with in bills of sale legislation. This division created difficulties for the work of the Law Commission when in recent years it reviewed company charges. Its terms of reference prevented it from looking at bills of sale and hence thwarted a full overview of the system of per1

2

The constitutional structure of the United Kingdom is a matter of wonderment. England has no separate legislature, though Scotland has a Parliament and Wales has a Legislative Assembly. Legislative powers (more in the case of the Scottish Parliament) have been devolved by the United Kingdom Parliament in Westminster to the Scottish Parliament and the Welsh Assembly. English law is not in force in Scotland but it is in force in England and Wales. The existence of the Welsh Assembly may in future require some differentiation between law applicable only in England, law applicable only in Wales and law applicable in England and Wales. For present purposes, English law means the last of these three categories. The expression “tangibles”, or “tangible movables”, is not used in English domestic law, with the exception of conflict of laws. The appropriate equivalent is “choses in possession”, though even this expression suffers from the defect that it could also include so-called “choses real” (leasehold interests in land). The bills of sale legislation (see infra) used the expression “personal chattels”, but that had a particular meaning under the relevant statutes. The expression “chattels” is in common use. In modern practice, the expression probably most often used is “goods”, an abbreviation of the earlier form of “goods, wares and merchandise”. I shall nevertheless use the expression “tangibles” in this paper.

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sonal property security. This binary division of the law of security over personal property (tangible and intangible) is complicated by separate statutory provision for farmers (the Agricultural Credits Act 1928). Furthermore, partnerships are treated as individuals for the purpose of security, except that the recently introduced limited liability partnership (LLP) is assimilated to companies, with registration of charges being dealt with at Companies House in Cardiff using forms that are an adaptation of those used by companies.3 The Companies Act 2006 is a new statute which permits certain major changes to be made at a future date by way of secondary legislation. Until such secondary legislation is made, the full impact of the new legislation in the field of secured transactions cannot be known. It will take some time for the law on the subject to migrate completely from the Companies Act 1985 to the Companies Act 2006. The requirement of registration is laid out in Sec. 395 et seq. of the 1985 Act and in Sec. 860 et seq. of the 2006 Act. The particulars of registration are entered on a so-called 395 form (an LLP 395 form for limited liability partnerships). It will be some time before new forms are devised to reflect the change in numbering (so far there is no change in substance). In the case of individuals (to which ordinary partnerships are assimilated), the applicable legislation is the Bills of Sale Act 1878 supplemented by the Bills of Sale Act (1878) Amendment Act 1882. The former statute applies to all bills of sale, including those that do not serve a security purpose. The latter statute deals only with security bills of sale and it operates by laying down its own substantive provisions and by modifying pro tanto (to the extent needed for security bills of sale) the provisions of the 1878 Act. Apart from the difficulties of complying with this dreadful Victorian statutory relic, there are considerable difficulties in just reading the two statutes side by side as they apply to security bills of sale.

2.

The general features of the law of security

In the case of companies and farmers, security over tangibles may be granted in the form of a charge or a mortgage. The charge may take the shape of either a fixed or a floating charge. There can equally be a floating as well as a fixed mortgage, but few references are made in practice to this possibility. Whereas a mortgage of movables is the outright conveyance of ownership with a cesser (that is, a reversion to the mortgagor) on redemption of the mortgage, a charge is technically not a conveyance 3

See the Limited Liability Partnership Regulations 2001 (as amended), SI 2001 No. 1090, regulation 4 and Schedule 2.

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but an encumbrance.4 In practice, the difference between a charge and a mortgage is of little consequence. The statutory provisions on the registration of company charges define a charge as including a mortgage5 and Sec. 205 (1) (xvi) of the Law of Property Act 1925 defines a mortgage as including a charge. The differences between mortgages and charges have largely been eliminated by commercial drafting practice.6 The mortgagee’s remedy of foreclosure, not exercised in practice,7 and the remedy of taking possession, which for various reasons mortgagees would be advised not to exercise,8 were never available by law (as opposed to contract) to chargees. Floating charges are not granted by individuals (though provision is 9 made for farmers to do so under the Agricultural Credits Act 1928). This practice appears to be due to difficulties concerning the interpretation and application of bills of sale legislation. Sec. 5 of the Bills of Sale Act (1878) Amendment Act 1882 states that a bill of sale is void, except as against the grantor, “in respect of any personal chattels specifically described in the schedule thereto of which the grantor was not the true owner at the time of the execution of the bill of sale”. This has been understood as amounting to a prohibition on security bills of sale (that is,

4 5 6

7

8

9

Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207. Sec. 860 Companies Act 2006. In London County and Westminster Bank v Tompkins [1918] 1 KB 515, Pickford LJ states that “the elaborate and drastic documents by which bankers seek to protect themselves may pass the line between mortgages and charges unintentionally”. Note the way that the elimination of the line between mortgages and charges is condoned by the case law. For example, see Swiss Bank Corp v Lloyds Bank Ltd [1982] AC 584, per Buckley LJ in the Court of Appeal: “[A]n equitable charge may, it is said, take the form either of an equitable mortgage or of an equitable charge not by way of mortgage.” In Re Bank of Credit and Commerce International SA (No. 8) [1998] AC 214, Lord Hoffmann refers repeatedly to the equity of redemption in charged assets. There cannot be a true equity of redemption in charged assets because the idea connotes the right to call for a reconveyance of property after a mortgage has been paid off. A charge does not involve the conveyance of property in the first place. Rather it is an encumbrance that can be lifted from the charged assets by paying the secured debt. It has never been a feature of the law of mortgages over tangible personalty and has in practical terms been eliminated from mortgages over land. Mainly because of the high standard of management of the charged assets expected of a mortgagee taking possession, see Gaskell v Gosling [1896] 1 QB 669, at 691 et seq. (Rigby LJ). Sec. 5 (2).

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charges) on after-acquired property. The meaning of the legislation and the extent to which it purports to deal with after-acquired property have been a constant source of misunderstanding and disagreement among the 11 judiciary. The legislation, however, applies only to documents and not 12 to transactions, and mortgages and charges of tangible movables are not required by law to be in writing. It will, however, not suit creditors to enter into oral charges in respect of after-acquired property. Apart from the difficulties posed by bills of sale legislation, perhaps the most significant feature of the English law of security is the ease with which it permits a single security to cover both present and future as13 sets. English law may have on the face of it a numerus clausus of con14 sensual security interests (mortgages, charges and possessory pledges), 15 but the elasticity and universality of the charge renders it unnecessary to look for new forms of security and English law has never had to de16 velop a notion of security transfer of title to make up for deficiencies in its law of security. Future assets are automatically attached by a charge

10

11

12

13

14 15

16

See, for example, R. M. Goode, Commercial Law (3rd edn. 2004), p. 587 footnote 63. See Thomas v Kelly (1888) 13 App Cas 506, at 514 et seq. (Lord Macnaghten), advancing the proposition that, apart from a stated exception, a security bill of sale over after-acquired property was not a bill of sale for the purpose of the Act, and Brown-Wilkinson VC in Welsh Development Agency v Export Finance Co Ltd [1991] BCLC 936, at 956 (reversed on other grounds at [1992] BCLC 148, CA), who thought this view was wrong. See Lord Herschell in Charlesworth v Mills [1892] AC 231, as explained by Lord Esher MR in Ramsay v Margrett [1894] 2 QB 18, at 23 et seq. The significance of this observation has never been fully clarified. So far as a document merely records a previous transaction (“not intended to be part of the bargain to pass the property in the goods” in that case), then it is not a bill of sale. So far as no writing requirement is laid down by law to constitute that earlier bargain, then it should follow that the legislation will not “bite” on documents that merely record the bargain. It is in the nature of a security bill of sale, however, that as a practical matter of proof a creditor will find it difficult to persuade a sceptical court that an informal security has in fact been granted. Cf. Italian law (subject to the broader rights given only to banks in recent times) and German law (with its asset by asset approach). Re Cosslett (Contractors) Ltd [1998] Ch 495 (Millett LJ). Cf. Belgian law and French law (before the recent reforms) in their requirement that a nantissement du fonds de commerce cover the whole of a going concern and not particular parts of it. Cf. German and Spanish law. Italian law, Belgian law and Dutch law (since 1992) have not been accommodating to the notion of security transfer.

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granted in these terms as soon as they come into existence. In modern times, at least, the issue of secret liens and apparent ownership has not 18 played a major role in the English law of security, largely because of the introduction of compulsory registration. In the case of a floating charge, English law also permits the chargee to deal beneficially with the charged assets without having to account for their proceeds to the char19 gee. In one respect, however, English law has imposed obstacles with regard to a single security stretching into the future. It has resisted the automatic “tacking” of later discretionary advances by a creditor so that they benefit from that creditor’s priority position, as against a later creditor taking security over the same assets before the discretionary advance 20 by the first secured creditor is made. Security over tangible movables is also available by law to certain categories of creditor. These include unpaid sellers of goods, granted the 21 right by statute, as well as certain creditors long recognised as having the right at common law, such as repairers and carriers. The rights of these lienors may be supplemented by contract (invariably the case with carriers) so as to include rights that the creditor is not granted by law, namely, the right to retain tangibles for debts incurred by the owner on a 22 previous occasion and the right of sale in the event of non-payment. In the mid-1980s, the number of types of preferential creditors ranking ahead of ordinary secured creditors was severely reduced to comprise only six categories, and the number was further reduced to three with the Enterprise Act 2002, as the Crown in its various capacities was removed

17 18

19

20

21

22

Tailby v Official Receiver (1888) 13 App Cas 523. Contrast the pre-Article 9 American position in Benedict v Ratner 268 US 353 (1925). See Cookson v Swire (1884) 9 App Cas 653 (Lord Blackburn, noting that retaining possession after a conveyance, in earlier times conclusively deemed to be fraudulent, later came to be seen as merely evidence of fraud). See Sec. 94 Law of Property Act 1925 (setting out the limits of tacking); Hopkinson v Rolt (1861) 9 HLC 514; H. Beale/M. Bridge/L. Gullifer/E. Lomnicka, The Law of Personal Property Security (2007), p. 480 et seq. The difficulty that this position posed for bankers taking security for an overdraft facility is shown by Deeley v Lloyds Bank Ltd [1912] AC 756, since each payment into a current account retires old debt and each withdrawal creates new debt. Sec. 41 Sale of Goods Act 1979. But the lien is lost when possession is lost and there is no equivalent of the rights found in other legal systems, such as French law, Italian law and Belgian law, allowing an unpaid seller who has not reserved title to recover goods from the buyer within a stated period. See Barker (George) Transport Ltd v Eynon [1974] 1 WLR 462.

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from the ranks of preferential creditors. It is a striking feature of the law governing the rights of preferential creditors that they are entitled to be paid ahead of floating chargees and to that extent therefore they expro24 priate floating chargees. A listing of preferential creditors does not quite do justice to the complexity of the law, because account has to be taken of the rights to recover expenses of those who administer the estates of insolvent persons, namely, administrators, administrative receivers, trus25 tees-in-bankruptcy and company liquidators. Furthermore, with the retrenchment in the ranks of preferential creditors there has emerged a limited statutory right to ordinary unsecured creditors to participate in the estate of an insolvent person at the expense of floating chargees. This 26 again arises under the Enterprise Act 2002. The vulnerability of the floating charge encourages creditors to seek a fixed charge over assets to the maximum extent permitted by law. To that end, they have sought to take fixed rather than floating charges even over book debts (accounts receivable), though there were few signs of similar developments in the case of tangibles. So far as fixed charges were taken over tangibles, they concerned equipment rather than stockin-trade (inventory) and related items, since in the case of equipment it was a practical matter for the creditor to exercise the relatively tight controls, imposing for example the requirement of consent by the chargee to individual disposals of the equipment, necessary for a charge to be characterised as fixed. In recent times, the controls required for a fixed 27 charge have been reemphasised, so that in practical terms it is impossi28 ble to take a fixed charge over a debtor’s circulating capital. This shift in the attitude of the law has come at the expense of the long-standing preference of English law to give full effect to the contract between secured creditor and debtor. English courts have long been reluctant to recharacterise transactions, whether this was to treat a supposed fixed 23

24

25

26

27 28

See Schedule 6 to the Insolvency Act 1986, as amended by Sec. 251 Enterprise Act 2002. Sec. 175 Insolvency Act 1986 and para. 65 (2) of Schedule B1 (as added by the Enterprise Act 2002). For example, Sec. 175 (2) (a) Insolvency Act 1986 states that preferential creditors rank equally and rateably inter se after the expenses of the winding-up (the list of which in rule 4.218 of the Insolvency Rules includes expenses incurred by and remuneration accruing to the liquidator). Adding Sec. 176A to the Insolvency Act 1986. Taking account both of this provision and the rights of preferential creditors at the expense of a floating chargee, English law seems to be more generous to secured creditors asserting their rights than the other legal systems in this study. National Westminster Bank v Spectrum Plus Ltd [2005] 2 AC 680. See Agnew v Commissioner of Inland Revenue [2001] 2 AC 710.

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charge as a floating charge or to treat a complex funding scheme as 30 giving rise to a charge. English law, while condemning sham transactions that are designed to dissimulate the parties’ true intentions, have accepted artificial transactions and treated them at face value, so long as 31 the parties actually do what they say they are doing. It has to be recognised, nevertheless, that English law was less leniently disposed to reservation of title creditors who by various means, such as deemed ownership, agency and trust clauses, sought to claim an original interest in new goods manufactured with the goods supplied and in the money proceeds of the goods supplied. Despite language that was sometimes encouraging to draftsmen of reservation of title clauses,32 their effectiveness as such clauses, as opposed to charges, was confined to the very goods supplied.33 Amongst secured creditors, the basic principle is that the first in time prevails.34 Nevertheless, floating charges give way to subsequent fixed charges, so far as these are created within the ordinary course of business of the chargor and within the limits of an authority, implied or express, to do so, granted by the floating chargee to the chargor. It is probably because English law does not recognise title retention as a form of security that it has never developed the idea of a purchase money security interest, though interesting examples with little practical importance have arisen in the case of land but not tangibles.35 Those creditors exercising effective reservation of title clauses, whether in a contract of sale or in a financing contract taking the form of hire purchase, conditional sale or finance lease, nevertheless rank ahead of those creditors taking security over the debtor’s assets. This is because the debtor’s assets do not extend to assets owned by third parties. This ranking might plausibly be

29

30 31

32 33

34 35

See Re New Bullas Trading Ltd [1994] 1 BCLC 485, overruled by the House of Lords in National Westminster Bank v Spectrum Holdings Ltd [2005] 2 AC 680. See Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148. See Re Inglefield (George) Ltd [1933] Ch 1. A case where the parties’ choice of language was unfortunate so that a sale and resale of stock-in-trade was recharacterised as a charge over the assets in question was Re Curtain Dream plc [1990] BCC 341. English law therefore accepts a sale and leaseback for what it purports to be and is not restrictive in the way that Italian law is. For example, Clough Mill Ltd v Martin [1985] 1 WLR 111 (Robert Goff LJ). See for example Tatung (UK) Ltd v Galex Telesure Ltd (1989) 5 BCC 325. So far, however, as a reservation of title clause apples to the original goods supplied, English law (unlike Italian law) makes it easy for a seller to reserve title. See Case 1 infra. See Abbey National Building Society v Cann [1991] 1 AC 56; Re Connolly Bros Ltd (No. 2) [1912] 2 Ch 25.

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seen as an unexpressed recognition of the purchase money security interest. English law accepts the principle that charges should be registered and 36 thus made available to public inspection. Both the bills of sale legisla37 tion and the Companies Act 2006 provide for this. Nevertheless, the effectiveness of such a system of public notice is impaired, not only by 38 the exclusion of title-based financing devices, but also by the requirement that only particular types of charge are required to be registered. For example, a fixed charge over shares is not on the list of charges that have to be registered under the Companies Act. Registration under bills of sale legislation and the Companies Act 2006 is by entry against the name of the debtor and is a negative priority point, in that it prevents the charge (or bill of sale) from being defeated by third parties (including here insolvency officers, such as a company liquidator). In the case of companies, it has been established that registration constitutes public notice, at least against those who might be expected to search the regis39 ter. Constructive notice is less important than might be supposed for various reasons: first, equitable interests arising by way of charge are effective against insolvency officers since they stand in the shoes of the insolvent person and bear the burdens that afflict his conscience;40 secondly, a legal mortgage is rarely taken, so the prospects of such a security outranking an earlier equitable charge are sensibly diminished; and thirdly, to the extent that a floating charge can upset the normal order of priority by outranking a later fixed charge, because of restrictions on the debtor’s authority to create a later fixed charge over the same assets, it will be because the later fixed chargee has actual notice, that is, knowledge, rather than constructive notice, of any limitations on the chargor’s usual authority to deal with its floating charge assets. Apart from the debtor entry registration systems provided for under bills of sale legislation and the Companies Act, there are also asset registers dealing with land, ships, aircraft and certain types of intellectual property. Registration here is against the assets in question and the registers, besides being registers of charges, also function as registers of title. Their relations with the debtor entry registers are not necessarily easy to discern. 36

37

38 39 40

This is to be contrasted with Germany (no registration) and the Netherlands (confidential registration with the tax authorities). In the case of companies, apart from the specialist registers where a second registration is required, English law subsumes all charges under a single register (cf. Italy). Unlike Spain, where there is an option to register finance leases. Wilson v Kelland [1910] 2 Ch 306. For example, Madell v Thomas [1891] 1 QB 230.

England and Wales

II.

Case Studies

1.

Non-possessory security right in specific equipment

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a) If the security (it will be a fixed charge in practice) is granted by a company (the position is the same, mutatis mutandis, for a limited liability partnership), then nothing more is required than a simple writing sufficiently evidencing the grant of the charge. There are no technical requirements regarding the way that the charged assets are described. The English law of security is largely an offshoot of contract law and contract law will accept any description that passes the test of contractual certainty. Just as English contract law is with relatively few exceptions informal in tone, so the law does not in fact require writing for a charge to be valid41 and there is no relevant notarial system to consider. There is no stamp required for security over tangibles. Stamp duty and stamp reserve tax in recent years have been confined to land and share transfers. The documentation will in practice consist of a facility letter and an instrument of charge (or debenture) and the transaction will have to be registered if it is to be opposable against third parties and insolvency officers. This is because the transaction falls under the head of one of the registrable charges, namely, a charge that if granted by an individual would be a registrable charge.42 English law thereby succeeds in anchoring the company charges system to the disreputable bills of sale legislation. If the charge is granted by an individual, then, if the charge is going to be reduced to writing, it has to be in a prescribed form or otherwise it is void.43 A schedule of the property charged has to be attached to this form and the bill of sale is effective only as to the property “specifically described” in the schedule. The bill of sale is void if it is not duly attested by “one or more credible witness or witnesses” not party to the bill.44 In the case of an agricultural charge, it may be made “in such form and…upon such conditions as the parties thereto may agree”.45

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42 43

44 45

But the Registrar will not accept details of an unwritten charge for the registration that is needed to give the chargee third party protection. Mortgage Guidance Form 395, available at http://www.companieshouse.gov.uk/forms/generalForms/395Guidance. pdf (1 August 2007), states: “This form must be accompanied by an original instrument creating or evidencing the form (original emphasis).” Sec. 860 Companies Act 2006. Sec. 9 Bills of Sale Act (1878) Amendment Act 1882. The form is set out in a schedule to the Act and takes the form of an indenture. Sec. 8 and 10 Bills of Sale Act (1878) Amendment Act 1882. Sec. 5 (2) Agricultural Credits Act 1928.

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In order to register a company charge (the same applies mutatis mutandis to limited liability companies) so as to make it effective against third parties and insolvency officers, the instrument that creates or evidences the charge,46 together with the particulars of charge, have to be sent within 21 days of the creation of the charge to the Registrar of Companies in Cardiff, where the particulars of charge are entered on the company charges register.47 The particulars of charge are entered on a simple form (a 395 form)48 which contains a box (“Short particulars of the property mortgaged or charged”): the box does not require any technical description or classification of the property charged. Curiously, the registration is effective as to the contents of the instrument of charge,49 whereas it is the particulars of charge that are available to public inspec50 tion. The staff in the office of the Registrar of Companies check the particulars of charge against the instrument of charge to ensure that the former document is accurate, but they occasionally make mistakes. Registration of the charge within 21 days protects the priority position of the chargee from the creation of the charge. There is a discretion in the court to permit registration out of time,51 but it will not be exercised in the

46

47

48

49 50

51

Often referred to as the instrument of charge. In view of the general absence of writing requirements for the creation of charges over personal property (that is, not land), it is technically correct to differentiate between documents that create a charge and documents that evidence a charge that has already been created. See footnotes 12 and 41 supra. There is a statutory duty laid on the company chargor, with a criminal penalty attached for non-compliance, to register the charge. The task of registration is in fact carried out of the chargee to protect itself against the adverse consequences of non-registration. The chargee will employ solicitors to register the charge, but there is at least one legal publisher (Jordans) that offers a registration service over the internet. See http://www.jordans.co.uk/jordans3.nsf/Main/Registration+of+charges (1 August 2007). The fee for filling in the 395 form and lodging it at Companies House starts at £ 279.72 (including VAT). For a fee starting at £ 126.97 (including VAT), Jordans will check a 395 form already prepared against the instrument of charge and “handle” the registration of the 395 form at Companies House. The registration fee is £ 13. See Mortgage Guidance Form 395, available at http://www.companieshouse.gov.uk/forms/generalForms/395Guidance.pdf (1 August 2007). National Provincial and Union Bank of England v Charnley [1924] 1 KB 431. Cf. Spanish law which requires the registration of particular clauses for mortgages of movables. Sec. 873 Companies Act 2006.

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chargee’s favour if insolvency proceedings involving the chargor are imminent or in progress.52 The position regarding individuals is completely different. The technical requirements for registering a security bill of sale are daunting and it is easy to make mistakes. The number of such bills of sale registered annually is believed to be very small. The security bill of sale is void unless registered together with an affidavit of due execution within “seven clear days” of execution.53 The affidavit will set out the residence of the grantor of the bill. Registration is carried out by the “registrar”, defined as the “masters of the Senior Courts attached to the Queen’s Bench Division of the High Court of Justice”.54 Where the affidavit of due execution shows the grantor of the bill to reside outside the London insolvency district, or the personal chattels to be located outside the London insolvency district, then the registrar is required within “three clear days” after registration in the principal registry to deliver an abstract of the contents of the bill of sale in the prescribed form to the district judge where the grantor resides or the personal chattels are located, as the case may be.55 Provision in made in the Agricultural Charges Act 1928 for the registration of charges granted by farmers.56 Registration must take place within seven clear days of execution, though there is a discretion to allow registration out of time. A register of agricultural charges is kept by the Land Registrar, even though the charge may extend to “assets” as well as agricultural land. A memorandum of the charge has to be sent to the Registrar, together with prescribed particulars of the charge, and the register may be searched for a prescribed fee. Curiously, perhaps, the Act contains a prohibition on listing the names of chargor farmers.57 b) A lender for example may search the relevant register on line to see 58 if there has occurred an earlier charge. The search will reveal the par52

53 54 55 56 57 58

For example, Re Ashpurton Estates Ltd [1983] 1 Ch 110. The wording of permission to register out of time is expressed in the form of a Charles Order, taking its name from Re LH Charles & Co Ltd [1935] WN 15, by which the company (in effect, the liquidator acting in the company’s name) is given liberty to move for the order to be discharged if in fact the company goes into liquidation within the ensuing time limit specified in the order. Sec. 8 Bills of Sale Act (1878) Amendment Act 1882. Sec. 13 Bills of Sale Act 1878. Sec. 11 Bills of Sale Act (1878) Amendment Act 1882. Sec. 9. Sec. 10 (1). A monthly subscription to Companies House (as from 1 February 2005), dealing with a range of company matters, costs £ 5. It then costs nothing to look at an in-

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ticulars of charge and not the instrument of charge itself, which is returned after the registration has been completed. Further, since the reser59 vation of title by an unpaid seller is not a registrable charge, details of the reservation of title are not eligible to appear, even voluntarily, on the company charges register. Moreover, there is a blind spot on the register in that a chargee has 21 days to present particulars to the registrar and it will take a further several days (up to about a week) before the particulars of charge are available for inspection. There exist private, voluntary 60 registration systems dealing with hire purchase and related agreements. In practice, they cover a high percentage of hire purchase agreements and financiers; their lack of completeness prevents them from providing full assurance to those who are eligible to consult their records and who do so. There is no requirement in English law that a reservation of title financier or hire purchase financier attach a plate or notice to the equipment so as to give notice of its interest to the world. c) If the manufacturer sells an encumbered machine, the first difference is whether the machine was subject to a floating charge or, more likely, a fixed charge. If the charge was a floating charge, then a sale by the manufacturer in the ordinary course of business would fall within the implied licence or authority given to the manufacturer to deal with floating charge assets. The purchaser would thus obtain full title to the machine with the lender’s permission. If the machine is subject to a fixed charge, and if the manufacturer conducts the sale without permission, then the manufacturer has the power to transmit a good title to the machine to a bona fide purchaser in the ordinary course of business of the machine by virtue of the familiar principle that equitable interests are overridden in cases where legal title is transmitted to a bona fide purchaser. The same applies if the goods are subject to a floating charge and the manufacturer exceeds certain restrictions imposed by the instrument of charge on its authority to dispose. If the machine is subject to a legal mortgage, then the assistance is required of a statutory exception in favour of the bona fide purchaser in

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dex of a company’s charges and £ 1 to view one or more charges of a selected company as well as £ 1 to download a document. Documents can also be sent for £ 3 by post or fax. See http://www.companies.house.gov.uk/toolsToHelp/Directprice List.shtml (1 August 2007). Even if it is in respect of all moneys owed and not just for the price of the particular goods supplied: Armour v Thyssen Ehdelstahlwerke AG [1991] AC 339. In this respect, English law appears to be in line with Germany and the Netherlands (to an extent at least in this case) and in opposition to Spain. For example, Experian Ltd. (http://www.experian.co.uk, 1 August 2007). This is not a practical matter for the short-term reservation of title of ordinary sellers.

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the ordinary course of business who takes possession. The position is the same if the machine is the subject of title-based financing, such as hire purchase or, more likely, a finance lease. The scope of the rule that registration of a company charge constitutes constructive notice of the 62 registrable particulars of charge has never been fully tested. It certainly applies to competing chargees and it therefore ought to apply, as a matter of principle, to those who finance by other means, such as by sale and leaseback. It is unlikely to apply to outright purchasers of the machine, whose title will be tested according to whether they acted in good faith and in the ordinary course of business. If a chargor were selling many machines, then it might tell against the good faith of a buyer that it did not fully engage in exploring the possibility that the machines were subject to a registered charge. The status of the buyer as a wholesale or retail buyer might therefore make a considerable difference to the outcome of a title dispute with the chargee. If the machines were subject to a title-based scheme of financing, then, in the absence of any scheme of registration, private or otherwise, any inquiries the buyer might make would be dependent upon the cooperation of the seller. The creditor’s right to the proceeds, whether the sale is authorised or not, would first depend upon whether it had a charge that originally covered proceeds of the type herein described. Where the machine is encumbered by a floating charge, then, although a floating charge can be expressed to capture a narrow range of assets, the likelihood will be that it extends to the proceeds of the disposition, in our case, the substitute machinery. It is quite possible too that a fixed charge over machinery might be expressed so as to capture substitute machinery. The same is not likely to be the case if the machinery is subject to a finance lease.63 If the charge did not extend on its terms to the proceeds, the next question would be whether the chargee had by operation of law a proprietary right to the proceeds that it could assert by means of the process of tracing. First of all, there would have to be a wrong committed when the machine was disposed of, which would not the case where the disposal was authorised, as it would be in the case of a floating charge. So far as the security is an equitable mortgage or charge, the right of a claimant to trace into proceeds was, according to the traditional view, based on a requirement that there had to be a fiduciary relationship between the claimant and the person disposing of property. This assumed the existence of a property right of the claimant in the first place, easily enough satisfied in the case of a trustee and beneficiary since equity 61 62 63

Sec. 9 Factors Act 1889; Sec. 25 Sale of Goods Act 1979. Wilson v Kelland [1910] 2 Ch 306. See the finance lease precedent in R. M. Goode, Commercial Law (3rd edn. 2004), p. 727 et seq.

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conferred upon the beneficiary a proprietary claim to the proceeds of an unauthorised disposition by the trustee. The leading cases on tracing in equity involve trustees and beneficiaries. In parallel with equity, the common law had its own tracing rules, but these, though not requiring a fiduciary relationship, were inflexible and of no assistance if the tracing process had to go through a mixed fund, like a bank account. This would be a problem if the proceeds of sale of machinery were mixed in an account before the substitute machinery was purchased. 64 The modern law of tracing has been redefined in a way that emphasises that tracing is an evidentiary process and that, in order to be able to trace, the claimant must have in the first place a proprietary right to the proceeds, arising by operation of law, which can be vindicated with the aid of tracing. This has nothing to do with unjust enrichment and is not a matter of discretionary entitlement, even if the property rights claimed are equitable in character. Hence, resulting trusts and constructive trusts 65 do not come into play. As long as the existence of a fiduciary relationship is necessary for a tracing claim, however, the existence of such a property right will be limited. There have nevertheless been calls for the abandonment of any requirement of a fiduciary relationship between 66 claimant and person disposing of assets. Until that happens, it is unlikely that a secured creditor would be treated in equity as having by operation of law a proprietary right in the proceeds of an unlawful disposition: there is no fiduciary relationship between secured creditor and debtor. This explains why the rights of a secured creditor in a case of this kind have received almost no judicial attention. The days of the fiduciary relationship requirement do however seem to be numbered; its abandonment would also open the door to eliminating any distinction between common law and equitable tracing. In Westdeutsche Landesbank Giro67 centrale v Islington LBC, Lord Browne-Wilkinson refers to a tracing claim against a thief, albeit one who perhaps improbably is bound by a 68 69 fiduciary relationship to the owner, and in Foskett v McKeown, Lord

64 65 66

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See Foskett v McKeown [2001] 1 AC 102. Ibid. See the brief summary of the tracing process from the commercial lawyer’s point of view in R. M. Goode, Commercial Law (3rd edn. 2004), p. 52 et seq., stressing that the claimant has to elect either to follow the original assets or the proceeds (on which see also Lord Millett in Foskett v McKeown), and the further discussion at p. 458 et seq. If it were not for the election, the tracing claimant might in time benefit from a “geometrical multiplication of [his] property”. [1996] AC 669. This opens up the possibility that any unconscionable behaviour might give rise to a proprietary claim. It is one of the oddities of equitable intervention that a person’s

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Millett makes a passing, one-line reference to a secured creditor having rights in proceeds. This is insufficient for a current restatement of the law that a secured creditor has the right to trace into the proceeds of unlawful dispositions of the secured assets. Furthermore, even assuming a change in the law, the conceptualisation of a charge as an encumbrance, as opposed to a transfer of property to the chargee,70 might inhibit a court in deciding that the chargee should have a proprietary right in the proceeds of sale of the machine in this case. A mortgage might be a different matter, in that a mortgage of personal property still involves the defeasible transfer of the ownership in the mortgaged asset to the mortgagee.71 Perhaps one should not make too much of these technical distinctions. If it seems odd that the position on tracing is so difficult to state in the context of secured credit in English law, the real point is that the structure of the law of security, as well as of proprietary rights akin to security, deprive the issue of tracing of any real significance. The ease with which security over all of the assets of a debtor can be granted in English law, together with the improbability of the machines being financed with the aid of a narrowly based charge confined to machinery, as opposed to a finance lease or other title-based device, render unlikely any clarification of the law of tracing within the field of secured credit. A prudent secured creditor would be ill-advised not to take a charge over proceeds in the first place. d) If the lender has any rights in replacement machines, then, subject to any tracing claim arising from a wrongful disposition of the earlier machines, it will only be because the instrument of charge so provides. Any such right will not arise by operation of law since English law does not as such recognise a doctrine of, or akin to, real subrogation in circumstances like these. e) The security right will take the form either of a charge or of a mortgage. The remedies available at law for a chargee are, first, to apply to the court to have the charged assets sold (since a mere chargee, to whom no property interest has been conveyed, will not have the right to take possession), or secondly, to apply to the court for the appointment of a receiver to take possession of the charged assets, thereafter to receive

69 70 71

proprietary rights against third parties are peculiarly dependent upon the stricken conscience of a wrongdoer. [2001] 1 AC 102. Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207. Keith v Burrows (1876) 1 CPD 722.

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income generated by the assets and dispose of them if necessary.72 The appointment by the court of a receiver is a remedy that, like other equitable remedies, is discretionary. There is a statutory right to have a receiver appointed where the charge is expressed in a deed.73 A mortgagee has these remedies, together with the additional remedies of foreclosure, almost a dead letter (because it involves forfeiting the mortgagor’s equity of redemption), and taking possession on default.74 As stated earlier, the fine distinctions separating the remedies of chargee and mortgagee are eliminated by drafting practice, which amplifies remedies to the greatest extent possible. Moreover, the most powerful remedy at all is available by contract to a chargee or mortgagee whose security includes a floating charge, where the security as a whole covers all or substantially all of the chargor/mortgagor’s assets. Under an irrevocable power of attorney, the secured creditor is entitled to appoint in the name of the debtor an administrator who, acting as the agent of the debtor, is entitled without interference from the debtor to pay down the secured debt. The administrator can be sent in at very short notice indeed75 and the right of the secured creditor to take this action, pre-empting intervention by other interested parties, is safeguarded by legislation.76 It is very often the case that a bank will be requested by a company’s directors to intervene by appointing an administrator in this way: the directors are fearful of incurring personal liability for wrongful or fraudulent trading77 while the company is in an insolvent state. The issue of cost and time is a difficult one to address in general terms. It depends upon the complexity of the case and the value of the items. Courts in England aim to be self-financing, so that for each application and for each order a fee is generated, on a sliding scale as to the value of the matter. So far as professionals, such as lawyers and insolvency accountants become involved, the high fees involved will add substantially to the cost and have at times attracted critical comment.78 Applications

72 73 74

75 76

77 78

Sec. 37 (1) Supreme Court Act 1981. Sec. 101 and 205 (1) (xvi) Law of Property Act 1925. The controls on the exercise of this right in the Bills of Sale (Amendment) Act 1882 imply the existence of such a right by operation of law: Re Morritt (1886) 18 QBD 222. See Bank of Baroda v Panessar [1987] Ch 335. Insolvency Act 1986, Schedule B1, as added by the Enterprise Act 2002, discussed further in Case 1 f) infra. Sec. 212 Insolvency Act 1986 et seq. See the remarks of Mr Justice Lightman, speaking in a non-judicial capacity, “The Challenges Ahead: Address to the Insolvency Lawyers’ Association” JBL (1996) p. 113.

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are made to the County Court if the amount at stake is up to £ 30,000, otherwise to the High Court. f) The starting point is that the commencement of insolvency proceedings does not impair the exercise by a secured creditor of any available remedies for the debtor’s default. Hence, the liquidator has no power to prevent chargees and mortgagees from exercising any of the remedies stated above. The position changes somewhat, however, in the case of an insolvency procedure that involves management, as opposed to a quick break-up, of an insolvent party’s estate. When the office of administrator was introduced in the mid-1980s, it brought with it a moratorium on the exercise of certain property rights, whether these arose by way of security in the proper sense or by way of reservation of title. This moratorium arose with the commencement of steps to secure the appointment of an administrator and continued during the conduct of the administration,79 subject to the moratorium being lifted in an individual case either by the administrator or by the court.80 The length of the moratorium is a discretionary matter for the court81 and was discussed at length in the leading case, which involved finance leases of bespoke computer systems.82 The discretionary guidelines laid down at length in that case83 centre upon a balancing of the legitimate interests of the lessor against the legitimate interests of other creditors of the company (“scales and weights”). The exercise is not a mechanical one and no two cases are alike. Proprietary rights will be the subject of interference in this way only where this is “unavoidable” and even then “only to a strictly limited extent”. The moratorium will probably, therefore, be lifted if “significant loss” is likely to be caused to the interests of those whose property rights are frozen by the moratorium. The moratorium was continued in the Enterprise Act 200284 but was extended to meet the additional case of those administrators appointed out of court by chargees. The out of court administrator replaced the former administrative receiver in most cases but, whereas

79 80 81

82 83

84

Sec. 10 Insolvency Act 1986 et seq. (now repealed). Re Atlantic Computers Ltd [1992] Ch 505. Unlike the case of Dutch law, there is no general court power to order a moratorium on the enforcement of security. Ibid. This was a case where the conflict was between unsecured creditors and titleretaining financiers. Where the moratorium is being exercised in the interests of a chargee (now possible because chargees have been able to appoint administrators out of court since the Enterprise Act 2002), this is bound to affect the way that the discretion is exercised. Schedule 16, adding a new Schedule B1 to the Insolvency Act 1986.

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the administrative receiver had and has no true moratorium power,85 the out-of-court administrator has. This power is exercised in the same way as the former power contained in insolvency legislation. g) In English law, motor vehicles are treated for the purpose of security like other tangible movables. There is no difference.

2.

Non-possessory security right in present and future equipment (floating security right)

a) The position under the Companies Act (and under regulations dealing with limited liability partnerships) is the same as in Case 1. Instead, however, of the charge being registrable on the ground that, had it been granted by an individual it would have been a registrable bill of sale, the charge is now registrable on the separate ground that it is a floating charge. For reasons stated earlier, individuals, if they are not farmers, are considered not to have the ability to grant a floating charge. Nevertheless, by way of exception to this, Sec. 6 (2) of the Bills of Sale Act (1878) Amendment Act 1882 states that nothing in that Act shall render a bill of sale void in respect of “trade machinery” brought on to stated types of premises “in substitution for … trade machinery specifically described in the schedule to [a registered] bill of sale”. A charge granted over agricultural assets under the Agricultural Credits Act 1928 extends, in the case of “agricultural plant”, to “plant substituted for the plant specified in the 86 charge”. b) See Case 1. Although restrictive clauses in a floating charge, curtailing the freedom of the chargor to grant a fixed and therefore superior security in the ordinary course of business, are not registrable, the practice has grown up of inserting such restrictive clauses in the particulars of charge so that, when the register is searched, the restrictive clause is actually seen and noticed by the searcher. Constructive notice of the presence of such a clause would not arise because such clauses are not registrable particulars under the Companies Act 2006. c) The answer lies largely in Case 1 supra. The idea of the floating security is that the chargor is authorised to dispose of assets in the ordinary course. There would also be no question of a proprietary remedy available through the tracing process, since the wrongdoing needed to 85

86

But see the ingenious fabrication by Mr Justice Hoffmann of a de facto moratorium power for administrative receivership in Lipe Ltd v Leyland Daf plc [1993] BCC 385. Sec. 5 (3) (b) Agricultural Credits Act 1928.

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give rise to such a remedy would be absent. A separate right to the proceeds granted in the instrument of charge would of course be a different matter. d) So far as such substitute machines fall within the category of assets embraced by the floating charge, the lender does have a right by way of floating charge to these replacement machines. Similarly, any well-drawn instrument of charge will give the lender a right to the proceeds of insurance of the machines if they are lost or destroyed. It should nevertheless be stressed that any sensible lender will seek to avoid taking a floating charge over plant and machinery and that the instrument of charge will give the lender a fixed charge in the machinery and its substitutes. As a result of a recent decision of the House of Lords,87 it has become in practical terms impossible for a creditor to take a fixed charge in receivables, because of the need for effective controls in fact to be exercised over any dealings with and collection of those receivables that would interfere unreasonably with the day-to-day conduct of the debtor’s business. It is technically possible for a critical judicial eye to look at the need for similar interventions by the creditor in the case of a fixed charge over equipment, over and above the requirement that permission be sought of the chargee before the equipment is disposed of, but such a development is unlikely. At the heart of the House of Lords decision, and of a previous Privy Council decision,88 is the belief that a fixed charge should not be taken over the circulating capital of a company. A company’s circulating capital includes cash, receivables, stock-in-trade, raw materials and work in progress, but does not include its equipment. e) See supra. So far as any floating security extends, whether alone or with the aid of other charges, to the whole or substantially the whole of a company chargor’s property, then any administrator appointed out of court, pursuant to a right given by the chargor to the chargee to make such an appointment in the name of the chargor, will be an administrator for the purpose of insolvency legislation with the powers, including the moratorium power, granted under the legislation.89 Court and related fees will be avoided unless an application has to be made to the court unless the administrator is faced with the need to obtain directions from the court.90

87 88 89 90

National Westminster Bank v Spectrum Plus Ltd [2005] 2 AC 680. Agnew v Commissioner for Inland Revenue [2001] 2 AC 710. See Schedule B1 to the Insolvency Act as added by the Enterprise Act 2002. There is a general power to apply in connection with the exercise of the functions of administrator: ibid., para. 63.

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f) As stated above, the commencement of insolvency does not prevent the chargee from exercising any remedies to which it is entitled. There is however a statutory duty laid on the administrator to pay preferential creditors and, so far as the legislation orders, unsecured creditors,91 ahead of a floating chargee. In Buchler v Talbot,92 the House of Lords reversed the rule that the expenses of the liquidation should be paid ahead of the floating chargee, but this reversal has in its turn been reversed again by legislation, namely, Sec. 1282 of the Companies Act 2006. g)

As stated above, there is no difference for motor vehicles.

3.

Non-possessory security right in present and future inventory (floating security right)

a) The answer to Case 3 is the same as the answer to Case 2 because there are no differences between equipment and inventory under this heading. b)

As in a).

c)

As in a).

d) As in a). Note also the received wisdom, even before the decision of the House of Lords in National Westminster Bank plc v Spectrum Plus Ltd,93 that a fixed charge could not be taken over inventory. e)

As in a).

f)

As in a).

g)

As in a).

4.

Purchase-money financing – alternative sources

a) The manufacturer has all of these options but it is unlikely that the third party financier will take a mortgage or charge. Rather, the financier would use a title-based device, such as a finance lease, hire purchase or conditional sale. 91 92 93

Sec. 176A Insolvency Act 1986, as added by the Enterprise Act 2002. [2004] 2 AC 298. [2005] 2 AC 680.

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b) (1) If a mortgage or charge were adopted, then the rules stated above for the registration of company charges or security bills of sale would apply. A seller might reserve title and then assign its rights to a third party financier, but this practice normally arises in different, low-value sorts of assets (for example, furniture) where the system of block dis94 counting is employed. It is much more likely, in the case of a highvalue robotic machine, that a supplier would sell the machine to a financier, which would then have it delivered by the supplier to the manufacturer on finance lease or other title retention terms. No registration of title-based agreements is required, though, as stated above, there are voluntary schemes in operation. In particular, it has long been settled that hire purchase and conditional sale, and thus also finance leasing, do not give rise to registrable bills of sale,95 with the further consequence that they are not registrable as company charges. In addition, there are no writing requirements (Statute of Frauds) operating between the parties to a finance lease etc transaction. (2) For reasons stated above, the following text considers only titlebased financing devices. Because the debtor lacks title to the relevant assets, title-based devices defeat earlier security because such earlier security “attaches” (to use an Article 9 word) only to assets belonging to the debtor. They also, a fortiori, defeat later security granted by the debtor, subject to any special legislation (see immediately infra). Depending upon the particular device employed, title creditors are nevertheless vulnerable to third party purchasers acquiring the equipment in the ordinary course of business. The ordinary course of business here is not sensitive to whether the seller is disposing of equipment or inventory; rather, the test supplements the buyer’s bona fides and examines whether the sale took place objectively in a business-like way.96 If the supply to the manufacturer takes place on conditional sale terms, then the manufac94

95 96

Block discounting is similar to facultative factoring. A trader and a discounter enter into a master agreement further to which the trader, at intervals, offers blocks of individual hire purchase or similar agreements for discounting. The trader receives the discounted value of these agreements, minus a security retention, and the trader then collects the instalments for the discounter. The discounter is a purchaser of the trader’s rights against its customers (which can, but need not, include its proprietary rights to the subject matter of those agreements) and does not become contractually bound to those customers. See RM Goode, Commercial Law (3rd edn. 2004), p. 702 et seq. McEntire v Crossley Bros [1895] AC 457. See Oppenheimer v Attenborough & Son [1908] 1 KB 221, a decision concerning mercantile agents and the Factors Act 1889 but applicable to cases where it is a buyer in possession who is disposing of goods. See also Case 1 c) supra.

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turer is a buyer in possession with the power to transmit title to a disponee under sale of goods and factors legislation.97 The disposing transaction must be a “sale, pledge or other disposition” of the goods, hence a purchaser under the relevant statutory provision includes not just outright buyers but also other persons giving value, such as a pledgee, legal mortgagee or a person obtaining the asset under an exchange or barter arrangement. How far the understanding of a purchaser might go, and in particular, whether it might include equitable security, depends critically upon the 98 meaning of the undefined word “disposition”. If interpreted literally, it is perfectly capable of catching a subsequent transaction by which equitable rights are acquired. Nevertheless, there would certainly be some judicial disquiet if the argument were squarely raised that equitable rights could override legal rights in the financier. Moreover, the relevant 99 legislation calls for the goods to be delivered to the disponee, which would not ordinarily be the case where the manufacturer later charged or mortgaged the machine. If the manufacturer has obtained the machine on hire purchase terms, then it has not “agreed to buy” the machine under sale of goods and factors legislation and so lacks the power to pass 100 title under that legislation. The manufacturer may nevertheless pass a good title to hire purchase “motor vehicles” to a private purchaser, 101 though not to a “trade or finance” purchaser, under hire purchase legis102 lation. There is no similar statutory power available in the case of finance leasing. In the absence of such statutory provision, a good faith purchaser will have to fall back on basic common law principles of apparent ownership or authority, grounded in notions of estoppel. It is in practical terms almost impossible for a successful claim to be made that, by its words or conduct, a financier represented to the outside world that 197

Sec. 9 Factors Act 1889; Sec. 25 Sale of Goods Act 1979. See the interpretation placed on the word in Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1972] 1 QB 210. 199 Delivery has in recent years been interpreted so as to be satisfied in the case of a buyer who sells and attorns to the sub-buyer: see Forsyth International (UK) Ltd v Silver Shipping Co Ltd [1994] 1 WLR 1334, applying Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236. 100 Helby v Matthews [1895] AC 471. 101 For this reason, the disposing power of a hirer on hire purchase terms is less than that of a buyer on conditional sale terms: Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 90. But a trade or finance purchaser as defined in the legislation would not include a business that used the motor vehicles as equipment. 102 Part III of the Hire Purchase Act 1964 (as amended). For the definition of “disposition” see Sec. 29 (1) (drafted in terms that should exclude a mortgage and a charge). 198

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the lessee had the right or authority to pass a good title to a purchaser. It is not enough that a representation of authority or ownership originated with the lessee in possession or that, by transferring possession to the lessee, the financier in some way facilitated such a claim by the les104 see. (3) The remedies of those with security in the technical sense of that word have been discussed above. A financier with title to the machine has the right to repossess the machine, its own property, in the event of 105 default without going to court; the right will invariably be spelt out also in the lease, conditional sale or hire purchase agreement. The question now arises whether the hirer or conditional purchaser has any accumulated rights under an agreement as against a financier seeking repossession of the equipment and termination of the agreement. It is well settled that a conditional purchaser and a hire purchaser do not incrementally acquire property rights, whether equitable or legal in character, 106 as instalments are paid under the transaction. A fortiori, this is the case for a finance lease where, as is not uncommon, an agreement to sell the 103

Moorgate Mercantile Co Ltd v Twitchings [1977] AC 890; Jerome v Bentley [1952] 2 All ER 114. 104 Ibid. In English law, good faith purchasers are heavily dependent upon specific statutory exceptions to the rule that a transferor can only such property interest as is vested in him (nemo dat quod non habet). English law is therefore significantly less generous to good faith purchasers than any of the other legal systems in this study. 105 This is known as recaption and is an example of the right to exercise self-help that any owner out of possession is entitled to exercise. Reasonable means must be exercised, including reasonable force, proportionality being the key: Blades v Higgs (1861) 10 CB (NS) 713 (Erle CJ); Law Reform Committee, Conversion and Detinue (1971) (18 th Report, Cmnd 4774). The entitlement of an owner to enter another’s land to recover goods, especially where that other is a third party, is a difficult question and dependent upon the circumstances, particularly the giving of prior notice to recover the goods: Anthony v Haney (1832) 8 Bing 186. It is profoundly difficult to give firm advice on this subject. Self-help generally, if it is to be exercised, had better be exercised quickly and surgically with a minimum of disturbance, so that difficult questions of entitlement to act are deliberated after the event. 106 See, e.g., Helby v Matthews [1895] AC 471. In a conventional reservation of title case, there is a dictum that a buyer who has paid part of the price may have a restitutionary or implied contractual right, personal and not proprietary in character, to receive any surplus after the seller has realised the goods; Clough Mill Ltd v Martin [1985] 1 WLR 111 (Robert Goff LJ). This may logically be extended to conditional sales and hire purchase. For consumer credit agreements, see also Sec. 132 Consumer Credit Act 1974.

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equipment to the former lessee may but not must be made after the lease has run its course. Nevertheless, it is becoming increasingly recognised that, as long as the lessee, hirer or conditional purchaser is ready and willing to resume the payment of instalments and continue those pay107 ments to term, relief may in some cases as a matter of equity be 108 granted against forfeiture of the possessory interest in the equipment. Common law systems thus treat possession as more than a creature of contract but rather a matter of property in its own right. (4) The position of the secured creditor in the strict sense in the event of the manufacturer’s insolvency has been dealt with above. As for those creditors with title-based rights, the moratorium that can be enforced against assets from the commencement of administration applies to them too, whether they are embodied in a reservation of title clause in a contract of sale or in a hire purchase or conditional sale or in a finance 109 lease.

5.

Bona fide acquisition

The subject of a sale of equipment in the ordinary course of business has already been discussed. There is little to add in the case of a sale of inventory. The sale of inventory will be permitted by an authority conferred upon the manufacturer to sell in the ordinary course of business. Hence, perfection of the floating security by registration is beside the point. And even if registration were in some way relevant to the buyer’s 107

Relief against forfeiture, which has a more established presence in the case of land, is discretionary and available “in appropriate and limited cases”: Shiloh Spinners Ltd v Harding [1974] AC 691 (Lord Wilberforce). 108 Stockloser v Johnson [1954] 1 QB 476; Barton Thompson & Co Ltd v Stapling Machines Co [1966] Ch 499; On Demand Information plc v Michael Gerson (Finance) plc [2003] 1 AC 368; Goker v NWS Bank plc (Unreported 1 August 1990); Transag Haulage Ltd v Leyland DAF Finance plc [1994] 2 BCLC 88. In the case of consumer transactions, a similar measure of relief is available as a matter of right: Sec. 129 Consumer Credit Act 1974 et seq. Apart from this case, there are occasional hints that English law will go behind the form of a title reservation transaction and recognise it as a type of sub modo security interest. For example, a third party wrongdoer sued for converting goods the subject of a hire purchase agreement is bound to pay as damages to the financier the amount of unpaid instalments and not the value of the goods at the date of the act of conversion: Wickham Holdings Ltd v Brooke House Motors Ltd [1967] 1 All ER 117. Otherwise, English law (like Italian law) recognises that a genuine reservation of ownership has occurred under a finance lease. 109 Schedule B1 to the Insolvency Act 1986 (as added by the Enterprise Act 2002).

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position, English commercial law is generally resistant to notions of constructive notice110 and, even in the limited cases where it does arise, as where one lender has constructive notice of a previously registered company charge,111 this constructive notice will not apply to outright purchasers, since they belong to a class that is not expected to search the register of company charges.112 As for the sale of machinery, discussed also above, the same points apply. The buyer would not be expected to search the register and it is also a very nice question whether, even if knowing of the existence of a charge or mortgage over the machines, the buyer should infer from that knowledge that the machines should not be sold or that they should not be sold without permission. The requirement that the buyer be a bona fide purchaser is not usually couched in terms of a requirement to make inquiries, but the higher the value of the item, and (as stated above) the greater the number of items being sold, the more likely a court is to find that the buyer who has not made inquiries is guilty of a wilful blindness that is fatal to a claim of bona fides. A buyer in the same line of business as the manufacturer selling its machines, and therefore cognisant of the realities of financing, should certainly be faulted for a failure to ask questions or to demand to see the relevant paperwork. If the sale price were significantly below market value, not the case here, this would constitute a separate ground for impeaching the buyer’s bona fides.

6.

Possessory pledge – constructive or fictive possession

With one exception, the possible elastic properties of pledge have not been tested in English law. English law does not have a concept of nonpossessory pledge because there was no need to overcome any legal objection to the taking of non-possessory security. The creation of the 110

Manchester Trust v Furness [1895] 2 QB 39. Wilson v Kelland [1910] 2 Ch 306. Registration of an agricultural charge is deemed to constitute actual notice of the charge and its registration to “all persons and for all purposes connected with the property comprised in the charge” as from the date of registration: Sec. 9 (8) Agricultural Credits Act 1928. Nevertheless, this rule does not apply as regards a bank that has an agricultural charge over a current account or for future advances, in respect of competing agricultural charges created after the bank’s security: ibid. The scope of this exception is unclear because it does not as such create a right to tack (see text accompanying footnote 20 supra) in cases where it would not otherwise exist (principally, in the case of discretionary advances and current account financing). 112 See also Case 1 c), where an exception is submitted for sale and leaseback cases, which are financing schemes taking the form of outright purchase. 111

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equitable charge obviated any need to stretch the legal pledge to accommodate non-possessory financing. The exceptional case occurs with short-term advances in the export trade, where the release of a bill of lading under the terms of a trust receipt is deemed to be a continuing pledge. This arrangement accommodates the needs of all parties. It permits the buyer of a cargo to take delivery of it from a carrier, the carrier to release the cargo to the holder of the bill of lading and the bank to retain its pledge interest in the bill of lading, as well as in the cargo represented by the bill of lading. The bank is considered to be in constructive possession of the cargo.113 In treating the bank’s interest as that of a pledgee, any requirement that it should register its interest as a company charge or as a security bill of sale is avoided,114 since the relevant legislation does not apply to possessory pledge. The trust receipt arrangement resembles a similar principle that applies in the case of liens exercised by those who provide services in respect of goods. It is considered possible for a lienee to retain its possessory interest in tangibles despite a temporary release of them to the lienor,115 but it is unlikely that a mere acknowledgment by the manufacturer that possession of machine or inventory is held under the terms of a pledge for a financier would be taken at face value. The likely interpretation of the parties’ conduct is that a (registrable) charge over the assets in question was thereby created.

7.

Over-security

This is a concept neither understood nor recognised in English law.116 A creditor is entitled to bargain for as much security as it can obtain. So far as a creditor’s rights are limited, this lies in the rules of insolvency distribution, where the holders of a floating charge are expropriated in favour of preferential creditors and, to a limited financial extent, unsecured creditors of the chargor.117

113

See Re David Allester Ltd [1922] 2 Ch 211. Ibid.; Re Hamilton Young & Co [1905] 2 KB 772. 115 Albemarle Supply Co v Hind [1928] 1 KB 307. 116 As with the other legal systems in this study with the exception of Germany. 117 Sec. 175 Insolvency Act 1986 and para. 65 (2) of Schedule B1 (as added by the Enterprise Act 2002); Sec. 176A Insolvency Act (as added by the Enterprise Act 2002). 114

England and Wales

8.

151

Legal (non-consensual) rights of unpaid seller

An unpaid seller has no special privilege in English law apart from the possessory lien of the unpaid seller118 and the right of stoppage in transit.119 The lien is a lien only for the unpaid price,120 and not for the cost of storage, and it is associated with a right to resell the goods that in modern times has been rationalised as stemming from a termination of the contract for the buyer’s breach, coupled with a revesting of the property in the goods in the seller pursuant to an implied condition subsequent.121 The problem with the implied term approach is that it applies only where the seller remains in possession and not where the goods have been delivered to the buyer. The implied term, therefore, can hardly be rationalised as based upon a true agreement between buyer and seller. The right of stoppage in transit applies only where the buyer becomes “insolvent”, an expression not defined by the Act. The case law does not differentiate between cash flow and balance sheet insolvency. The effect of the seller exercising the right of stoppage is that the seller resumes possession of the goods. Stoppage in transit therefore has the consequence of resurrecting the lien that the seller had earlier surrendered when the goods were delivered to the carrier, who is generally treated in English law as the agent of the buyer.122 The Sale of Goods Act 1979 states that the right of stoppage ceases when “the buyer or his agent in that behalf takes delivery of [the goods] from the carrier”.123 In English law, there is nothing that corresponds to the right given by some laws to a seller to recover possession from a buyer within a stated period of the buyer taking delivery of the goods and in the event of non-payment. In consequence, it has become common practice in the last 30 years for sellers granting credit to have inserted in the contract of sale an express reservation of title clause.

118

Sec. 41 Sale of Goods Act 1979. If the property in the goods has not yet passed to the buyer, the Act refers instead to a right of retention. 119 Sec. 44 Sale of Goods Act 1979 et seq. In modern conditions, this right is very rarely invoked. 120 The seller is permitted to retain the goods “until payment or tender of the price”, Sec. 41 Sale of Goods Act 1979. 121 RV Ward Ltd v Bignall [1967] 1 QB 532. 122 Wait v Baker (1848) 2 Ex 1, 154 ER 380. See also Sec. 32 (1) Sale of Goods Act 1979 (delivery to the carrier is presumptively delivery to the buyer). 123 Sec. 45 (1) Sale of Goods Act 1979. The same applies where the carrier at the end of the journey acknowledges to the buyer that the goods are being held on his account: Sec. 45 (3) Sale of Goods Act 1979.

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9.

Special property registers

For present purposes, the relevant asset registers deal with ships and aircraft. There are also asset registers dealing with land and certain intellectual property rights. In the case of aircraft, the UK Register of Civil Aircraft is operated by the Civil Aviation Authority pursuant to the Air Navigation Order 124 2000. It contains detailed provisions concerning the identity and operations of aircraft that have to be registered in the UK and the requirements of registration. The registration and priority of aircraft mortgages, however, are governed by a separate instrument, the Mortgaging of Aircraft Order 1972.125 The 1972 Order contains a permissive provision that a UKregistered aircraft, together with “any store of spare parts”, may be made security for a loan. Such a mortgage, in a form set out in the Schedule to the Order and accompanied by a certified true copy of the mortgage, may be entered in a Register of Aircraft Mortgages kept by the Civil Aviation Authority. Provision is also made for advance filing by means of a socalled “priority notice” recording an application to enter a “contemplated mortgage” on the Register. Applications for registration are entered on the Register in the order of their receipt by the Civil Aviation Authority. The rights of a mortgagee under a registered mortgage are not affected by the removal of the aircraft from the UK nationality register. The 1972 Order expressly states that “[a]ll persons shall at all times have express notice of all facts appearing in the Register”, though the registration of a mortgage does not necessarily mean that it is a valid mortgage. It should be noted that a charge over an aircraft is also compulsorily registrable under the Companies Act if it is given by a company. Registered mortgages have priority over any other mortgage or charge on an aircraft and, as between two registered mortgages, priority is determined by the order of registration. A mortgagee’s priority under the 1972 Order is effective “notwithstanding any express, implied or constructive notice affecting the mortgagee”. This means that a secured creditor with constructive notice of a charge registered under the Companies Act 2006 will have priority over that earlier charge if it is not registered also pursuant to the 1972 Order. The priority of a mortgagee under the 1972 Order, however, does not come at the expense of a possessory lien for work done on the aircraft on the authority of persons in possession of the aircraft. In the case of aircraft, bills of sale legislation is disapplied but, as seen above, the Companies Act 2006 is not disapplied.

124

SI 2000 No. 1562. The powers to make the order are found in the European Communities Act 1972, the Civil Aviation Act 1982 and the Airports Act 1986. 125 SI 1972 No. 1268 (as amended), made under the Civil Aviation Act 1968.

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In the case of ships, there is similar but less clear provision for the registration of the ownership of ships and of ship’s mortgages. Provision is made for the optional registration of ships further to the Merchant Shipping Act 1995 and the Merchant shipping (Registration of Ships) Regulations 1993.126 The 1995 Act contains in Schedule 1 certain “private law provisions” dealing with the transfer and mortgaging of ships, but these provisions do not apply to all ships, even if they have been registered under the Act.127 Consequently, if a ship is excluded from the scope of these private law provisions, a mortgage may not be registered as a ship mortgage. As with aircraft, a mortgage or charge granted by a company registered in England Wales is registrable under the Companies Act 2006 with the usual consequences. A ship’s mortgage, either of the whole ship or of one or more of its 64 parts, must be properly attested and on a form approved by the Registrar. As with aircraft, priority between registered ship’s mortgages is based on the order of registration, and provision is also made for priority notices (particularly useful if the ship has not yet been built). Provision is also made for the transfer of registered mortgages.

10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment) To understand the position of the credit providers, it must first be determined what happens to the raw materials when they are supplied to the buyer. If raw materials are supplied to a manufacturer who transforms them into something new, then any right to those raw materials is lost because they have ceased to exist.128 The same would apply if the goods supplied were irrevocably attached to a greater whole so as to lose their separate existence.129 If goods are commingled, however, so as to be a calculable share of a mixed larger quantity, even if the different parts produce a different quality or standard than their individual parts, then any right to the relevant commingled part survives as a common law right by becoming an aliquot share of the larger whole.130

126

SI 1993 No. 3138. Small vessels and ships on bareboat charter. 128 See Chaigley Farms Ltd v Crawford Kaye & Grayshire Ltd [1996] BCC 957; Pongakawa Sawmill Ltd v NZ Forest Products Ltd [1992] 3 NZLR 305. 129 Hendy Lennox Ltd v Grahame Puttick Ltd [1984] 2 All ER 152. 130 Indian Oil Ltd v Greenstone Shipping SA (The Ypatianna) [1987] 3 All ER 393. 127

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Assuming that a fiduciary duty exists as between a seller reserving ti131 tle to the raw materials supplied and a buyer, it has been held that a right to trace may not be exercised if the tracing has to take place into a composite manufactured product, for example, the wood chip product 132 that is manufactured out of lumber and resin. So far as a calculation can be made of the seller’s contribution to the new product, which ought not to be unduly difficult, this position is impossible to justify. It would be preferable to conclude that the necessary fiduciary duty does not exist as between seller and buyer in the first place, thus eliminating any plat133 form for a tracing claim. In any case, it can hardly be claimed that a buyer using raw materials for the purpose for which they were supplied has committed a wrongful act (see supra). The limitations of the unpaid seller’s rights when goods lose their identity has prompted attempts to insert in the contract of sale a reservation of title clause that purports to lay an original claim to the new goods manufactured with the aid of the seller’s goods, which has always been recharacterised as amounting to a 134 charge over the new goods. There is no point of course in discussing the rights of hire purchase financiers and finance lessor to the fruits of raw materials since, obviously, such instruments are not used for the supply of raw materials. Similarly, if it is a case of the supply of raw materials taking place pursuant to a charge or other conventional security, the secured creditor will stand to lose as much from the fact that raw materials cease to exist, unless the secured creditor takes the obvious step of having the charge extend to the new product which is derived from the raw materials supplied. A clash between secured creditors supplying different raw materials towards the new product will be resolved by the application of ordinary priority principles and will be resolved according to the date of creation of the competing charges. A settlement of any contest between competing reservation of title sellers cannot take place in the same way. A dead heat occurs as and when the goods supplied lose their separate identities. So far as a supplier retains a share of a commingled greater whole, then, in the absence of any agreement between the relevant parties, the appropriate course of action would be to apply to the court to sever the tenancy in common that arises upon the commingling of substances.

131

But note the uncertainty surrounding the continuing need for a fiduciary relationship to launch a tracing claim, discussed under Case 1 c) supra. 132 Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25. 133 Re Peachdart Ltd [1984] Ch 131. 134 Ibid.

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11. Cross-border issues In the case of title-based financing, English law recognises proprietary consequences that follow according to the lex situs in respect of transactions that take place subject to that law. Since English law lays down no compulsory registration requirements in the case of title-based financing techniques, the requirement of reregistration in State B (England) does not arise. This explains the complete lack of any case law that corresponds to American and Canadian case law on the same subject. If State B were another foreign jurisdiction and State C were England, there is no relevant case law, but English law should recognise State B, so far as its law requires reregistration, only in so far as State B gives effect to a transaction in State B that serves to divest the interest of the relevant party who had perfected an interest in State A but who did not reperfect in State B.135 If State B, unlike English law, does not recognise the role of the law of State A as the lex situs, that is no reason for English law to give up its commitment to the lex situs. Although the problem is more likely to arise in the case of a supplier of goods under a short-term, reservation of title, there is a potential problem in determining which is the relevant situs for the purpose of 136 identifying State A. Suppose that equipment is supplied under the terms of a conditional sale by a seller located in State A and a buyer located in State B. State A requires the conditional sale to be registered but State B does not. The terms of delivery may be relevant in identifying the original lex situs, since that law is identified by time as well as by place. For example, a seller’s delivery obligations require the equipment to be delivered in State B under a contract of conditional sale governed by the law of State A. The delivery term may be on CPD (carriage paid to destination) or similar terms. Even though the reservation of title clause is present in the contract, as a matter of characterisation it would seem that the effect of that clause is a proprietary matter and therefore subject to the law of State B. But if the seller’s delivery obligations were performed in State A, as they might be for a contract on ex works or FOB (free on board) terms, then the effect of the law of State A should be recognised in State B. The position regarding non-possessory security is more complex, largely because the English law of security stems largely from a combination of the law of contract and the law of corporate capacity. So far as the transaction in State A involves an English company and amounts to 135

See J. Fawcett/J. Harris/M. Bridge, International Sale of Goods in the Conflict of Laws (2005), chapter 18. 136 This problem does not arise under Dutch law in so far as reservation of title for export goods is to be determined according to the law of the country of destination.

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a charge for the purpose of the Companies Act 2006, then the charge would be ineffectual so far as it complied only with the law of State A and not with the law of State B (England). It is not then a matter of reregistration or grace periods in which to reregister, but rather an original registration requirement. English law accommodates the law of State A in the case of property outside the country. According to Sec. 866 of the Companies Act 2006, a copy of the instrument of charge, as opposed to the original, may in such cases be sent to the Registrar of Companies in compliance with English registration requirements. A particular difficulty is presented by oversea companies with an es137 tablished place of business in England. The relevant provisions under the Companies Act 1985, though repealed, need still to be discussed since they form the basis of a current consultation. Beginning with Sec. 409 of the 1985 Act, charges on English property granted by a company incor138 porated outside Great Britain with an established place of business in England have to comply with the registration requirements of the Act. 139 This gives rise to the so-called Slavenburg problem, which occurs if the oversea company with an established place of business in England has not registered in England as an oversea company, as it is required by law to do. This omission may be due to various reasons, not the least of which is that of determining when a place of business is created and when that place of business becomes an established place of business. The failure of an oversea company to register itself in England means that it will not have a corporate number that can be use when the register of company charges is searched. In consequence, the Registrar of Companies will not actually enter details of any charges granted by such companies on the register but will enter the details instead on a searchable index of doubtful utility called the Slavenburg index. Now, the Companies Act does not actually require a charge to be entered on the register if it to be saved from defeasance. Rather, it requires particulars of the charge together with the instrument of charge to be delivered to the Registrar. Consequently, the rights of the chargee are preserved from defeasance by the above procedure. A further problem presented in the Slavenburg case concerned property brought into England after the charge was created. In the view of the court, the requirement of registration extended to future property in England as well as to property in England at the time the charge was created. This conclusion is somewhat doubtful and would lead to applica137

The legislation refers to England and Wales. An expression that includes England and Scotland, but not Northern Ireland and not the Channel Islands and Isle of Man. 139 The leading case is NV Slavenburg’s Bank v Intercontinental Natural Resources Ltd [1980] 1 WLR 1076. 138

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tions having to be made, perhaps long after the charge had been created, to comply with the registration requirements outside the 21-day rule.140 So far as an English court is adjudicating on a matter of priority as between a charge created in State A and a later charge created in State B (England), it will apply its ordinary time-based rules of priority and come down in favour of the earlier charge. The same applies in the case of execution creditors, whose rights in English law are weak since they are defeated by creditors with fixed charges and by creditors whose floating charges have crystallised before the execution is completed. Priority in English law is not determined by the date of registration, but a failure to register under Sec. 860 of the Companies Act 2006 would lead to the defeasance of the charge as against other secured creditors and execution creditors. Subject to the Slavenburg point in the previous paragraph, English law does not recognise as such the principle that a security already perfected under a foreign law needs to be perfected again under English law just because the charged assets have later been brought into 141 England.

140 141

See the text accompanying footnotes 51-52. The commitment of the other legal systems in this study to the lex situs (or lex rei sitae) rule results in the same approach being adopted, except that certain legal systems (e.g., France and Germany) require a correspondence between the right created under a foreign law and an equivalent in their own legal system. Germany’s approach in this respect is based on the numerus clausus rule.

Italy Anna Veneziano I.

Introduction

1.

General background; structure of national law re security over tangibles

Modern Italian secured transactions’ law is both too poor and too complex. This is particularly true for traditional security devices with respect to tangibles. Financing based on an enterprise’s tangible assets is difficult due to the paucity of efficient legal devices. At the same time, this area of Italian law is confused, as a number of particularised exceptions to the equal treatment of creditors (pari passu rule) have been introduced without a general rethinking of the whole system.1 On the other hand, Italian law recognizes some acquisition finance devices, in particular retention of title and financial lease. Such devices are usually not classified as security but as ownership vested on the vendor/lessor and are subject to divergent rules as to effectiveness between the parties as well as against competing creditors and in insolvency.2 1

2

For criticism of Italian secured transactions law by Italian scholars in a comparative perspective see G. Tucci, Garanzie su crediti dell’impresa e tutela dei finanziamenti (1974); G. Piepoli, Garanzie sulle merci e spossessamento (1980). More recently A. Veneziano, Le garanzie mobiliari non possessorie (2000); Alb. Candian, Le garanzie mobiliari (2001); see also M. Bussani, Il modello italiano delle garanzie reali, Contr. e impr. 1997, 163 et seq.; id., Rapport Italien, in Traveaux de l’Association Henri Capitant, Vol. XLVII (1998), p. 213 et seq.; E. Gabrielli, Sulle garanzie rotative (1998); G. Tucci, Towards a Transnational Commercial Law for Secured Transactions: the Preliminary Draft UNIDROIT Convention and Italian Law, Unif. L. Rev./Rev. dr. unif. 1999, 371 et seq.; G. Ferrarini, Changes to Personal Property Security Law in Italy: A Comparative and Functional Approach, in R. Cranston (ed.), Making Commercial Law. Essays in Honour of R. M. Goode (1997), p. 477 et seq. More details are provided infra, paras. 3. and 4. (as to registration of retention of title) and Case Studies 4 and 10. As a matter of principle, a special treatment of retention of title devices based on the underlying assumption that they are not security interests, because the seller (or lessor) is the “true owner” of the goods, seems to be the prevailing approach also in the other legal systems dealt with in this Study.

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Recently, the legislator simplified the existing regime of non-possessory rights over tangibles by deleting some of them and introducing a unitary, limited form of enterprise charge.3 This reform followed in the wake of the de-specialisation of credit institutions brought forward by European legislation (prior to this change, the Italian banking system was characterised by the existence of specialised credit institutions with exclusive authorisation to grant financing to specific branches of industry). Until now, however, the new provisions have not changed the practice of enterprise financing. Among other factors which will be related in more detail below, one important obstacle to a wider use of the existing non-possessory security devices is represented by the particularly cumbersome enforcement procedures. While possessory pledgees enjoy speedier remedies upon default, non-possessory security rights are still subject to the ordinary rules on enforcement.4 Another limitation is the unsatisfactory position in insolvency proceedings. Even though Italian insolvency legislation was recently changed by Legislative Decree No. 5/2006 (substituting new provisions within the old framework of the Royal Decree No. 267/1942),5 that effort did not introduce a radical change in the ranking system provided for in substantive secured transactions law. In insolvency, there is quite a long list of preferred claims that enjoy a special priority; this limits the efficacy of non-possessory security rights. The Insolvency Law refers on this point to the priority rules in the Codice civile (see Art. 111 No. 2 Insolvency Law).

3 4

5

See however the functional approach followed by German courts when the sale with retention of title is prolonged on proceeds or products (“Verlängerter Eigentumsvorbehalt”, see German Report, sub I.1.b)) as well as the new provisions in the French Civil Code recognising the security purpose of retention of title (French Report, sub I.) and the doubts concerning the characterisation of the same device expressed in the Spanish Report (sub.III.1.). To this add the rules relating to the rights of tax authorities in the Netherlands which consider retention of title clauses in sales and financial leases as “security” rather than true ownership (Dutch Report, sub I.3.). More details are provided infra, paras. 2. b) and 4. and Case Studies 1and 3. See infra Case Study 1 para. e). Enforcement procedures for non-possessory security devices in Italy are much less effective compared to the ones existing in most other legal systems dealt with in this Study. Enforcement procedures are analysed in particular by G. Tucci, Towards a Transnational Commercial Law on Secured Transactions: the Preliminary Draft UNIDROIT Convention and Italian Law, Unif. L. Rev./ Rev. dr. unif. 1999, 371, at 386 et seq. Legislative Decree 9 January 2006, No. 5. A previous, more limited reform was introduced by Law 14 May 2005, No. 80. The whole system is rather confusing at the moment due to lack of coordination between the two reforms.

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First on the list are procedural costs (court and insolvency administrator fees) (Art. 2777 C.c.) followed by all sums due to employees (wages, salaries, indemnities after ending of an employment contract, as well as social security claims) with no time or amount limitation (Art. 2751-bis No. 1 C.c.) and sums due for services or under other work contracts limited to the last two years (Art. 2751-bis No. 2 C.c.). Such preferences are followed by special liens on movables, which are satisfied according to a specified order. The 2006 reform of Insolvency Law added another category of superpriority that takes precedence even over the afore-mentioned claims: “crediti prededucibili” (see Art. 111 para.1 No. 1, Insolvency Law as amended). This covers, among other instances which are specific to certain contracts, costs relating to the insolvency administration as well as claims deriving from post-commencement financing. Thus, claims arising from: the activity of the insolvency administrator (including tort claims); the operation of the business when provisional operation is authorised within a liquidation procedure; rescue procedures before confirmation of a rescue plan or during its implementation, when the plan failed and a liquidation procedure ensued. The only claims which prevail over such crediti prededucibili are the ones secured by a pledge or a chattel mortgage (Art. 111-bis, para. 3, Insolvency Law) (the rule applicable to chattel mortgages is, however, still unclear). These provisions were welcomed as a means to facilitate financing of reorganization during insolvency proceedings. It remains to be seen how they will influence the general financing of enterprises. Most recently, the new legislation on company law introduced in the 1942 Italian Civil Code provisions on so-called “dedicated assets” (“patrimoni destinati”).6 These provisions are applicable only to the financing of stock companies (“società per azioni”), while there is no limitation as far as the type of eligible creditor is concerned. The complex documentation to be provided, however, makes it difficult for creditors other than institutional ones. As far as the structure of this device is concerned, it is a “dedication” (a legal ring-fencing) of a part of the assets of a company for the exclusive benefit of creditors that finance a specific economic venture (which, however, cannot be its entire business activity). These provisions grant a limited protection to the financiers against competing creditors, as the latter cannot attach the equipment set 6

Riforma delle società, Legislative Decree 17 January 2003, No. 6, which introduced into the Civil Code section on company law a series of provisions on patrimoni destinati ad uno specifico affare, Art. 2447-bis C.c. et seq. See in particular Art. 2447bis para. 1 lit. b C.c. in conjunction with Art. 2447-decies C.c., that allows for stipulation of a loan contract to finance a specific affair that is exclusively reimbursed by the returns from the same affair.

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aside to pursue the affair for the entire duration of the operation. This device does not, however, constitute an encumbrance on the enterprise’s tangible assets as such. The financier has only a priority on the “returns” of the economic venture and cannot force liquidation of the dedicated assets.7 It remains to be seen how the returns will be calculated. To sum up: notwithstanding developments which do deserve attention, the system is still unsatisfactory. Enterprises which do not choose to remain unsecured resort to alternative means of secured financing such as personal security, which is widely used. Sellers who export abroad do not rely on real security but primarily on personal security or a bank guarantee (the bank is generally secured by a pledge on intangibles or a personal security) or insurance, according to the amount to be secured. Depending on the legal system where the goods are exported, a reservation of title may turn out to be useful, though it is not much used in practice due to the low efficacy of this device within Italian law. I would like to point out that the resort to alternative means of secured financing is the advise that I would give to an Italian entrepreneur looking for external sources of financing, particularly because the implementation of the above-mentioned new instruments has not yet been judicially established.

2.

Security devices denominated as such

a)

Possessory devices

The 1942 Codice civile in principle allows only for possessory pledges where tangible assets are concerned (“pegno con spossessamento”).8 All

7

18

The financier’s rights in insolvency are now the result of Art. 2447-decies C.c. in conjunction with the new Art. 72-ter Royal Decree 16 March 1942, No. 267 (Insolvency Law) as amended by Legislative Decree 9 January 2006, No. 5. Their interpretation is far from clear. It can be inferred that the company’s insolvency terminates the contract whenever continuation or realization of the affair is made impossible by it. If such impossibility does not occur, the insolvency administrator may choose to step into the company’s shoes and continue the contract. If it does not do so, the financier may ask the insolvency judge for authorization to proceed with the affair either on his/her own or through a third party. The financier may then keep the returns of the affair, but he/she may not enforce against the assets themselves and must claim any remaining debt as a mere unsecured creditor. Art. 2786 C.c. et seq. (Del pegno di beni mobili). The Codice civile contains in addition express rules concerning pledges on debts (“crediti”) and other rights on tangibles (Art. 2800 C.c. et seq.).

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other security on movables is seen, at least formally, as an exception provided for by special code provisions or other legislation. In order to be effective as against third parties the pledge must be constituted by a written document bearing an ascertained date (“data certa”) and sufficiently describing the sum secured and the collateral.9 Moreover, the dispossession must deprive the debtor of any power of autonomous disposition of the tangible goods. A possessory pledge may be created not only through delivery of the asset to the pledgee but also by constituting a “co-custody” of the collateral shared between creditor and debtor. When, however, the collateral is left at the debtor’s premises, the security retains its priority vis-à-vis third parties only if the debtor is not authorized – and is disabled to act by itself – to freely deal with the assets (as in the case of a storage room for inventory that can be accessed only by using two keys at the same time, one in the possession of the debtor and the other kept by the creditor).10

b)

Non-possessory devices

A limited number of non-possessory chattel mortgages (“ipoteche mobiliari”) exist. The chattel mortgage can be created only on certain easily identifiable goods of relatively high unit value and for which a registry concerning title is set up: ships, aircraft and motor vehicles11 (further details are provided infra, para. 4 and Case Study No. 9).

19

10

11

Only recently did Italian courts, spurred by scholarly opinion and special legislation in analogous fields, recognise the enforceability of a revolving pledge on financial instruments under certain conditions. See Cass. 5 May 1998, No. 5264, Banca e borsa 1998 II, 485 et seq.; Cass. 27 September 1999, No. 10685, Foro it. 2000, 528 et seq.; App. di Milano 4 July 2001, Banca e borsa 2002, 693 et seq. and E. Gabrielli, Il pegno, in Trattato di diritto civile diretto da Rodolfo Sacco, Vol. 5 (2005), p. 223 et seq., where he restates its original idea expressed in Il pegno anomalo (1990). The courts have not, however, extended this possibility to tangible inventory. For details on pledges with delivery to a neutral third party and pledges with cocustody see E. Gabrielli, Il pegno, in Trattato di diritto civile diretto da Rodolfo Sacco, Vol. 5 (2005), p. 121 et seq. A specialised registry for the first two categories of assets is found in most legal systems dealt with in this Study (there are registries for such assets even in Germany, see German Report, sub II.9.; Belgian law singles out only ships, see Belgian Report, sub II.9.) and rights on these assets are also the subject matter of international instruments. Less widespread are on the other hand special rules for motor vehicles (see however French Report, sub. II.9.). Worth noting is that the abrogation of the title registry for motor vehicles in Italy is at present being discussed at par-

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Since the beginning of the last century, the Italian legislator has incrementally developed an array of ad hoc non-possessory security rights called “privilegi speciali”. They were confined to specific types of goods, usually within the framework of legislation introducing incentives to finance a particular segment of industry, often through the creation of specialised credit institutions. These security rights were quite varied as to form and effectiveness requirements. Originally, the privilegio was a non-consensual security right arising by operation of law in favour of certain subjects whenever certain factual conditions are met and requiring neither any act on the part of the benefited creditor nor any publicity. The Codice civile as well as special legislation also provided for socalled “consensual” privilegi, which can be referred to as “charges”, being the result of an agreement between the parties (connected to a loan) and needing registration to be opposable to third parties (see Art. 2745 para. 2 C.c.).12 It must be however said that neither kind of privilegio offered an effective security, especially on proceeds.13 Most of the charges were replaced in 1993 by the new special charge in favour of banks contained in the reformed Banking Law (“privilegio speciale ex Art. 46 legge bancaria”,14 herein “Art. 46 Bank Charge”). The Art. 46 Bank Charge might be viewed, with some generosity, as an enterprise charge, but it must be said that until now it has had little impact on the practice of enterprise financing. It can be created over the assets of an enterprise15 to secure medium- to long-term financing (loans exceed-

12

13

14

15

liamentary level. More details are provided infra, para. 4 (registration) and Case Study No. 9. For the sake of clarity from now on we will refer to the first kind of privilegio as a “lien” and to the second kind as a “charge”. The prevailing judicial interpretation was restrictive. See Cass. 10 May 1980, No. 1594, Foro it. 1980 I, 2528 et seq., with a critical note by G. Tucci, one of the earliest scholars suggesting a thorough reform of Italian secured transactions law. Testo Unico delle leggi in materia bancaria e creditizia, Legislative Decree 1 September 1993, No. 385, as amended by Legislative Decree 4 August 1999, No. 342 (in short, legge bancaria, hereinafter Banking Law). The definition of “enterprise” is an established one in Italian law and derives from the definition of “entrepreneur” (“imprenditore”) in Art. 2082 C.c. (“the entrepreneur exercises an organized economic activity in a professional way in order to produce or to exchange goods or services”). This excludes both consumers as non-profit organizations (acting within their statutory purposes), but it includes entities other than incorporated companies (e.g. partnerships) and also includes individuals doing business as sole proprietorships. Thus, unlike the current interpretation of the UK Companies Act charge legislation, Art. 46 is not limited to companies and limited partnerships.

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ing 18 months) by banks.16 Thus, financiers other than banks, even other regulated financial institutions, are ineligible. An Art. 46 Bank Charge can be created, inter alia, on existing tangible property (including equipment, inventory, fruits and cattle17), which must be used in the operation of a commercial activity,18 with the exclusion, however, of movables that are registered in a public registry such as motor vehicles. The legislative rules on creation and perfection are very short and have caused a certain amount of debate among scholars, concerning in particular the limits to the “revolving” nature of the security device and the extent of its priority vis-à-vis other security rights (these issues will be dealt with in Case Studies Nos. 1 and 3). It is difficult to predict which interpretation will prevail since there is not yet any case law on the application of Art. 46. Still existing, though not much used in practice, is the unpaid vendor’s lien on “machines” – that is equipment19 – under Art. 2762 C.c. (“privilegio del venditore di machine”). It is a lien of limited duration over sold and delivered equipment, arising by operation of law in favour of the seller provided that the documents proving the sale and the outstanding price are filed in a registry. Though there is a publicity requirement for this device, it is not based on consent and thus the buyer need not agree to the lien: the sales contract is sufficient (this is why the term “lien” and not the term “charge” is used here). The same lien is available also to third parties authorised to financing the acquisition of “ma-

16 17

18

19

The definition of bank is found in Art. 1 lit. b) of the Banking Law. The Banking Law still contains separate provisions for agricultural and fishing industry, for which a regime of specific incentives is kept. As far as security for such financing is concerned, Art. 44 of the Banking Law refers to Art. 46 with two qualifications: the security is applicable also to short-term loans and an added lien by operation of law is kept (apparently in order to lower the costs for smaller operations). A separate regime for farmers is not uncommon in other jurisdictions, see English Report, sub I.1. This point was cleared by Legislative Decree 4 August 1999, No. 342, since originally the limitation to assets used in the exercise of a commercial activity seemed to refer only to equipment. The meaning of the word “macchine” does not appear to be the same in the different statutes regulating secured transactions. In the case of the unpaid vendor’s lien “machines” means “equipment used in the enterprise main activity”, thereby excluding other machines held for use by the entrepreneur, while in other provisions it refers to electric tools, whatever their use may be.

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chines”. More details and the reasons for its limited effectiveness in practice are given below.20 In addition, there are statutory non-possessory security pledges on certain products of the food industry, which concern ham – and more recently cheese – subject to trademark protection (“pegno non possessorio sui prosciutti”).21 They allow for transformation of the product at the debtor’s premises. The pledge is constituted by marking the goods which are to be transformed (i.e. pork meat in the case of ham) with a special inerasable sign and by entering the right in special book-accounts, and it remains effective during processing of the goods and is transferred onto the finished product.22 These non-possessory pledges were introduced in order to supersede the practice of sales of the product to be transformed to the financier or to a third party (e.g. the producers’ association) followed by delivery of the product to the debtor on a fiduciary basis, which created problems as to the validity of the agreement.23 The development of such non-possessory pledges further illustrates that emerging needs in the financing of industrial activities are met in Italy by adding yet another kind of exceptional instrument instead of reconsidering the system of secured transactions as a whole.

3.

Title-based security devices

Italian courts have not recognised as an alternative device the transfer of tangible property by way of security, which is considered to be invalid, inter alia, under the prohibition of pactum commissorium (Art. 2744 C.c.).24 A legislative exception to this rule was recently provided for in

20

21

22 23

24

See Case Study No. 8. In this respect, the Italian unpaid vendor’s lien is less effective than the French and Belgian counterparts, see French Report, sub II.8.; Belgian Report, sub I.2.b) and II.8. For ham Law 24 July 1985, No. 401. Similar provisions were enacted for cheese products protected by trademark (Art. 7 of the Law 27 March 2001, No. 122 containing provisions on agricultural and forest sectors). For priority conflicts with other security rights see infra, Case Study No. 3. For a qualification of such agreements as special forms of non-possessory pledges see in particular E. Gabrielli, Il pegno anomalo (1990), p. 76 et seq. See the leading case of the Supreme Court Cass. No. 3800, 3 June 1983, Foro it. 1984 I, 212 et seq. This is by now consolidated judge-made law. In this respect, Italian law differs not only from jurisdictions where transfer of ownership by way of security is one of the main devices to encumber tangible goods (e.g. Germany) but also to other legal systems such as the English one and even the Spanish one (whose approach was traditionally more similar to the Italian system). A more re-

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the law implementing the Financial Collateral Directive,25 but was not extended to security devices in other fields. This judicial hostility toward fiduciary transfers is also seen in conflict of law issues involving retention of title on proceeds and products of sold goods and transfer of property by way of security, which were struck down as ineffective. On the other hand, Italian law does recognize some title-based devices in the context of acquisition finance, in particular retention of title and financial leases. Such devices, as mentioned earlier, are usually not classified as security but as ownership vested on the vendor/lessor. This means not only that effectiveness requirements are wholly different than in the case of security devices, but also that vendor and lessor are insulated from competition with other creditors. The statutory rules on retention of title, however, make it impractical to use it on a large scale in commercial transactions.26 On the other hand, business in the leasing industry is steadily increasing: at the end of 2005 the total outstanding leasing contracts on equipment approached € 23 billion (this figure, however, includes both operating and financial leases).27 The granting of a financial lease generally requires less time than is the case for a traditional bank loan and is perceived as more flexible (tailored to the needs of each customer), as well as advantageous from the point of view of taxation. Moreover, a financial lease allows creditors to escape the more restrictive provisions concerning retention of title, which render the latter device less attractive.28 Such advantages are linked to the fact that the lessor remains “true owner” of the goods. Whenever the contract is recharacterised as a security device, however, courts consider it to be invalid (as it happens in some instances of sale-and-lease-back, see Case Study No. 4).

25 26

27

28

strictive approach to transfer of tangible property by way of security is found in Belgium and the Netherlands. Art. 6 No. 2 Legislative Decree 21 May 2004, No. 170. For details see infra, para. 4. and Case Study No. 4. This is in contrast with most other jurisdictions dealt with in the present Study, at least as far as vendor’s rights on the original goods are concerned. See Italian Association of Leasing (ASSILEA), Rapporto sul Leasing 2005, available at http://www.assilea.it/repository/annual_report/Rapporto2005.pdf (1 August 2007). See infra, Case Study No. 4.

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4.

Existing registries

There is no single comprehensive filing system for secured transactions. Certain security devices, however, do require registration (the traditional way to give “publicity” to chattel mortgages in lieu of dispossession).29 The existing registries differ widely. Common features are that that they are “document filing” registries as contrasted with “notice filing” (i.e. the operative document establishing the transaction must be presented to the registry) and there are no special rules (e.g. grace periods etc.) regarding filing of security rights on assets moved into Italy from another country. The extent of computerisation of such registries varies. The most advanced in this respect is the enterprise registry (“registro delle imprese”) where the contract providing for “dedicated” assets is to be filed. The reason is that this registry was established relatively recently (in 1995).30 Although the registries still receive input on a local basis, because all entries are to be found on a single electronic index they have in effect become a single national registry from the standpoint of a searcher. According to the law, both input and output are completely electronic. In practice, a person wishing to file must still personally bring the document to the (provincial) office, either on paper or stored electronically. There is no remote access search, but a copy of the requested document is made available, also via letter or e-mail, to whoever presents a request. The request can be transmitted also electronically. Costs are limited to administrative fees for the copies. According to the system designed by statute, data stored in the registries should be immediately available to a searcher. In practice, data is still brought personally to the office. It then has to be manually inserted in the registry and this causes a certain delay in the availability of information to users. All other registries are moving towards the use of electronic filing.31 The time between presentation to the documents to the registry and availability of the data to a searcher varies according to the registry involved. The chattel mortgages (“ipoteche mobiliari”) provided for in the Codice civile and in the Maritime Code (“Codice della Navigazione”) on ships, 29

30

31

This general approach is followed in other legal systems (Spain, France, Belgium, England) though with very different degrees of fragmentation and effectiveness of the registries according to the various security devices. Contrast Germany and the Netherlands. The registry was already provided for in Art. 2188 C.c. et seq. but was not implemented until Presidential Decree 7 December 1995, No. 58. Starting from 1994 all Italian public administration offices have to digitalize their filing systems.

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aircrafts and motor vehicles are required to be registered in specialised asset-based registries in order to achieve effectiveness both between parties and against third parties. This is true for older types of registration.32 These registries function at the same time as title and security right registries33 and are nationwide. Until recently, the mortgage had to be notarised before registration. With Decree No. 223, 4 July 2006 (socalled “Decreto Bersani”)34 the legislator abolished the exclusive competence of notaries in this field. This change should lower the costs of stipulating a chattel mortgage to administrative fees and taxation. Even more recently, the abrogation of the title registration system for motor vehicles was proposed and is now being discussed in Parliament (see Case Study No. 9 for further details). Retention of title on certain items, i.e. machinery whose value exceeds € 15,49 (n.b.: this amount has never been adjusted) is also subject to registration. In this respect, Italian law differs from most other European legal systems dealt with in the present study.35 It must be noted, however, that this registration affects only sub-buyers of the goods, rendering the clause effective against them. As far as competing creditors of the subseller are concerned, other rules apply (see Case Study No. 4). Furthermore, the publicity, and the consequent effectiveness against sub-buyers, achieved by registration is not particularly efficacious. The registry is based at the first instance court, Tribunale (166 throughout Italy) of the place where the goods are located at the time of stipulation of the clause. The protection offered by registration is lost when the goods are moved out of the territorial competence of the Tribunale. No rules deal with change of registration location upon movement of the goods. Likewise, no rules provide for the possibility of registering a retention of title stipulated with respect to goods located outside Italy at the time of the stipulation, but later moved to Italy. The Art. 46 Bank Charge must be registered in order to be effective against third parties (including competing creditors). Registration must be 32

33

34 35

The need for registration in order to achieve effectiveness both between parties and against third parties is still present in other jurisdictions dealt with in the present Study, see Spanish Report, sub IV.2.b). See also the newly introduced pledge on inventory in the French Commercial Code, which seems to require registration as a condition of effectiveness also as between creditor and debtor, see French Report, sub II.3. In this respect, Italian law conforms with the other legal systems dealt with in this Study (for Belgian law only in relation to ships). The Decree was confirmed by Statute 4 August 2006, No. 248. Doubts as to the need for registration of retention of title in order for it to acquire third party effects are expressed in the Spanish Report, sub IV.2.c). All the other countries do not require registration for title retention.

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done at the Tribunale within whose jurisdiction the place of business of the grantor is located. This is the same registry as the one mentioned above for retention of title. No effort was made in this legislation, however, to modernize the existing registries, nor to solve the issue of priority between an Art. 46 Bank Charge and a registrable retention of title.36 An additional registration must be entered at the Tribunale of the place where the bank has its seat. 37 Registration as such is not expensive, though if parties resort to a notary public (which is customary when a bank is party to an agreement) the fees are based on a percentage of the value of the loan: this is usually a large amount and is to be paid by the grantor’s enterprise. In an effort to limit the costs of the operation while keeping the requirement of a notarised document, a new paragraph added to Art. 46 by Legislative Decree No. 342/1999 states that any notary fee relating to the registration of this charge is diminished by half.

II.

Case studies

1.

Non-possessory security right in specific existing items of equipment

As already noted, in Italian law there is no general consensual nonpossessory security right on specific goods held for use. The only way to collateralize already-owned equipment of various types and provenance would be the granting of an Art. 46 Bank Charge, bearing in mind that this device may be stipulated only in favour of banks and only by enterprises for medium- to long-term financing (more than 18 months).

a)

Documentation and formalities to achieve effectiveness

aa) against grantor

In order to be effective as between the bank and the grantor, Art. 46 para. 2 states that the Art. 46 Bank Charge must be created by a written document “exactly describing”: (1) the collateral; (2) names of lender and debtor (or third-party provider of security); (3) amount of the loan and its terms; and (4) sum secured. 36 37

Priority issues are dealt with in more details below. See Case Study No. 1 b). This additional duty regarding registration was introduced by Legislative Decree 4 August 1999, No. 342 and was favourably commented upon, see among others M. Sepe, in P. Ferro-Luzzi/G. Castaldi (eds.), La nuova legge bancaria. Commentario, Vol. V (2nd update, 2000), p. 115.

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Thus, Art. 46 requires a high level of formality even as between grantor and bank, though it refrains from making registration a condition of effectiveness as between them (in contrast with the provisions on chattel mortgages on ships, aircraft and motor-vehicles). A point which has raised concerns among scholars is the need for an “exact description” of the four elements listed in Art. 46 para. 2. As to the collateral, and in the absence of case law on the question, most scholars have agreed on a more liberal approach, stating that a “sufficient” description in lieu of an “exact” one would satisfy the statute. This would put the description requirements of the Art. 46 Bank Charge in line with what is provided for in the rules on possessory pledges, where the term used is “sufficient” (see Art. 2787 para. 3 C.c.). In any event, how precise a description must be to satisfy the “exact” standard would be a matter for the courts, and the specificity of the description, even under the “sufficient” standard, may vary according to the type of collateral which is the object of the charge.38 In the case of the assets mentioned in this Case Study, a fairly precise description of existing machines is certainly possible and is therefore considered to be required. A different solution was suggested, however, in the case of inventory and account-receivables, where the requirement of a high degree of exactitude might well be inconsistent with the “revolving” nature of the collateral. For a discussion of the latter point see infra, this Case Study, para. c), and Case Study No. 3. A similar problem is also generated by the requirement with respect of the “sums secured”, in the context of a revolving credit arrangement. This is however not relevant to this first Case Study; for details see infra, Case Study No. 3. The distinction made in Art. 46 para. 2, Nos. 3 and 4 (“loan” and “sum secured”) derives from the rules on mortgages, where the security right may cover only a part of the loan. Thus, the amount of the loan as such and the sum secured by the charge may be different. Furthermore, Art. 46 expressly mentions not only the amount, but also the “conditions” of the loan. This rather vague formula does not identify those elements of the loan transaction which must be disclosed. This is unfortunate because the need to disclose in a public registry all particu-

38

See among others G. Presti, Il privilegio per i finanziamenti bancari a medio e lungo termine in favore delle imprese, Banca e borsa 1995 I, 594, at 610 et seq.; A. Veneziano, La garanzia sull’intero patrimonio dell’imprenditore della nuova legge bancaria italiana al confronto con i modelli stranieri: una riforma a metà?, Dir. comm. int. 1996, 938 et seq.; M. Rescigno, Le garanzie “rotative” convenzionali: fattispecie e problemi di disciplina, Banca e borsa 2001 I, 1 et seq.

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lars of a loan may well be perceived as problematic (at least in some cases).39

bb) against third parties

In order to be opposable to third parties generally, the security agreement must be notarised (or authenticated by a public official) and entered in a registry kept by the First Instance Court (Tribunale) of both the place where the grantor has its seat and the place where the lending bank has its seat (when different). The entire document establishing the Art. 46 Bank Charge must be filed. Further details on registration are provided supra, para. I.4.

b)

Discoverability of earlier created rights in the collateral

As noted supra, para. I.4., chattel mortgages on registered assets, some title retentions and all Art. 46 Bank Charges are required to be registered, though they are subject to different rules as to effectiveness requirements and priorities. An Art. 46 Bank Charge does not cover movables subject to registration which are the object of chattel mortgages. Therefore, no conflict between these two devices arises with respect of that type of collateral. Lender may look into the registries in order to discover whether priorin-time rights of the same type as the Art. 46 Bank Charge have been filed (and to obtain information as to their scope and extent). As between Art. 46 Bank Charges, a simple first-to-file rule is applied. All other competing rights on the assets prevail over the Art. 46 Bank Charge if created with an “ascertained date” (“data certa”) that antedates registration of the charge. Although nowhere stated explicitly, presumably the charge otherwise prevails. It is quite difficult for the lender to determine whether there are unregistered rights created with an earlier ascertained date since the ascertainment does not render the rights public; it may be achieved by a notarisation or authentication by a public official of a private writ39

Concerns about confidentiality are also raised in other jurisdictions. Confidentiality is one of the reasons traditionally put forward to resist introduction of a generalised registration system for security devices in Germany. A Uniform Commercial Code filing model would not, however, imperil confidentiality, as that does not require disclosure in the public record of any financial data but, rather, requires merely identification of the parties (or the secured party’s representative) and a general description of the collateral. The problem is more evident in those legal systems where registration is based on a document filing rather than notice filing.

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ten document (the notarisation or authentication officially gives it a date) (see Art. 2704 C.c.). Although Art. 46 Bank Charge and some title retentions are both registered in the same registry, this was apparently done solely to avoid the cost of providing for another registry. No rules on the priorities as between the two devices is to be found in any legislation. Some scholars have suggested that a first-to-file rule should apply also in this case.40 The tenability of such a proposal depends on whether courts are prepared to disregard any document relating to the title retention that was entered into prior to registration – even if it bears an ascertained date.41 Under this approach, the bank would prevail if the Art. 46 Bank Charge were registered before registration of the title retention (though the two devices may be filed in different local registries), notwithstanding the existence of a prior-in-time document with ascertained date proving the stipulation of the title retention. Another approach is based on the fact that registration of a title retention expressly relates only to the conflict with a sub-buyer of the collateral and may be said to be irrelevant to the priority conflict with other creditors of the sub-seller. Under this approach, even if a bank learned that an item of equipment being charged to it had been acquired by the chargor subject to a retention of title clause, and learned of the location of the equipment at the time the title retention was stipulated, checking the appropriate registry would still be insufficient to assure priority over a title-retaining seller that obtained an ascertained date earlier that the date of the bank registration (whether or not the seller registered). Finally, it could be argued that the seller should always prevail, as the assets sold under a retention of title never become part of the debtor’s assets and therefore they cannot be covered by a previous registered Art. 46 Bank Charge. This is the approach taken by many other European jurisdictions, which grant retention of title priority over earlier created security rights on the ground that the assets bought (or hired) under retention of title never entered into the debtor’s after-acquired property in the first place. In the author’s opinion, none of the solutions suggested above is satisfying. Under the first approach the security function of the retention of title is fully recognised, but the strict “first-to-file” rule which is proposed would have the practical effect of giving priority to the lending bank protected by an Art. 46 Bank Charge as against a seller with retention of title in the great majority of cases (as Art. 46 applies to medium- to long40

41

See in particular G. Tucci, in F. Capriglione (ed.), Commentario al Testo Unico (2nd edn. 2000), p. 349. See for a clear review of the alternatives M. Rescigno, Le garanzie “rotative” convenzionali: fattispecie e problemi di disciplina, Banca e borsa 2001 I, 1, at 2 et seq.

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term financing). Furthermore, this approach seems to be inconsistent with the present function of the registration for retention of title under Italian law. The second approach avoids the problem of inconsistency just mentioned, but it still has the practical effect of denying priority to the seller with retention of title in most situations (as the retention of title will be probably agreed upon and acquire an ascertained date at a later time than the time of registration – or of constitution – of an Art. 46 Bank Charge). The third mentioned solution, finally, may have the practical effect of safeguarding the priority of a later-in-time seller with retention of title, but it achieves this result by adopting a formal approach based on who is the “owner” of the assets. A better solution would be to grant title retention, as a purchase-money security device, some kind of priority over a more general enterprise charge, regardless of time of filing or stipulation of the title retention. Lessors, on the other hand, are considered to be owners of the leased property. Therefore they have the right to repossess their assets in case of default. They outrank any other holder of rights on the same assets (except for acquirers in goods faith under Art. 1153 C.c.). This means that an Art. 46 Bank Charge does not extend to leased equipment. Finally, there is no way, from public records, for a bank to become aware of existence, scope and extent of other rights that need not be registered and that may prevail even if created later in time (e.g. superpriorities on movables effective in insolvency).42

c)

Rights of secured creditor upon sale by grantor in

aa) the sold collateral

The issue is directly solved by Art. 46 para. 5 Banking Law, according to which a subsequent buyer takes subject to the rights of the bank that registered its charge on the equipment before the sale, unless the buyer is protected by Art. 1153 C.c., which contains the well known rule of bona fide acquisition.43 A buyer without knowledge of the Art. 46 Bank Charge that in good faith receives possession of the asset from the debtor takes free of the charge. The extent to which registration may affect the buyer’s good faith ignorance is not clear, since the black-letter-rule of Art. 46 expressly preserves the protective effects of the bona fide acquisition provision, while the recognition of a generalised duty on the third42 43

See supra, para. I. 1. On the extension of this rule to the different case of subsequent sales of the same asset, where the conflict is between two buyers (Art. 1155 C.c.) see R. Sacco, Il possesso, in Trattato di diritto civile Cicu e Messineo (1988), p. 388 et seq.

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party acquirer to search the registry would in practice deprive the reference to Art. 1153 C.c. of any effect.44 In the absence of judicial decisions, some scholars45 have argued that the solution should vary depending on the nature of the collateral. In the case of assets which are not held by the buyer for sale in the ordinary course of its business – such as the machines held for use in this Case Study – a buyer (likely to be a business that uses such machines) could be considered to be in bad faith if it failed to check the register. The opposite result would apply in the case of sale of inventory, where the secured party, the debtor/seller and the buyer all expect the inventory to be available for sale and therefore, the buyer should not be expected to make inquiries to discover possible encumbrances on the goods sold. Still open is the further question whether a buyer of goods that are encumbered by a charge created but not yet registered takes free of the charge if the buyer bought with knowledge of the charge.

bb) proceeds of the sold collateral

According to Art. 46 para. 5, when the bank cannot repossess the asset because of bona fide acquisition of the encumbered assets, the lender’s security right is automatically transferred to the corrispettivo (meaning consideration received in exchange). The term corrispettivo is interpreted as referring to the receivable arising out of the sale of the collateral. More doubtful is the application of the term corrispettivo to cash paid to the debtor for the assets sold. There are problems in tracing cash when it has been commingled with other monies of the debtor, and as Art. 46 does not refer to cash as collateral, it does not seem possible to construe a creditor’s right to an equivalent sum within the debtor’s patrimony. Doubts also arise in the case of a tangible given in exchange. In any case, Art. 46 para. 1, lit. a) expressly mentions that the charge may cover “existing and future” equipment. The latter provision, however, does not automatically extend the charge to future equipment, even when it is in substitution for original equipment, but requires an express agreement that includes future equipment and adequately describes it (see infra, para. d)) Some problems arise also with respect to receivables. Art. 46 para. 1, lit. d) expressly mentions that the security may be created on receivables, present or future, deriving from the sale of the assets that are encum44

45

See M. Sepe, in P. Ferro-Luzzi/G. Castaldi (eds.), La nuova legge bancaria. Commentario, Vol. I (1996), p. 717. See in particular G. Tucci, in F. Capriglione (ed.), Commentario al Testo Unico (2nd edn. 2000), p. 342.

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bered. The language of Art. 46 makes it clear that extension of the charge to the receivable generated by the grantor’s sale of the asset is not an automatic effect of the charge on the sold asset. The security agreement must expressly provide for such an extension. The first difficulty concerns the relationship between the mentioned rule and Art. 46 para. 5, which automatically extends the security right to the proceeds when the asset cannot be repossessed by the bank because of good faith acquisition. It has been argued that when the parties agree on extending the security right to the receivables deriving from the sale of encumbered assets, the bank implicitly authorizes the sale and, consequently, waives its right to repossess the sold assets, independently of the good or bad faith of the subsequent buyer. In the absence of such an extension, the bank retains its right to repossess the asset or, alternatively, its right is automatically extended to the receivable arising from the sale.46 Further problems arise from the rules on description of the collateral which were mentioned above. The statute requires that the charge agreement must exactly describe the (goods and the) accounts encumbered. According to a majority view among scholars, shared by the Italian Banking Association, existing accounts must be described precisely, with indication of the amount and of the account debtor; for future accounts, on the other hand, a more generic reference to the assets whose sale is going to generate the accounts should be sufficient. It is doubtful that a description of “all receivables generated by the sale by the grantor of any item of collateral” would satisfy this requirement. Finally, the somewhat ambiguous text of Art. 46 even left room for a restrictive interpretation according to which the publicity regime envisaged for other assets would not be applicable to receivables, for which, instead of publicity, notice to the account debtor would be required. In the author’s opinion, that interpretation should be rejected in light of the unitary system of publicity through registration introduced by Art. 46.47

46

47

See M. Rescigno, Le garanzie “rotative” convenzionali: fattispecie e problemi di disciplina, Banca e borsa 2001 I, 1, at 8. For this view, see G. Tucci, in F. Capriglione (ed.), Commentario al Testo Unico (2nd edn. 2000), p. 347. For the opposite view, see M. Sepe, in P. Ferro-Luzzi/G. Castaldi (eds.), La nuova legge bancaria. Commentario, Vol. I (1996), p. 715; G. Presti, in U. Morera/M. Nuzzo (eds.), La nuova disciplina dell’impresa bancaria, Vol. II (1996), p. 100 et seq.

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Rights of secured creditor in replacement collateral (real subrogation)

According to Art. 46 para. 1, the charge may cover “existing and future” equipment (lit. a)). In addition, it includes any assets acquired with the loan (lit. c).48 Thus, provided that the security agreement contains an express reference to, ad adequately describes, future equipment, the latter would be included, whether or not the new equipment substitutes for the original equipment. In this case a description of the general category of the future asset would be sufficient. A problem may arise from the fact that Art. 46 does not mention “equipment” as a separate category of assets but refers, all together as one group, to plants (“impianti”), works (“opera”) – meaning plants under construction – and equipment (“beni strumentali”). It remains to be seen how courts will interpret such an unclear list and whether the latter type of assets may be considered to be inclusive of the other two or only relating to certain kinds of tools.

e)

Remedies upon default

Art. 46 fails to provide any special rules on enforcement. This failure was strongly criticized by scholars and practitioners as it means that the bank is left with the inefficient rules on enforcement of non-possessory liens under the Procedural Code.49 The bank does not enjoy the rights of the pledgee to choose between the normal execution rules and the self-help provisions contained in the Codice civile. These latter provisions give the pledgee the right after default to ask the court for appropriation of the asset(s), after appraisal made by the same court (either referring to current market price at the time of the sale or to expert evaluation) and with an accounting to the debtor of the excess, if any, of the value over the balance due. Alternatively, the pledgee is entitled to seize the assets (if they are deposited with a third party) and have them sold by an official agent either at public auction or, if the asset has a current market value, at that value (but in this case with no judicial supervision as to the existence and amount of a market price). The Codice civile provisions on remedies for pledgees also permit the parties to agree (even prior to de48

49

This latter provision too may be subject to a restrictive interpretation, limiting its application to the cases where the loan expressly mentions the assets to be acquired (“mutuo di scopo”), see G. Presti, Il privilegio per i finanziamenti bancari a medio e lungo termine in favore di imprese, Banca e borsa 1995 I, 610 et seq. This restrictive interpretation, however, is a minority view. See in particular G. Tucci, Towards a Transnational Commercial Law for Secured Transactions: the Preliminary Draft UNIDROIT Convention and Italian Law, Unif. L. Rev./Rev. dr. unif. 1999, 371 et seq.

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fault) on a different method of sale. In contrast, the bank must follow the ordinary cumbersome procedures (Art. 502 C.p.c. et seq.) which usually take a very long time (at worst it can take even more than one or two years) and inevitably result in a very substantial decrease in the amount realised from the collateral.

f)

Insolvency of the grantor

The Art. 46 Bank Charge is expressly given the rank of a lien under Art. 2777 para. 3 C.c. This means that the bank will be satisfied out of the proceeds of the sale of the assets with preference to all other creditors except for the super-priorities arising in relation to the insolvency or rescue procedure, procedural costs and all sums due to employees, social security costs, sums due for other services and work contracts (on such super-priorities see supra, para. I.2.) as well as claims secured by a pledge on the same assets. No “ring-fenced sum” is provided for in favour of general unsecured creditors. As is the case with all creditors, the bank must timely file its claim and be admitted into the insolvency proceedings with recognition of its secured status. Insolvency proceedings are usually quite long (duration may vary somewhat based on the complexity of the case) and it is not uncommon that they take years.

g)

Motor vehicles collateral

Motor vehicles are “movable goods subject to registration” and therefore they cannot be collateral under the Art. 46 Bank Charge. A specific chattel mortgage (“ipoteca mobiliare”) can be created over motor vehicles. There cannot be a chattel mortgage on future motor-vehicles (even if acquired as replacement for the original collateral). On the other hand, the rule of Art. 1153 C.c. on bona fide acquisition is excluded (i.e. registration makes the mortgage effective against any subsequent purchaser; as in all mortgages, the subsequent purchaser is entitled to free the asset from the security right by repaying the outstanding secured obligation). Due to its characteristics (see Case Study No. 9), the chattel mortgage is perceived to be inefficient. A financial lease or a sale- and lease-back of a motor vehicle is more common (see Case Study No. 4). It is interesting to note that the inefficiency of the present regime of chattel mortgage on motor vehicles and the existence of more satisfying types of security for the acquisition creditor are among the reasons which have most recently justified a legislative proposal to abolish the special register for motor vehicles.

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Non-possessory security right in present and after-acquired equipment (floating security right)

The questions arising in respect to this Case Study are treated above under Case Study No. 1, especially para. b) on documentation and formalities and para. e) on replacement collateral.

3.

Non-possessory security right in present and future inventory (floating security right)

a)

Introductory remarks

A floating security right over present and future inventory is difficult to achieve under Italian law. An approximation can be reached by means of an Art. 46 Bank Charge.

b)

Documentation and formalities to achieve effectiveness against grantor and against third parties

aa) Effectiveness against grantor: revolving collateral

In an effort to broaden its coverage, Art. 46 expressly mentions inter alia raw materials, products under processing, finished products as well as goods kept in stock (“scorte”) and inventory in general (“merci”);50 other goods acquired with the loan; account receivables, whether present or future, deriving from the sale of the above-mentioned tangibles. This seems to indicate that a floating security right on inventory of the kind mentioned in the example would be valid. Nevertheless, several problems are presented. For the charge to be effective even as against the grantor, it must be established by a written document that, inter alia, sets forth the “exact description” of the collateral. If an “exact description” were in fact required, a floating security would be impossible. This is why the majority view among scholars suggests, as mentioned above for Case Study No. 1, that the detailed particularity of the description should vary according to the type of assets concerned. In the case of inventory, while the mere mention of the broad categories provided for in Art. 46 may be seen as insufficient, a generic reference to the type of goods and/or to their location might satisfy the requirement. More restrictive approaches 50

The difference between scorte and merci comes from accounting legislation: the first term refers to the goods kept in stock to be sold at a later time while the second term refers to inventory in general.

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(such as the need to indicate a precise quantity or value of the goods) do not seem to be justified also in the light of old case law on the specific charges which were replaced by Art. 46.51 Another source of doubt concerning this provision is the fact that though “future equipment” (and “future accounts receivable”) are mentioned, there is no equivalent mention of “future inventory”. In the absence of case law on the question, the majority of scholars agrees by now that the intrinsic nature of inventory is to be sold on and replaced by other inventory; thus, the revolving character of Art. 46 is to be affirmed.52

bb) Effectiveness against grantor: revolving loan

Future advances are a problem under Italian secured transactions law. If a bank desires to stipulate a revolving credit agreement it generally makes use of an anticipazione di credito, a specific type of contract regulated by the Codice civile (Art. 1846 et seq.) that may be unsecured or guaranteed by personal security (which requires the specification of a maximum amount) or secured by a pledge on intangibles. It is not certain that Art. 46 para. 2 embraces revolving credit, inasmuch as it requires “exact” descriptions of both the amount to be lent and of the secured obligation (stated in the statute as validity requirements).53 In the author’s view, however, the indication of a maximum amount (instead of a precise sum) may satisfy the description requirements in the case of a revolving security right.

51

52

53

For the more restrictive view see G. Presti, Il privilegio per i finanziamenti bancari a medio e lungo termine in favore delle imprese, Banca e borsa 1995 I, 610, at 619. The opposite view is voiced by M. Rescigno, Le garanzie “rotative” convenzionali: fattispecie e problemi di disciplina, Banca e borsa 2001 I, 1 et seq. In favour of such interpretation G. Tucci, in F. Capriglione (ed.), Commentario al Testo Unico (2nd edn. 2000), p. 345-346; A. Veneziano, La garanzia sull’intero patrimonio dell’imprenditore della nuova legge bancaria italiana al confronto con i modelli stranieri: una riforma a metà?, Dir. comm. int. 1996 938, at 939; E. Gabrielli, Sulle garanzie rotative (1998), p. 99. In the absence of judicial decisions, a negative answer was given by some scholars. See G. Presti, Il privilegio per i finanziamenti bancari a medio e lungo termine in favore delle imprese, Banca e borsa 1995 I, 610, at 620.

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effectiveness against third parties

Were the charge valid, it would have to be registered in order to achieve effectiveness as against other creditors, subsequent purchasers and in insolvency. The rules would be the same as above, Case Study No. 1. As to subsequent purchasers, the good faith acquisition rule of Art. 1153 C.c. would almost always be satisfied in the case of inventory, which typically would be sold in the ordinary course of business.

c)

Discoverability of earlier created rights in the collateral

In addition to the priority conflicts already treated above under Case Study No. 1, a conflict between an Art. 46 Bank Charge and the nonpossessory pledge provided for by law No. 401 of 24 July 1985 on ham (and cheese) with trademark protection may arise. In the absence of case law on the question, the preferred solution would be to give priority to the Art. 46 Bank Charge if it were registered before the marking and registration of the non-possessory pledge. The reason is that the financier of the ham or cheese producer could never justify its ignorance of the registered Charge.54

4.

Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third party secured lender

a)

Introductory remarks

Manufacturer has, at least in theory, the option of acquiring the asset either by buying subject to a retention of title clause (“riserva della proprietà”) or by leasing it under a financial lease (“leasing finanziario or locazione finanziaria”). There are important differences, however, between the efficacy of the two devices from the standpoint of the supplier. Acquisition of tangibles, both equipment and inventory, subject to retention of title is rather uncommon in commercial situations while financial leasing of equipment is steadily gaining acceptance in the market. This is due to the fact that while retention of title is subject to burdensome formal requirements and limitations as to the remedies of the seller/creditor, no such regime is provided for in the case of financial lease. Thus, licensed leasing institutions can effectively escape the protective provi54

G. Tucci, in F. Capriglione (ed.), Commentario al Testo Unico (2nd edn. 2000), p. 350.

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sions which were set forth for title-retaining sellers. Finally, there is no security device generally available under Italian law to a third party secured lender that achieves special status with respect to a tangible on the basis that the lender supplied the purchase-money credit for the acquisition of that asset (but see infra the last para. of this section). Express rules on retention of title are to be found within the Codice civile (Art. 1524-1526 C.c., dealing exclusively with instalment sales). Such rules were primarily designed to protect the consumer buying goods on credit. Special legislation was implemented in 1965 relating to retention of title on higher value goods. More recently, new rules were introduced by legislation implementing the 35/2000/EC Directive on combating late payment in commercial transactions.55 The financial lease is not regulated within the Codice civile. As in the case of many other transactions arising from international commercial practice, initially it was struck down by courts, being considered to be an impermissible circumvention of the rules on instalment sales with retention of title. Since the initial judicial approvals around 1970,56 the economic importance of financial lease has steadily increased over the years. Though there is still no complete legislative regulation, the statutes now contain many provisions expressly devoted to financial leasing, not only in taxation law but also, for example, in the Banking Law (Art. 10 para. 3 and 106 Banking Law, dealing with requisites for licensing financial institutions to this activity) as well as most recently in Insolvency Law (see Art. 72-quater Insolvency Law, on which see infra, para. e)).57 55

56

57

OJ 8 August 2000, L 200/35 et seq. The Directive was implemented in Italy by the Legislative Decree 20 September 2002, No. 231, Art. 11 (3). The Decree was the subject of a controversy recently decided by the European Court of Justice, relating to Art. 11. The outcome was favourable to the Italian government since the Court decided that Art. 11 did not fail to implement Art. 4 of the Directive, even though Art 11 provides for additional acts on the part of the seller in order for the title retention to be opposable to the buyer’s creditors (see infra, para. c)): ECJ 26 October 2006, Case C-302/05 Commission v. Italy. Thus, the Court confirmed the view held by scholars that the Directive applies only to the relationship between seller and buyer and does not deal with opposability to third parties. See in particular E.-M. Kieninger, in J. Basedow et al. (eds.), Aufbruch nach Europa (2001), p. 151, at p. 160 et seq. See Trib. di Vigevano 14 December 1972; Cass. 28 October 1983, No. 6390, both reported in G. De Nova, Il contratto di leasing (3rd edn. 1995), where the yearly debate in case-law and scholarship is clearly traced. Sale-and-leaseback is also not unknown in practice. It is considered to be invalid on the ground of violation of the prohibition of pactum commissorium (Art. 2744 C.c.), unless the contract is concluded in the ordinary course of business and provides for a clause that permits estimation of the asset and accounting of any sur-

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As to a third-party secured lender, it might make use of an Art. 46 Bank Charge if it were a bank, since that provision expressly mentions, within the list of potential collateral, “future assets acquired with the loan” (and indeed, a minority view on this provision did hold that it was to be limited to situations where the loan expressly indicates the purpose of acquiring a specific asset).58 In such a case the points raised under Case Study No. 1 apply. Another potentially available acquisition finance device is the unpaid vendor’s lien in Art. 2762 C.c. which can arise also in favour of a third party financier. This device, however, is not particularly efficacious for the reasons set forth below (see Case Study No. 8).

b)

Documentation and formalities

A retention of title can be agreed upon without the need of any formality in order to be effective both as between vendor and buyer and as against the buyer’s unsecured creditors.59 There is no form requirement necessary to conclude a financial lease contract effective between the parties. In practice, however, financial lease contracts are always written (usually standard contract forms) for reasons of evidentiary requirements.

c)

Priority of acquisition credit source v. earlier and later competing creditors and buyers

aa) Re the initial tangible

According to the Codice civile provisions, in order to be opposable to a buyer’s creditor who attached the assets on the basis of a judgment, the retention of title clause must be in writing and bear an “ascertained date” that is prior to the attachment by the judgement creditor. Art. 11 para. 3 of the above-mentioned Legislative Decree implementing the Late Pay-

58 59

plus value at the time of enforcement (“patto marciano”). For this development see Cass. 16 October 1995, No. 10805, Foro it. 1996 I, 3492 et seq. with informative obs. by A. Monti. See above, footnote 48 and accompanying text. For a judicial application Cass. 13 May 1991, No. 1524, Arch. civ. 1991, 1142; C.M. Bianca, La vendita e la permuta, in Trattato di diritto civile Vassalli, Vol. VII, Part 1 (2nd edn. 1993), p. 583 et seq., at 606. This general principle was not changed by the implementation of the EU Late Payment Directive, despite a somewhat unfortunate turn of phrase contained in Art. 11 para. 3 Legislative Decree 20 September 2002, No. 231.

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ment Directive allows opposability to a buyer’s creditor of a titleretention clause if it is: (1) previously agreed upon between the parties; (2) in writing; (3) confirmed in the sale invoices; (4) with ascertained date prior to the date of the attachment and (5) duly registered in the buyer’s accounts (also prior to the attachment). The need to confirm the retention of title in each invoice and register it each time in the buyer’s accounts is an additional burden to the seller, as compared to the Codice civile provisions. On the other hand, the Decree expressly provides that an “ascertained date” can be acquired at a time later than the time of the parties’ agreement (older case law had difficulties on this point)60 and the certainty of the date may result also from the mere entry in the buyer’s accounts. As regards competing creditors, a conflict may arise with a bank secured by an Art. 46 Bank Charge. This conflict was dealt with supra, Case Study No. 1, para. b). Another competing claimant might be a sub-buyer of the asset from the buyer. If the asset is a machine, the seller would have to register the retention of title according to Art. 1524 para. 2 C.c., in the registry kept at the Tribunale (first court instance) of the place were the asset is located at the time of the title retention stipulation (this is required for machines of value exceeding € 15,49). Registration protects the seller’s rights as against sub-buyers (superseding the bona fide provision of Art. 1153 C.c.) but only if the asset remains within the jurisdiction of the same Tribunale. Furthermore, in the case of equipment exceeding the value of € 258,23, an additional requirement of a marking (a plate containing the seller’s name and its property right in the machine as well as particulars concerning the machine) is provided for by special legislation; again, however, satisfaction of this requirement protects the titleretaining seller only from sub-buyers. More controversial is the question whether a sub-buyer with actual knowledge of the retention of title should nevertheless take free if the retention of title is not registered. The prevailing view is for the affirmative. 60

While in principle admitting that the “ascertained date” could be obtained at a later time than the time of stipulation of the retention of title, case law tended to presume, in such a situation, that the retention of title was not contextual to the sales contract (which was not considered to be admissible, see Cass. 22 June 1972, Giust. Civ. 1972 I, 1758): Cass. 25 May 1975, No. 3926, Foro it. 1975 I, 1014 et seq. and E. Bocchini, La vendita di cose mobili, in Trattato Rescigno, Vol. 11: Obbligazioni e contratti, 3 (2nd edn. 1998), p. 708 et seq., at p. 717. More recent case law goes in the opposite direction, see citations in C.M. Bianca, La vendita e la permuta, in Trattato di diritto civile Vassalli, Vol. VII, Part 1 (2nd edn. 1993), p. 583 et seq., at p. 606; B. Carpino, Vendita con riserva della proprietà, in Trattato Rescigno, Vol. 11: Obbligazioni e contratti, 3 (2nd edn. 1998), p. 322.

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There are no formal requirements to be satisfied for a financial lease to be effective against third parties. In practice, as already mentioned, such contracts are always in writing. Courts would require proof that the contract was concluded before attachment by a judgement creditor or before commencement of insolvency before recognising the priority of the lessor’s title. The lessor is considered to be the owner, therefore it defeats a subsequent judgement creditor and may recover the asset from an attaching judgement creditor. As against subsequent buyers of the leased asset, the bona fide acquisition rule in Art. 1153 C.c. applies, though Courts will take into account the type of asset and the professional status of both lessee and subsequent buyer in determining the sub-sequent buyer’s good faith.

bb) Re proceeds of the initial intangible

No express statutory provision deals with the question of the titleretaining seller’s rights with respect to proceeds arising from the wrongful sale of the initial tangible by the buyer to a sub-buyer. Even if the wrongful resale is a criminal offence, the seller is not subrogated to the proceeds of the resale.61 If asset is destroyed or damaged and the loss is covered by insurance purchased by the buyer, however, the seller would be automatically subrogated to the right to the insurance monies. Though the admissibility of an express authorisation in the title-retention sale agreement to the buyer to resell the asset (in which case the sale would not be wrongful) does not seem to be excluded from a theoretical point of view,62 such an authorisation in the context of equipment is not used in practice. One of the reasons may be that it is difficult for the seller to extend its rights to the (future) proceeds by means of a provision within the sales contract because of restrictive statutory rules concerning the assignment of future receivables.

d)

Remedies upon default

In the event of the buyer’s default, the title-retaining seller may terminate the contract and recover the asset as the owner, but would have to make restitution of the price instalments already paid (discounted, how61

62

The seller does have a right to reclaim the asset itself when the retention of title was registered under Art. 1524 para. 2 C.c., as long as the asset is still in the jurisdiction of the Tribunale where the registry is located, see supra, para. c) aa). See C.M. Bianca, La vendita e la permuta, in Trattato di diritto civile Vassalli, Vol. VII, Part 1 (2nd edn. 1993), p. 583 et seq., at p. 592.

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ever, by damages caused by the default, if there are any, and a “fair compensation” for the use by the buyer). A special provision protects the defaulting buyer from abuse in the case where the agreement provides that the paid instalments be retained as liquidated damages by the seller by rendering such a provision void (Art. 1526 C.c.). Furthermore, notwithstanding any agreement to the contrary, in the case of an instalment sale default in payment of only one instalment, which does not exceed one-eight of the total price, does not enable the seller to terminate the contract (Art. 1525 C.c.). In principle, the terms of the lease determine the parties’ rights upon default. Usually, the lease provides for automatic termination and that the lessor may repossess the asset, seek damages caused by the default and ask for compensation for use by the lessee. An agreement contrary to the above mentioned Art. 1526 and 1525 C.c. is deemed to be valid.

e)

Insolvency of the buyer/financial lessee

In the case of the buyer’s insolvency, a retention of title prevails if it results from a written document bearing an ascertained date that precedes the commencement of insolvency proceedings. Art. 73 para. 1 Insolvency Law states that the insolvency administrator may decide to keep the contract going with permission of the creditor’s committee, in which event the seller has the right to ask for the setting aside of a sum for future payment of the price, unless the insolvency administrator immediately pays (but the sum due is discounted at the legal interest rate). If the insolvency administrator does not opt for keeping the contract, the seller has the right to immediately repossess the asset (being its owner) with no obligation to account for any excess of value over the remaining unpaid price. The position of the lessor in the lessee’s insolvency is now expressly dealt with in the Insolvency Law (Art. 72-quater). The insolvency administrator may choose, with the authorization of the creditors’ committee, whether to continue the contract or to terminate it. In the event of termination the lessor has the right to retake the asset and must pay over to the insolvency administrator any monies exceeding the unpaid rent that are derived by the lessor from the sale or other use of the asset. If, on the other hand, the agreed rent obligation is not satisfied in its entirety, the lessor is considered to be an unsecured creditor for the deficiency. The instalments already paid by the lessee cannot be avoided under the new rules on preferential debts (Art. 67 para. 3, lit. a of the Insolvency Law as amended). When the provisional continuation of the insolvent business activity is authorized, the lease contract continues unless the insolvency administrator elects to terminate it.

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Bona fide acquisition

For treatment of the opposability of existing security devices to subsequent buyers, where, inter alia, the difference between buying equipment and buying inventory is considered, see Case Studies No. 1, 3 and 4.

6.

Possessory pledge – constructive or fictive possession

In the case of a possessory pledge on tangibles, dispossession must deprive the debtor of the ability to make an autonomous disposition of the goods. When the collateral is left at the debtor’s premises, the security retains its effectiveness vis-à-vis third parties only if the debtor is disabled from freely dealing with the assets – constructive or fictitious possession is not admitted. For goods deposited in storage or in transitu which are represented by a document, a pledge may be created by transferring the part of the document relating to the creation of a security (“nota di pegno”). When this is done, the debtor no longer has the ability to dispose of the goods. As already seen, Italian law has followed other routes in order to allow the creation of non-possessory pledges or other security devices in specific cases.

7.

Over-security

Over-security is not an issue for security rights over tangible goods in Italy. In particular, there is nothing analogous to the implied Freigabeklausel which is found in German law.

8.

Legal (non-consensual) rights of unpaid seller

The unpaid seller of goods that did not stipulate a security (either by means of retention of title or otherwise) has in principle no rights in the goods sold from the time title passes to the buyer. If the goods are specific, title is transferred to buyer by and upon the agreement of the parties to this effect. If the goods are “generic”, i.e. specified only in relation to their kind (such as widgets not specifically set aside in advance), title is transferred whenever the sold goods are separated from the others and set aside for the buyer’s benefit.63 In the event of buyer’s default, seller may terminate the contract either by lodging a claim before a court (which will issue a decision declaring 63

Art. 1376 and 1378 C.c.

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that the contract is terminated), or automatically, inter alia, if the contract provided so or if payment was formally requested by means of a written statement and the buyer did not pay within the allowed time.64 After termination of the contract, ending buyer’s rights in the goods, the seller becomes entitled to repossess the goods sold, but may do so only if they are identifiable and are still within buyer’s estate. If the defaulting buyer had sold them, whether to bona fide purchasers or not, the seller would not be able to reclaim them. A contractual clause according to which the sale is automatically terminated upon the buyer’s insolvency is invalid.65 In the case of buyer’s insolvency, the seller who has already performed the contract by delivering the goods has no preferential treatment whatsoever, but is considered to be an unsecured creditor for the price, competing with all other unsecured creditors on a pari passu basis. If the goods are still to be delivered, the contract is classified as “not yet performed” under Insolvency Law (Art. 72 Insolvency Law as amended in 2006), which allows the insolvency administrator to choose whether to perform the contract or to terminate it. Seller can claim damages deriving from non-performance as an unsecured creditor. As mentioned earlier, an unpaid vendor’s lien on “machines” – that is, equipment – is provided for in Art. 2762 C.c. (“privilegio del venditore di machine”). According to this provision, a seller is granted by operation of law a lien of limited duration (three years) over sold and delivered equipment, the unit value of which exceeds € 15,49, provided that the documents establishing the sale and the price are filed in the registry for retention of title (Art. 1524 para. 2 C.c.), but only so long as the equipment remains in the buyer’s possession and within the jurisdiction of the Tribunale where the filing was made. The lien subsists even if the equipment becomes attached to land or other immovable property. The same lien is granted to financiers authorised to make such loans. An exact description of the equipment is required as well as all documents proving the loan, its specific purpose, the amount and the due date. In the case where both the seller and the third party financier have provided “purchase money” financing for the same equipment, the priority conflict as between them is solved on a first-to-file rule. It must be stressed that in the buyer’s insolvency this lien does not enjoy a high rank. Though it is included in a long list of preferred claims (Art. 2778 C.c.), it is postponed not only to procedural costs (Art. 2777 C.c.) and to all outstanding employee’s monies of any kind and social security payments (Art. 2751-bis No. 1 C.c.), but also to other preferred claims in the 64 65

Art. 1453 C.c. et seq. See now Art. 72 para. 5 Royal Decree 16 March 1942, No. 267 (Insolvency Law) as amended by Legislative Decree 9 January 2006, No.5.

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same list (there are thirteen claims which take priority over the unpaid vendor’s charge). Moreover, the lien may be granted only on equipment specifically described as opposed to a generic description. In practice, this lien is not an efficacious way to obtain a proprietary security right over a machine that is equipment and even less so, if the machine is the buyer’s inventory.

9.

Special property registries

As mentioned earlier, the Codice civile and other legislation provide for a limited number of chattel mortgages on easily identified movable goods of relative high unit value (see Art. 2810 para 2 C.c.). The document containing the chattel mortgage (“ipoteca mobiliare”) must be filed in the same registry that records transfer of ownership of the goods concerned. Registration is needed for the mortgage to be effective not only as against third parties, but also as between creditor and grantor. Until recently, the mortgage document had to be notarised before registration. With Decree No. 223, 4 July 2006 (so-called “Decreto Bersani”)66 the legislator has abolished the exclusive competence of notaries in this field. Thus, the parties may resort to other public officials indicated in the statute. In particular, for ship and aircraft chattel mortgages the official may be a civil servant at the city hall, while for motor vehicles the authentication of the agreement may be obtained from a motor vehicles agent. This change should lower the costs of stipulating a chattel mortgage to administrative fees and taxation (as an example, for a motorcar the administrative fees would be about € 25, thus much less than the fees usually charged by notaries). A chattel mortgage may be created over existing (but not future) motor vehicles licensed in Italy, which are registered in the Pubblico registro automobilistico (P.R.A.).67 Registration costs are not very high, but the problem is that the register is not always updated. This is one of the reasons why leasing motor vehicles is a reasonable alternative to obtain financing for their acquisition. As already mentioned supra, para. I.1. and I.4., a most recent legislative proposal envisages the abolition of the title register for motor vehicles. Chattel mortgages can be created also on ships (Art. 565 et seq. C. nav.) as well as on aircraft (Art. 1027 et seq. C. nav.). Interestingly, the Maritime Code derogates from the general rules on mortgages over future goods (Art. 2823 C.c.) by admitting an advanced registration of a mort66 67

See supra, para. I.4., footnote 34 and accompanying text. See Art. 2810 C.c. as well as Royal Decree 15 March 1927, No. 436; Royal Decree 29 July 1927, No. 1814.

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gage over a ship or an aircraft under construction in a special registry (even before construction has begun) which will maintain its priority extending over any additions to the construction (Art. 366 and 1028 C. nav.). A chattel mortgage has priority based on the date of its registration over competing creditors and subsequent buyers. The chattel mortgage on ships, however, is a rather weak security because it is subordinated to a number of maritime liens arising by operation of law.68 Finally, Italy has ratified international Conventions dealing with maritime liens and mortgages and mortgages on aircraft.69

10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment/accession) An Art. 46 Bank Charge may be created, inter alia, over raw materials and goods under processing as well as finished products. To the extent that the revolving nature of this charge is admitted, the bank could enforce its rights on the products of the original encumbered raw materials, provided that the security agreement expressly mentioned future products and it sufficiently described them as required by Art. 46.70 There are no specific rules, however, on how to solve the priority conflicts when encumbered raw material is commingled with other goods not covered by the charge. As to the special kind of non-possessory pledge on some products of the food transformation industry protected by trademark, it follows the product from the raw material to the finished good by way of an inerasable marking and registration in special book-accounts.71 The situation is more difficult when we turn to acquisition finance devices. The Codice civile only regulates a simple retention of title clause. Any clause “prolonging” the seller’s rights on the product(s) of transformation of the sold goods would have to be the result of commercial practice accepted by courts.72 Such clauses are not used in commercial prac68

69 70 71 72

A. Lefebvre d’Ovidio/G. Pescatore/L. Tullio, Manuale di diritto della navigazione (10th edn. 2004), p. 466 et seq. See infra, Case Study No. 11. See supra, Case Study No. 3, para. b) aa). See supra, para. I.2.b). Scholars generally either do not address the issue or they deny the effectiveness of such clauses in the Italian legal system: the seller’s right cannot survive after processing of the goods sold since it only affects the original goods. For a different opinion, arguing that, at least in theory, the buyer could be authorised by the seller to process the goods and the seller could be designated as the owner of the product by derogation of Art. 940 C.c. on processing see C.M. Bianca, La vendita e la per-

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tice. So far, there is no reported case law recognising the effectiveness of prolonged title reservation clauses constituted abroad on assets which were subsequently moved to Italy. Sporadic decisions, on the other hand, have admitted the effectiveness of a retention of title when the movables sold are easily detachable from the immoveable property to which they were attached The financial lease device is not generally used for either raw materials or finished products (inventory).

11. Cross-border issues The Italian Private International Law Statute No. 218/1995 does not contain any special rule regarding security rights on tangibles, which are considered to be included in the general provisions on property rights (Art. 51 et seq.). The basic provision is still the lex rei sitae, which governs also the acquisition and loss of proprietary rights. The Maritime Code, on the other hand, does contain special rules on the law applicable to security rights over ships and aircraft, referring to their national law (Art. 6 C. nav.). Italy has ratified international Conventions on maritime liens (1926 Brussels Convention) and aircraft liens (1948 Geneva Convention) which facilitate recognition of security rights on such assets.73 It has signed but not yet ratified the 2001 Cape Town Convention on International Interests on Mobile Goods nor any of its Protocols. The main problem arises in giving effect to non-possessory security interests created abroad that do not correspond to the ones expressly admitted in the Italian legal system. Courts have recognized some types of foreign non-possessory (legal) liens - such as the maritime liens - by assimilating them to the corresponding right under Italian law, thereby, however, applying Italian law to the content and effects of the foreign security.74

73

74

muta, in Trattato di diritto civile Vassalli, Vol. VII, Part 1 (2nd edn. 1993), p. 583 et seq., at 602. The more recent Brussels International Convention for the Unification of Certain Rules relating to Maritime Liens and Mortgages of 27 May 1967 Brussels and the Geneva International Convention on Maritime Liens and Mortgages of 6 May 1993 have not been ratified by Italy. For the case of change of ship nationality – not regulated by the 1926 Brussels Convention – see Cass. 4 April 1976, No. 1279, Dir. Mar. 1977, 422 et seq., note F. Berlingeri, which applied the distinction between titulus and modus (the old nationality law should be applied to the creation of the lien, while content, effects and execution are subject to the new nationality).

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Non-possessory pledges on other goods or transfers of property by way of security, including when stipulated in the context of retention of title clauses, were not accepted because they were deemed to be contrary to public policy provisions.75 On the other hand, as far as financial leasing is concerned Italy has ratified the UNIDROIT Convention on International Financial Leasing.76 The Convention permits a – very limited – recognition of rights against third parties in international financial leasing. Particularly striking in this area is the lack of recent case-law and the rarity of older case-law. This may be due to the fact that foreign creditors are aware of the difficulties in enforcing their security rights and resort to other means of credit support. Such is the advise that I would give to the initial secured party in most cases. The cost of finding out whether courts would recognize the security device and the high probability that no priority will ultimately be recognized clearly outweigh the advantage of stipulating a security over tangibles. Another reason may be that, in practice, “extended” or “prolonged” title retention clauses, while often present in standard forms of sellers in legal systems where they are considered to be effective, are not relied on by the sellers when the goods are to be exported to less generous legal systems such as Italy. Italian law does not contain any provision regarding grace periods for adaptation of foreign security arrangements (whether financiers’ credit or sellers’ credit). Such an adaptation would in any event be dependent on the recognition of the foreign right as equivalent to one already recognised in Italy. Not only the adaptation of an already recognised security interest, but also the creation of a new one by a foreign creditor but according to Italian law is not easy when formalities such as registration must be complied with. In particular, this is true for Art. 46 Banking Law, which does not contain any specific rule for registration of charges by foreign creditors. As yet, I have no information on the effective use of Art. 46 Bank Charge in cross-border cases. 75

76

See among the few reported cases the well-known decision App. di Milano 6 April 1956, Foro it. 1957 I, 1956 et seq. Other decisions where the retention of title was deemed ineffective because it did not have an “ascertained date” are Cass. 21 June 1974, No. 1860, Rass. Avv. St., 1974 I, 1414 et seq.; Trib. Latina 19 February 1973, Riv. dir. civ. 1975 II, 540 et seq., with a critical note by Zuddas. Ottawa Convention on International Leasing of 28 May 1988, ratified by Italy with Law 24 July 1993, No. 259 and entered into force on 1 May 1995.

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Introduction

1.

General background; structure of national law re security over tangibles

This part will provide an overview of certain core characteristics of Netherlands law in relation to proprietary security rights over tangibles. Netherlands law provides for two types of security rights over tangibles that are available to general credit providers: a right of mortgage (“hypotheek”) with respect to registered property (“registergoederen”) such as registered ships and aircraft, and a right of pledge with respect to other tangibles. This paper does not discuss the right of mortgage.1 A supplier of tangibles may use the ownership of the tangibles sold as security by stipulating a reservation of ownership (retention of title) clause in the contract of sale. Furthermore, an unpaid seller may under certain circumstances revindicate unpaid goods even if the contract of sale did not include a reservation of ownership clause (see case 8). Dutch law restricts the use of ownership as a security instrument. Prior to the entry into force of the present Dutch Civil Code (“Burgerlijk Wetboek”) in 1992, Dutch and German law to a large extent corresponded with respect to the approach to transfer of ownership by way of security as a means of providing non-possessory security rights in tangibles (and undisclosed security rights in claims). The Dutch Civil Code only contained provisions on a right of pledge in tangibles with dispossession of the pledgor, but the need in practice to be able to provide security over tangibles while continuing to use them in the operation of a business, was sanctioned in case law which accepted the fiduciary transfer of ownership in tangibles without dispossession of the debtor. The present Civil Code, however, prohibits the fiduciary transfer of ownership by way of security2 and has introduced the undisclosed (non-possessory) right of pledge in tangibles. 1

2

Case 10 will briefly address the register in which ownership of and security rights over registered ships and aircraft are recorded. Art. 3:84 para 3 BW.

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Rights in rem (such as a right of ownership or a right of pledge) under Dutch law share a number of characteristics. Unlike rights in personam, they give the holder a right directly in the particular asset. Proprietary rights have effect erga omnes. The holder of the right can exercise the right vis-à-vis any party in possession of the goods; rights in rem have droit de suite. If an asset is encumbered with a limited right, such as a right of pledge, and subsequently a competing limited right is created in the asset, the earlier-created right will take priority over the later-created right (prior tempore, potior iure). Netherlands law has a closed system of rights in rem (numerus clausus). Parties cannot invent new types of rights with proprietary effect; they are restricted to the types of rights regulated by statute. Furthermore, parties are restricted in the extent to which they can influence the content of the right by contractual agreement. The available security devices do not depend on the nature of the debtor or the creditor. The same rules apply in respect of legal persons and natural persons. Financial institutions are in principle subject to the same rules as any other party.3

2.

Right of pledge in tangibles

a)

Disclosed and undisclosed right of pledge

Netherlands law provides for two different ways for the creation of a pledge on tangibles: a pledge with possession by the pledgee or a third party (“vuistpand” or “disclosed pledge”) and a pledge without possession by the pledgee or a third party (“bezitloos pand” or “undisclosed pledge”). If the collateral is subject to a disclosed pledge, the collateral must be effectively placed under the control of the pledgee or a third party mutually agreed upon by pledgor and pledgee. If the collateral is subject to an undisclosed pledge, the pledgor remains in possession of the collateral, but certain additional constitutive formal requirements must be met. Under Netherlands law a right of pledge can only be created pursuant to a valid title (an agreement (e.g. a credit facility) containing an obligation to provide security4) and can only be created by a person who has the right to dispose of the property.

3

4

Financial collateral arrangements within the meaning of Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements (OJ 27 June 2002 L 168/43 et seq.) are not dealt with in this paper. Under Dutch law such agreements do not have to be, but for evidence purposes usually will be in writing.

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The right of pledge can secure existing as well as future debts (of the pledgor or a third party).5 A right of pledge can be created over assets owned by the debtor at the time of the creation of the right of pledge as well as assets it will acquire afterwards. A pledge over future assets, however, will become effective only at the time any such “future” asset becomes an “existing” asset, i.e. is acquired by the pledgor, provided, always, that the pledgor is entitled to dispose of such asset at that time.6 The right of pledge will then automatically come into existence and be effective without the need for further action by either party. A right of pledge is an accessory right (“afhankelijk recht”). If the secured obligation(s) cease(s) to exist, the right of pledge automatically ceases to encumber the assets on which it was granted.7

b)

Disclosed right of pledge

A disclosed right of pledge can be created without a written deed of pledge. The collateral must be brought under the control of the pledgee or a third party to vest such pledge. Should the pledgor, for whatever reason, regain control over the collateral, the disclosed pledge will automatically (by operation of law) be terminated.

c)

Undisclosed right of pledge

An undisclosed pledge can only be created pursuant to a written deed of pledge (which typically, but not necessarily, also contains the agreement to create a pledge) in compliance with either of the following formalities: (a) the execution of a deed of pledge in the form of an authentic deed (“authentieke akte”), generally a notarial deed, or (b) the registration of a (non-authentic) deed of pledge with the competent tax authority.8 It is not necessary that the original deed is registered. Registration of a faxed copy of the deed of pledge suffices.9 The undisclosed right of pledge comes into existence at the moment that the deed of pledge has been submitted to the tax authorities for 5 6

7

8 9

Art. 3:231 para. 1 BW. The pledgor may, for example, have lost the power to dispose of his assets as a result of bankruptcy proceedings. 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 claims that may arise out of that arrangement. A deed will be registered at a minimal fee of, at present, approximately € 3. HR 29 June 2001, NJ 2001, 662.

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registration. When the deed is actually registered in the register – something which will depend on administrative processes – is irrelevant. Notwithstanding the registration requirement – which applies only if the right of pledge is created pursuant to a private instrument – Netherlands law lacks publicity with respect to nonpossessory security rights in tangibles. The register maintained by the tax authorities is not available for inspection by the public generally or other creditors of the pledgor. The registration serves only to provide a date certain, i.e. to prevent “back-dating”.

d)

Realization of the collateral

If the pledgor is in default (“verzuim”), the pledgee may enforce his security right by realizing the collateral.10 The pledgee in principle has a right of summary foreclosure (“parate executie”) which means that it may proceed with the foreclosure without a court having determined that the pledgor is in default. However, the pledgee and the pledgor may agree that no sale will take place until after the court, upon the demand of the pledgee, has determined that the obligor is in default. In practice, lenders will generally not agree to such a limitation of their right of foreclosure. As regards the realization of collateral, the pledgee may sell the collateral in a public sale pursuant to local customs and applicable standard terms and conditions.11 If the collateral consists of property which is traded on a market or exchange, such as bearer shares of listed companies, a realization sale may also take place on such market or exchange through a qualified broker.12 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.13 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. 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

10

11 12 13

Art. 3:248 BW. A lower ranking pledgee or attaching creditor can only sell the pledged property subject to higher ranking rights of pledge. Art. 3:250 para. 1 BW. Art. 3:250 para. 2 BW. Art. 3:251 BW. Unless parties have agreed otherwise, both the pledgor and the pledgee may submit a petition to the court to determine the method of sale.

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occurrence of an event of default.14 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. In the insolvency15 of the pledgor, the pledgee may in principle proceed with the enforcement of the right of pledge “as if there were no insolvency”. During the insolvency of the pledgor, the pledgee may in principle request that the collateral be handed over to him and he may proceed with the foreclosure.16 The secured claims will be satisfied directly from the proceeds of foreclosure. The pledgee does not share in the general costs of the bankruptcy proceedings. The liquidator in bankruptcy may determine a reasonable period within which the pledgee must exercise its right of realization.17 If the pledgee has not sold the collateral 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 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. The liquidator may, until the time of sale, redeem the collateral by paying the secured obligations in full (including any realization costs already incurred). In the insolvency of the pledgor, the pledgee may be temporarily prevented from exercising its rights as a secured creditor if the court18 has ordered a so-called “freeze period” (“afkoelingsperiode”). On the applica14

15

16

17

18

Art. 3:251 para. 2 BW. Where the pledged property is encumbered with a limited right or is subject to an attachment, the co-operation of the holder of the limited right or of the attachor is also required. Netherlands law provides for two insolvency proceedings in respect of incorporated debtors: bankruptcy (“faillissement”) and suspension of payments (“surseance van betaling”), both regulated in the Bankruptcy Act (Faillissementswet). The position of the pledgee in both proceedings is similar. Art. 57 para. 1 Fw. With respect to suspension of payments this follows from the fact that the suspension of payments does not affect claims with priority, such as claims secured by a right of pledge (Art. 232 Fw.). Art. 58 Fw. The supervisory judge (“rechter-commissaris”) may extend the period once or more on the application of the pledgee. Art. 63a Fw. (bankruptcy), Art. 241a Fw. (suspension of payments). In case of bankruptcy a freeze period may also be ordered by the supervisory judge (“rechtercommissaris”). The reference to court in this paragraph includes a reference to the supervisory judge, where applicable.

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tion of any interested party or on its own motion, the court may issue a written order stipulating that, for a period of two months at most, any right of third parties, with the exception of estate creditors (“boedelschuldeisers”),19 to recourse against property belonging to the estate or to claim property under the control of the bankrupt or the liquidator may be exercised only with prior court authorisation. The freeze period may be extended once for no more than two months. The court may restrict the order to certain third parties and may attach conditions both to the order and to the authorisation of a third party to exercise a right to which the third party is entitled.

e)

Ranking of claims secured by a right of pledge

Netherlands law in several places stipulates that certain types of claims are privileged in the sense that – in case of a concursus creditorum (e.g. resulting from multiple attachments on the same asset, or the commencement of bankruptcy proceedings) – they must be paid in priority to other claims. The privileged nature of claims and their ranking is regulated in the Civil Code and other statutes (e.g. with respect to the privilege enjoyed by claims of the tax authorities, in the Collection of State Taxes Act 1990 (“Invorderingswet 1990”)). Netherlands law distinguishes between specific privileges20 – a creditor has priority with respect to the distribution of proceeds of a particular asset – and general privileges21 – a creditor has priority with respect to the distribution of proceeds of all of the debtor's assets. The ranking of claims finds its basis in articles 3:279-281 BW. Claims secured by a right of pledge rank above privileged claims and claims to which a specific privilege is attached rank above claims to which a general privilege is attached. Specific privileges in respect of the same asset have an equal rank and general privileges rank in the order determined by statute. The law provides for a number of exceptions to this general order of distribution. In particular, it provides that certain privileged claims must be paid from the proceeds of a particular asset in priority to a claim

19

20 21

E.g. creditors who have contracted with the liquidator, or claims for wages that have fallen due after the opening of insolvency proceedings etc., i.e. holders of claims generated after the commencement of the proceedings. E.g. Art. 3:283-287 BW. E.g. Art. 3:288 and 3:289 BW and Art. 21 para. 1 Inv.

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secured by a right of pledge in that asset.22 An important category of privileged claims that, under certain circumstances, rank above a right of pledge in tangibles are tax (and social security) claims. A general privilege is attached to all tax claims pursuant to Art. 21 para. 1 Inv. Contrary to the general order of distribution set out supra, Art. 21 para. 2 Inv. stipulates that the general privilege of the tax authorities ranks above all other privileges, with a few minor exceptions.23 Further, certain tax claims (such as wage withholding tax and turnover tax) rank above claims secured by an undisclosed right of pledge in – briefly stated – equipment held for use (but not inventory held for sale) situated on the debtor’s premises.

3.

Reservation of ownership (retention of title)

A seller of tangibles can obtain security for the payment of certain claims against the purchaser, notably the claim for payment of the purchase price, by reserving the ownership of the goods sold and delivered. Netherlands law (like German law) in that respect contains a presumption that the reservation of ownership is construed as a conditional transfer of ownership. The ownership of the goods sold and delivered is transferred to the purchaser under the condition precedent that claims identified in the contract are paid by the purchaser. The right of ownership which remains with the seller has a strong element of security. If such claims are left unpaid, the seller in principle will be entitled to terminate the contract and revindicate the goods. Netherlands law does not impose formal requirements (such as registration) as conditions to the effectiveness of reservation of ownership. Although a reservation of ownership clause does not have to be agreed upon in writing, in practice, contracts of sale in commercial transactions will generally be in writing. A reservation of ownership clause is in many cases included in general conditions. The claims that a seller can secure by reserving the ownership of tangibles are exhaustively listed in the Civil Code.24 Reservation of ownership may be stipulated to secure the most important existing and future claims originating from the business relationship between the seller and the buyer to the extent that such claims can be characterised as “trade credit” (e.g. payment of past and/or future deliveries, irrespec22

23 24

E.g. (under certain circumstances) a claim for costs incurred in preserving the collateral (Art. 3:284 BW) or a claim in respect of which the creditor can invoke a right of retention (Art. 3:291 and 3:292 BW). Art. 21 Inv. also applies in respect of employee insurance contributions. Art. 3:92 para. 2 BW.

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tive of whether such deliveries were or will be effected pursuant to the same or separate contracts of sale). It cannot serve to secure general loans extended by the seller or other types of claims that do not relate to the sale of tangibles. Insofar as a reservation of ownership clause in a contract purports to extend the operation of the clause to claims that do not fall within the categories mentioned in Art. 3:92 BW, to that extent the clause is void by operation of law. Security for claims that fall outside the scope of Art. 3:92 BW can be obtained by providing that transfer of ownership takes place subject to a right of pledge. This can be achieved simultaneously with, and even in the same agreement as, the reservation of ownership that secures the claims within the scope of that article. Pursuant to Art. 3:81 para. 1 BW, to accomplish a transfer of ownership subject to a right of pledge requires that the provisions for both the transfer of the asset and the establishment of a right of pledge be respected. The buyer acquires the ownership of the transferred asset which from the outset is encumbered with a right of pledge in favour of the seller. This right of pledge will therefore generally be enforceable against and have priority over the rights of any other creditor in whose favour the buyer had previously created a right of pledge in existing and future tangibles (such as a bank financing the buyer’s business). In the insolvency of the buyer, the unpaid seller will in principle have the power to terminate the contract and – as owner – revindicate from the estate the goods of which it has retained ownership. However, the seller may be temporarily prevented from revindicating his assets. The freeze period (“afkoelingsperiode”) that may be ordered in an insolvency of the buyer25 also affects the position of parties who are entitled to revindicate assets – e.g. on the basis of reservation of ownership – that are in the possession of the insolvent debtor or the liquiddator/administrator. During that freeze period a right to revindicate assets cannot be exercised without the prior authorisation of the supervisory judge or the court. One thing that sellers that have retained ownership of goods sold and delivered to the buyer must take into consideration (and the same applies to financial lessors) is the right of the tax authorities to attach and realise moveable assets belonging to third parties (“bodemrecht”). Pursuant to Art. 22 Inv., the tax authorities may, for the recovery of a number of specified taxes and employee insurance contributions, attach and realise equipment held for use belonging to third parties which at the time of attachment is located on the debtor's premises.26 Pursuant to policy rules, 25 26

See supra, para. I.2.d). Cf. para. I.2.e) supra with respect to the tax authorities’ priority in the distribution of the proceeds of the insolvent debtor’s assets. The tax authorities’ right to take re-

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the tax authorities do, however, respect “real” – as opposed to security – ownership. For the purposes of Art. 22 Inv. a right is regarded as “real” ownership if the asset concerned is not only legally owned by the third party but if it also in economic terms must be attributed to that party's patrimony (e.g. assets used by the debtor under an “operating”, as contrasted with a “financial”, lease). The right of ownership of a seller that is based on a reservation of ownership clause or (under certain circumstances) the right of ownership of a financial lessor is not regarded as “real” but rather as security ownership for purposes of these policy rules. Notwithstanding that the lease contract or the contract of sale can in principle also be terminated during a freeze period, the seller is (for the duration of the freeze period) prevented from reclaiming assets of which it has retained ownership. This may lead to a deterioration of the seller's position as the tax authorities are not prevented from levying an attachment on those assets during the freeze period. The freeze period only prevents the tax authorities from obtaining the surrender of the attached assets or proceeding with their realization. Recently, legislation has been introduced to correct this imbalance to the effect that, during a freeze period, an attachment made on assets owned by third parties by the tax authorities pursuant to Art. 22 Inv. cannot be invoked against the owner of the asset if the owner had reclaimed the asset prior to the attachment by way of a notification served by a bailiff.27

II.

Case studies

1.

Non-possessory security right in specific equipment

a)

Documentation and formalities

The first issue that needs to be addressed in order to determine the type of security right that can be created over the machines for the benefit of the Lender, is whether the machines are tangible moveable objects or whether they have become immoveable by way of accession, i.e. have become a component part of the real estate in which they have been placed (e.g. the factory). In the latter case, the creation of a separate security right in the machines in principle is not possible.28 For the pur-

27 28

course on third parties’ assets exists in respect of the same types of assets and claims. Art. 63c Fw. Security may be obtained by a right of mortgage (“hypotheek”) on the real estate (including the machines) or through a right of mortgage on a right of superficies.

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poses of this case study, it is assumed that the machines are and remain tangible, moveable objects. As the manufacturer will want to have possession and use of the machines, the security device used will be an undisclosed right of pledge. As set out above, an undisclosed right of pledge requires an authentic (notarial) deed or a registered private instrument. With respect to tangibles in which the pledgor has a present right, the right of pledge comes into existence and can be asserted against third parties (is “perfected”) once all formalities for its creation have been observed, i.e. the notarial deed has been executed or the private instrument has been recorded with the tax authorities. No further acts are required to give the right of pledge effect vis-à-vis third parties. In accordance with the general principle underlying Netherlands property law that proprietary rights can exist only in individually identifiable assets, the pledged assets must be able to be identified pursuant to the deed of pledge. The pledged assets do not have to be listed individually in the deed. A description that enables determination of the assets that have been pledged on the basis of, for example, the Manufacturer's books and records will suffice. Of course, if not all but only part of the machines of the Manufacturer are to be pledged, the reference in the deed of pledge must be more specific in order to be able to determine which machines have been pledged.

b)

Earlier rights

The Lender cannot ascertain with certainty whether there exist earlier-intime nonpossessory rights in the machines. Netherlands law lacks publicity with respect to the creation of an undisclosed right of pledge in tangibles. The requirement that a private pledge instrument must be registered with the competent tax authorities does not lead to publicity because the register maintained by the tax authorities is not a public register that can be consulted by third parties. 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 he has the power to create the right of pledge in the assets concerned and that such assets are not encumbered with any limited proprietary (security) rights or, alternatively, which other limited proprietary rights exist.29 If those representations turn out to be untrue, the Lender will be confronted with proprietary rights that may take priority over his right of 29

Art. 3:237 para. 3 BW.

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pledge. The Lender that acquires a nonpossessory (undisclosed) right of pledge in the machines in principle is not protected against pre-existing security or ownership rights, even those that it was not and could not have been aware of. A Lender that took possession would be protected if, at the time of taking possession, it did not know and could not have known of the pre-existing security or ownership rights.

c)

Rights in case of sale by the Manufacturer

aa) Rights in the sold machines

Transfer of the ownership of a machine by the Manufacturer to a third party in principle does not affect the rights of the Lender in the machine. The right of pledge is a proprietary right that as such has droit de suite. The machine in principle remains encumbered with the right of pledge for the benefit of the Lender even if the machine has passed into the hands of a third party. However, if the buyer at the time of the acquisition of the machine was in good faith, i.e. it did not know and could not have known of the right of pledge vested in the machine for the benefit of the Lender, it may be protected by the rules on protection of bona fide third parties in the Civil Code and acquire the machine unencumbered by the right of pledge.30

bb) Rights in proceeds

Under Netherlands law, the Lender will not acquire any rights in the proceeds of a sale of a pledged machine by the Manufacturer, unless this has been specifically agreed upon and a right of pledge has been created in favour of the Lender in respect of the Manufacturer’s claim for payment of the purchase price. The right of pledge that the Lender had in the machine is not automatically extended or converted into a right of pledge in the claim against the purchaser for payment of the purchase price. Netherlands law recognises the concept of substitution of property in respect of pledged assets in the sense that the right of pledge entails, by operation of law, a right of pledge over all claims for compensation which take the place of the secured property, including claims resulting

30

Art. 3:86 BW. See case 5.

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from its reduction in value.31 However, the claim for payment of the purchase price in case of resale of the machines is not a claim for compensation as referred to in the relevant statutory provision.

d)

Rights in replacement machines

The Lender does not acquire a right of pledge in any machines acquired by the pledgor to replace the original pledged machines, unless this has been specifically agreed upon. In the latter case, the deed of pledge must not simply refer to the current 200 machines of the Manufacturer as the assets that are being pledged to the Lender but to those 200 machines as well as machines that will replace them. Of course, whether a machine has in fact been acquired as replacement for another may well be a disputed matter as to which the Lender would have the burden of proof.

e)

Remedies upon default

Where the Manufacturer fails to perform the secured obligations or gives the Lender good cause for concern that there will be such a failure, the Lender is entitled to demand that possession of the collateral be surrendered to it or to a specified third person.32 If the Manufacturer refuses to hand over the pledged machines to the Lender, the Lender may levy an attachment on the machines in order to obtain possession of them. A bailiff may take possession of the machines and hand over the machines to the Lender (or a third party). If the right of pledge was created by way of a registered private instrument, the bailiff needs the consent of the temporary relief judge (“voorzieningenrechter”). If the Manufacturer is in default (“verzuim”) in respect of the secured obligations, the Lender is entitled to sell the pledged machines and to take recourse against the proceeds for what is owed to him. As set out above in para. I 2.d), foreclosure of the pledged machines must in principle take place by way of public auction. However, unless otherwise stipulated between the Lender and the Manufacturer, the tem31

32

Art. 3:229 BW. This right of pledge has preference over any other right of pledge established over the claim. Art. 3:237 para. 3 BW. Where there are several rights of pledge over the property, each pledgee as regards whom the pledgor or the obligor fails to perform his obligations can exercise this right, albeit that pledgees other than the most senior in rank may only demand the surrender to a pledgee or third person that has been agreed upon between the pledgees jointly, or that has been determined by the court.

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porary relief judge (“voorzieningenrechter”) may determine, at the request of either one of them, that the machines will be sold in another manner. At the request of the Lender, the temporary relief judge may also determine that (one or more of) the machines may be retained by the Lender as buyer for an amount to be determined by him. Once the Lender has become entitled to proceed to a sale, i.e. if the Manufacturer is in default, it may agree with the Manufacturer (without the intervention of the court) to a method of sale of the machines other than by way of a public auction. The Manufacturer and the Lender may, for example, agree on a private sale of the machines by the Manufacturer. In that case, the sale, even though private in nature and effected by the Manufacturer/pledgor, remains a realization sale and the Lender/pledgee will be entitled to the proceeds of such sale. Where an undisclosed right of pledge has been established on equipment intended to be used in carrying out a business in a specific factory or workshop set up for this purpose, and where this right of pledge has been established to secure a claim that is also secured by a mortgage on that factory or workshop, it may be stipulated that the Lender is entitled to foreclose against the pledged and mortgaged property together according to the rules governing mortgage.33

f)

Insolvency of the Manufacturer

In the insolvency of the Manufacturer the Lender may in principle proceed with the enforcement of the right of pledge "as if there were no insolvency". During the insolvency of the Manufacturer the Lender may in principle request that the machines be handed over to it and may proceed with the realization.34 The Lender is entitled to the net proceeds of the realization in accordance with the ranking of its claim. It does not have to share in the general costs of the bankruptcy proceeding, unlike ordinary unsecured or preferred (unsecured) creditors. If there are unsecured creditors with claims that rank above the Lender's claim (such as the tax authorities, a creditor that has incurred costs in preserving the machine or a creditor that can invoke a right of 33

34

Art. 3:254 BW. The same applies generally to tangibles that in accordance with common opinion are intended to permanently serve a particular piece of real estate and can be recognised as such on account of their form (e.g. dinner service bearing the logo of a hotel). Art. 57 para. 1 Fw. With respect to suspension of payments this follows from the fact that the suspension of payments does not affect claims with priority, such as claims secured by a right of pledge (Art. 232 Fw).

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retention), the liquidator in bankruptcy will exercise the rights of those higher ranking creditors in respect of the proceeds of foreclosure. In bankruptcy, preferred (unsecured) creditors can no longer individually exercise their rights against the debtor or his property but can only do so through the formal process of verification of claims set forth in the Bankruptcy Act. Preferred unsecured creditors, even if their claims rank above the Lender's claim, will receive their share of the proceeds of foreclosure through the list of liquidating dividends and, unlike secured creditors, must share in the general costs of the bankruptcy proceeding. The liquidator in bankruptcy may determine a reasonable period within which the Lender must exercise his right of foreclosure. If the Lender has not sold the machines within this period, the liquidator may claim the machines and sell them, without prejudice to the right of the Lender to the proceeds. However, in that case the Lender will be dealt with as a preferential but unsecured creditor and will receive the proceeds in accordance with the ranking of his claim through the list of liquidating dividends. This means that he will have to share in the general costs of the bankruptcy proceedings. The liquidator may, until a sale has occurred, redeem the pledged property by paying the full (accelerated) amount for which the pledge serves as security and the foreclosure costs already incurred. In the insolvency of the Manufacturer, the Lender may be temporarily prevented from exercising its rights as a secured creditor if the court or, in case of bankruptcy the supervisory judge (“rechter-commissaris”), has ordered a so-called “freeze period” (“afkoelingsperiode”).35 During a freeze period – 4 months at most –, the Lender will not be able to obtain the surrender of the machines or proceed with foreclosure unless it procures the prior authorization of the court or the supervisory judge. In practice, it is not uncommon that the pledgee agrees with the liquidator in bankruptcy that the pledged machines will be sold by the liquidator, thereby enabling the liquidator to sell the Manufacturer's business as a going concern. This will generally generate higher proceeds. The Lender will receive his share of the net proceeds of the sale from the liquidator but will pay a pre-arranged fee to the liquidator (“boedelbijdrage”). The fee to be paid by the Lender depends on the work performed by the liquidator in respect of the sale and is generally determined on the basis of guidelines published by the national conference of supervisory judges in insolvency (“landelijk overleg van rechters-commissarissen insolventies” – Recofa).36 If the Lender proposes a specific transaction to the liquidator and the intervention of the liquidator is limited to a review of that proposed transaction and the formal execution of the sale, a fee 35 36

See supra, para. I.2.d). See http://www.rechtspraak.nl (1 August 2007).

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of € 1.000 to € 2.500, depending on the amount of work involved, is considered reasonable. If the agreement between the liquidator and the Lender entails that the liquidator will arrange the sale and negotiate with potential buyers, the fee will be determined on the basis of a percentage of the proceeds (ranging from 10% decreasing to 3% with proceeds ranging from 0 increasing to € 450.000). In respect of (anticipated) proceeds in excess of € 450.000 specific agreements between the liquidator and the Lender are necessary.

g)

Motor vehicles

The responses given above do not change if the encumbered assets include motor vehicles. Even though motor vehicles are entered into a central register (and title certificates are issued) and registration numbers can and will serve as an important element of collateral description, it is not necessary that pledged motor vehicles be referred to by registration number in a deed of pledge.37

2.

Non-possessory security right in present and future equipment (floating security right)

The observations given under a) to g) supra do not change if the right of pledge encompasses all of the Manufacturer's present and after-acquired machines.38 It is noted, however, that the right of pledge will not extend to machines that are acquired by the Manufacturer after insolvency proceedings have been commenced.39

3.

Non-possessory security right in present and future inventory (floating security right)

The fact that the collateral is inventory rather than equipment does not change the observations set out above in relation to case 1. From a legal point of view there is no difference in the position of the Lender when the collateral consists of inventory rather than equipment. 37

38

39

For example, if all the debtor’s motor vehicles are to be pledged, a general description in the deed of pledge referring to “all motor vehicles” is sufficient. The deed of pledge may simply refer to “all the Manufacturer’s present and future machines”. Art. 35 para. 2 Fw. Insolvency proceedings take effect from 0:00 hrs of the day on which the insolvency order is issued (Art. 23, 217 Fw.) , i.e. the preceding midnight.

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If the acquisition of the inventory by the Manufacturer is financed by a seller that has reserved ownership, the Lender will in principle not acquire a valid right of pledge in (parts of) the inventory until such time as the debts secured by the reservation of ownership have been met. The creation (in anticipation) of an undisclosed right of pledge in (future) inventory will not be effective in respect of inventory of which the Manufacturer is not the owner.40 Also the fact that the right of pledge secures a revolving credit facility does not make any difference. A right of pledge can secure both existing and future claims.

a)

Rights of the Lender in the sold inventory

A transfer of pledged assets by the pledgor will in principle not lead to the extinguishment of the right of pledge. The right of pledge is a proprietary right that as such has droit de suite. However, in respect of a wholesaler (whose business it is to sell its inventory) it is important that the inventory can be sold free of encumbrances. The security documentation will generally stipulate that the Wholesaler has the right to sell the pledged inventory free of the right of pledge if the sale occurs in the ordinary course of business. The buyer will in that case acquire full and unencumbered ownership. Even if such right is not conferred on the Wholesaler, the buyer may nevertheless acquire full and unencumbered ownership in the sold inventory on the basis of the rules on protection of bona fide third party acquirers.41

b)

Rights of the Lender in proceeds

The right of pledge in the inventory is not by operation of law extended or converted into a right of pledge in the proceeds of the inventory. The Lender will not acquire any rights in the proceeds of the inventory unless the claims of the Wholesaler against its customers have been pledged to the Lender. With respect to the creation of a right of pledge over the Wholesaler's receivables the following must be taken into account. Netherlands law provides for a disclosed or undisclosed right of pledge on receivables.

40

41

Whether the buyer has any proprietary interest in the asset (such as an “Anwartschaftsrecht” under German law) that it can encumber (in favour of the Lender) is unclear and debated in legal writing. See infra, case 5.

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A disclosed right of pledge requires a deed of pledge and notification to the debtor of the pledged receivable. A disclosed right of pledge can be created over all existing and future receivables. However, the requirement of notification to the debtor of the pledged receivable in order to create the right of pledge entails that the debtor must be known. An undisclosed right of pledge requires an authentic (notarial) deed of pledge or a private pledge deed that is registered with the competent tax authorities. The pledge can extend to future claims only to the extent that they arise directly from a legal relationship already existing at the time of the creation of the right of pledge (generally, registration of the deed of pledge).42 This means that the Lender must make sure that a new deed of pledge is registered at regular intervals in order to minimise the risk that a pledge has not been created with respect to claims against the Wholesaler's customers that originate from recent transactions.

4.

Purchase-money financing – alternative sources

The acquisition of a new high-value robotic machine may be financed by all three options mentioned, i.e. a) by the seller, b) by a financial lessor and c) by a third-party secured lender.

a)

Documentation and formalities

If the seller finances the Manufacturer with respect to the acquisition of the machine by granting the Manufacturer a payment term or by allowing for payment in instalments, the seller may use its right of ownership as security for the outstanding purchase price by reserving the ownership of (retaining title to) the machine until it is fully paid. Reservation of ownership is not subject to any formal requirements, such as registration. The only requirement is that it is agreed upon between the seller and the Manufacturer (which agreement does not necessarily have to be, but for evidence purposes generally will be, in writing). As stated above in para. I.3. it is generally construed as a transfer of ownership under the condition precedent that all claims that it secures have been fully paid. Once the Manufacturer has met his payment obligations towards the seller, ownership will pass to the Manufacturer without any further act being required. If the transaction between the seller and the Manufacturer entails that payment will be made in instalments, certain additional requirements must be taken into account. Such transaction qualifies as a hire-purchase 42

Art. 3:239 para. 1 BW.

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contract (“huurkoop”), which is subject to certain mandatory statutory provisions.43 A hire-purchase contract must be entered into in writing (either by way of an authentic (notarial) deed or a private instrument) and must include a reference to the full purchase price, the instalment plan and the reservation of ownership clause. Failure to meet these requirements has serious consequences: the contract will be construed as a sale without reservation of ownership.44 No formal requirements apply with respect to financial lease contracts and the security that the lessor derives from maintaining the ownership of the machine, which, depending on the contractual agreements between the Manufacturer and the lessor, may pass to the manufacturer automatically at the end of the term of the contract or may require the exercise of a purchase option. Financial lease, even though a common form of acquisition financing, is not a contract that is regulated by specific statutory provisions in the Civil Code.45 The mandatory statutory provisions on hire-purchase contracts may also apply, however, to financial lease contracts.46 A third-party credit provider that finances the acquisition by advancing the purchase price of the machine as a loan to the Manufacturer, may obtain security by way of a right of pledge in the machine. Similar requirements apply as have been discussed above. The right of pledge enjoys no special position by reason of the fact that it secures acquisition credit.

b)

Priority

The seller that has retained title to the machine or the financial lessor may in principle invoke its right of ownership in the machine against third parties. The seller or the financial lessor may, however, be confronted with competing interests in the machine of other parties. The seller or financial lessor may, for example, be confronted with a competing claim to 43 44 45

46

Art. 7A:1576h et seq. BW. Art. 7A:1576j para. 3 BW. (Statutory) regulations in respect of financial lease contracts mainly concern tax issues. Pursuant to Art. 7A:1576h para. 2 BW any contract that has a similar purport as a hire-purchase contract is governed by the rules on hire-purchase contracts. The exact scope of this provision and the conditions under and extent to which, for example, financial lease contracts are included is unclear. In legal writing it is argued that, given the changed financing practice since its introduction (1936), a restrictive interpretation should be given to this provision.

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the ownership of the machine by a third party to whom the Manufacturer has sold and transferred ownership of the machine. Such a competing claim will be successful only if the third party is protected under the rules of bona fide acquisition (see infra, case 5) and the machine has in fact been brought into the possession of that third party. The seller or financial lessor may also be confronted with a competing claim of a secured creditor in whose favour the Manufacturer has created a right of pledge in the machine. The competing secured creditor will be protected (and therefore be able to invoke its pledge against the seller) only if the machine has been brought into the possession of the secured creditor (who acted in good faith at that time). Furthermore, the seller or financial lessor may be confronted with a creditor with a right of retention that can be invoked against the seller,47 or a creditor with a claim in respect of costs incurred in preserving the machine.48 As set out above in para. I.3., the right of ownership in the machine of the seller or the financial lessor may be disregarded by the tax authorities. In respect of certain tax claims that are due but unpaid by a tax debtor, such as wage withholding and turn over taxes, the tax authorities have the right to take recourse on equipment, such as the high-value robotic machine, belonging to third parties that is located on the debtor's premises.49 However, it is the tax authorities' policy to respect “real ownership” of third parties. A right of ownership invoked by the creditprovider pursuant to a reservation of ownership clause or financial lease contract will not be respected by the tax authorities. In accordance with the rules set out in para. I.2.e) supra, the pledgee will have priority over most other creditors of the Manufacturer. However, certain claims (such as tax and social security claims) will, in case of this machine, take priority over the claims of the Lender.

c)

Remedies in case of default

In case of default of the Manufacturer, the financial lessor and the seller may in principle revindicate the machine, assuming that the contractual right of the manufacturer to possession of the machine has ended.50 If the 47 48 49 50

Art. 3:290 et seq. BW. Art. 3:284 BW. Art. 22 para. 3 Inv. As the contract is set aside, the seller/lessor will in principle and unless the contract provides otherwise, have to refund to the buyer any amounts already received after deducting costs incurred and damages. It is unclear and debated in legal writing whether the title-retaining seller or financial lessor is obliged to account for financial benefits obtained as a result of the termination of the contract and the revindi-

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Manufacturer refuses to hand over the machine, the seller/financial lessor must have a prejudgement attachment, in order to obtain possession, levied on the machine and must initiate court proceedings to have its claim to the machine established. The pledgee's rights in case of default of the Manufacturer will be limited to taking recourse on the machine in accordance with the rules set out above in para. I.2.d). The pledgee can never recover more than the outstanding secured obligation.

d)

Insolvency of the Manufacturer

Based on their ownership of the machine, the seller or the financial lessor may revindicate the machine in case of insolvency of the Manufacturer. Netherlands insolvency law does not impose any restrictions on the seller's or financial lessor's (contractual or statutory) right to terminate the contract and, consequently, the Manufacturer's right to possession of the goods.51 However, if a freeze period (“afkoelingsperiode”) is ordered, the seller or the financial lessor may be temporarily prevented from exercising its rights to revindicate goods from the estate. If the transaction with the Manufacturer is to be characterised as hirepurchase, the Netherlands Bankruptcy Act provides that, in the insolvency of the Manufacturer, either the seller or the (liquidator of the) manufacturer may terminate the contract. The position of the secured lender in the insolvency of the Manufacturer is similar to the position of the Lender dealt with in case 1 supra.

5.

Bona fide acquisition

If the company sells tangibles – whether equipment or inventory – that have been encumbered with a security right for the benefit of a lender, in principle, those security rights remain attached to the collateral and the lender can have recourse to the collateral even if it has passed into the hands of a buyer from the pledgor. With respect to inventory collateral, it will generally be agreed between the pledgor and the pledgee that the pledgor has the right in the normal course of its business to sell its inventory free of the pledge. However, even in the absence of such an agreed right and even in the case of equipment (i.e. not inventory held for sale), if the buyer did not

51

cation of the asset (such a legal obligation exists with respect to hire-purchase contracts, cf. Art. 7A:1576t BW). See also footnote 50.

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know and ought not reasonably to have known that the tangibles were encumbered with a security right in favour of the pledgee, the buyer is in principle protected, provided that it has obtained actual possession of the goods.52 In this respect it must be kept in mind that Netherlands law does not provide for registration of nonpossessory/undisclosed security rights in a register that is accessible to third parties. Further, even if the buyer of inventory (held for sale) is or ought to have been aware of the pledgee’s security right in the inventory, the buyer may acquire full and unencumbered ownership if it had no reason to doubt that the pledgor would satisfy its obligations in favor of the pledgee.

6.

Possessory pledge – constructive or fictive possession

In none of the cases 1-4, supra, could the financier take a disclosed pledge over the encumbered assets by obtaining, in lieu of actual possession, the agreement of the party being financed that it holds the encumbered assets on behalf of the financier. A possessory right of pledge requires that the encumbered assets be out of the possession of the pledgor.

7.

Over-security

Netherlands law does not have a concept of over-security.

8.

Legal (non-consensual) rights of unpaid seller

An unpaid seller that has neither retained title to nor has been granted a security right in tangibles sold may nevertheless under certain circumstances revindicate unpaid tangibles from the buyer, even though ownership of the tangibles did pass to the buyer, by invoking what may be referred to as the right of reclamation (“recht van reclame”). The seller of tangibles53 that have been delivered to the buyer can revindicate those tangibles by a written declaration addressed to the buyer, if the price was not paid and if, in connection therewith, the re-

52

53

Art. 3:86 BW. If the seller remains in possession (because delivery was effected through a traditio constitutum possessorium), the bona fide third party acquirer is not protected. Moveables other than registered property.

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quirements to set aside the contract of sale have been met.54 This declaration sets the sale aside and terminates the right of the buyer or his successor to the tangibles. If the price of only a certain part of what has been delivered has not been paid, the seller may revindicate only that part. If, in respect of the whole, a part of the price has not been paid, the seller may revindicate only a corresponding part of what has been delivered, if the part delivered is capable of such separation. In both cases the sale is set aside only in respect of the revindicated part of what has been delivered. In all other cases of partial payment of the price, the seller’s remedy is to revindicate what has been delivered in its entirety, but it must in such cases reimburse what has already been paid. The right of reclamation may be exercised to the extent that the goods delivered are still in the same condition as they were when delivered. The seller’s right to revindicate the goods for non-payment is not unlimited in time. It lapses on the earlier of the expiry of six weeks after payment of the purchase price became exigible (due) and sixty days from the day on which the goods were delivered to the buyer or someone on its behalf. Furthermore, unless the goods have remained in the hands of the buyer, the right to revindicate terminates when the goods have been transferred, other than by gratuitous title, to a third person who could not reasonably have expected that the right would be exercised. The right to revindicate also terminates if, after the delivery of the goods to the buyer, a right of disclosed pledge over the goods has been created by the buyer. The right of reclamation can be exercised even in the insolvency of the buyer. If the buyer has been declared bankrupt or where he has been granted suspension of payments, a revindication has no effect if the liquidator, in the case of bankruptcy, or, in the case of suspension of payments, the buyer and the administrator, as the case may be, pay the purchase price or provide security for payment within a reasonable period given to them by the seller in his declaration.

54

Cf. Art. 6:265 BW: “(1) Every failure of a party in the performance of one of its obligations gives the other party the right to set the contract aside in whole or in part, unless the failure, given its special nature or minor importance, does not justify a setting aside of the contract and the consequences thereof. (2) To the extent that performance is not permanently or temporarily impossible, the right to set the contract aside does not arise until the obligor is in default.”

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Special property registries

Rights of ownership, mortgages and other rights in registered aircraft (“teboekstaande luchtvaarttuigen”) and registered seagoing vessels (“teboekstaande zeeschepen”) can be recorded in the Dutch public registry (“openbare registers”, the “Title Record”). An aircraft can be registered with the Title Record if A) the aircraft a) is registered with the Dutch nationality register, b) is not registered with the national register of another state, and c) has a take-off weight of at least 450 kilograms and B) the competent District Court has approved the request for registration of the aircraft with the Title Record. Registration in the Title Record of a seagoing vessel is reserved for seagoing vessels that qualify as a Dutch vessel and registered sea fishing boats. To qualify as a Dutch vessel certain criteria have to be met with regard to inter alia a) the nationality and business of the owner of the vessel b) and the (location of) management of the vessel and its owner.

10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment) If the raw materials have not yet been processed, the rights of the credit providers in the raw materials remain intact. If the raw materials are used in the production process of the Processor and have lost their identity as individual goods, for example, by way of accession (“natrekking”), confusion (“vermenging”), or specification (“zaaksvorming”), the credit providers' rights in the raw materials are extinguished. The question then arises whether the credit providers acquire any rights in the final product. Below, the main rules on accession, confusion and specification – which are all of mandatory law – are set out.

a)

Accession and confusion

If a tangible becomes part of another tangible that must be regarded as the principal asset, its ownership passes to the owner of the principal asset. A tangible is considered to be the principal asset if its value considerably exceeds that of the other tangible or it is so regarded by common opinion. Where none of the tangibles can be regarded as the principal asset and they belong to different owners, the latter shall become coowners of the new asset, each for a share proportionate to the value of the asset contributed.

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These rules apply, mutatis mutandis, where tangibles belonging to different owners are intermingled so as to form a single asset.

b)

Specification

As a result of specification, all rights in the original tangibles used in the production process are extinguished.55 The question arises who acquires the ownership of the newly manufactured tangibles in case the Processor is not the owner of (all of) the tangibles used in the production process. Under Netherlands law, in principle the manufacturer will acquire the ownership of the tangibles that it has manufactured.56 However, the question is who should be regarded as manufacturer of the new tangibles for the application of the rules on specification: the party that actually manufactured, or the party on whose order the manufacturing took place. In particular with respect to the sale of raw materials pursuant to a contract containing a reservation of ownership clause, the question arises to what extent parties are at liberty to determine who shall be regarded as the manufacturer for the application of the rules on specification. According to prevailing opinion, under Netherlands law, a mere stipulation in the contract between the seller and the buyer that the seller shall acquire the ownership of the tangibles manufactured by the buyer with the tangibles supplied under reservation of ownership, will not have proprietary effect. A contractual provision to the effect that newly manufactured tangibles are created by the manufacturer for the benefit of the other party in itself does not lead to the acquisition of ownership by that other party, in particular if that stipulation is merely intended to extend the seller's security to such newly manufactured tangibles. There must be some objective element that indicates that it is in fact realistic that specification has taken place for the seller. Only if the legal relationship between the seller and the buyer, in accordance with common opinion, can be said to entail that the seller has also assumed the additional costs and risks involved in the manufacturing of the tangibles with the materials it has supplied, will a contractual clause have proprietary effect in the sense that the seller will also acquire the ownership of the newly manufactured tangibles. The right of ownership acquired by the seller in that case does not merely serve the purpose of security for extended credit.

55 56

See e.g. HR 5 December 1986, NJ 1987, 745; HR 24 March 1995, NJ 1996, 158. Art. 5:16 para. 2 BW.

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Impact on a right of pledge

Limited proprietary (security) rights, such as a right of pledge, in raw materials that are later processed are extinguished when the processing occurs. A credit provider will acquire a right of pledge in newly manufactured tangibles only if that has been agreed upon in the deed of pledge. A bank financing the operations of the Processor may, for example, have stipulated that all present and future inventory of the Processor is encumbered with a right of pledge for the benefit of the bank. The right of pledge in the Processor's future assets is created in anticipation and will become effective once the Processor acquires ownership of the assets concerned, i.e. upon the processing (and provided that it is not bankrupt at that time).

11. Cross-border issues By way of preliminary remark it is noted that at present Netherlands law does not have a systematic body of statutory rules on international property law. The Dutch government has submitted proposals to parliament for an act on conflict rules in the area of property law (including receivables and shares) in November 2006.57 It is uncertain when this new legislation will enter into force. Under Netherlands private international law, the proprietary aspects of the transfer of and the creation of rights in tangibles are in principle governed by the lex rei sitae.58 For the determination of the applicable law in respect of the acquisition, modification, transfer or extinguishment of rights in tangibles (whether pursuant to juridical act or by operation of law), the place where the asset concerned is located at the time of completion of the relevant legal facts is decisive. The law applicable to reservation of ownership has been addressed in legislation following the implementation in the Netherlands of Directive 2000/35/EC on combating late payment in commercial transactions. In accordance with the main rule – applicability of the lex rei sitae – the proprietary aspects of reservation of ownership are governed by the law of the state where the asset is located at the time of delivery (“levering”). This leaves unaffected the contractual obligations that arise from the 57

58

Regeling van het conflictenrecht betreffende het goederenrechtelijke regime met betrekking tot zaken, vorderingsrechten, aandelen en giraal overdraagbare effecten (Wet conflictenrecht goederenrecht), Tweede Kamer, vergaderjaar 2006-2007, 30 876. Art. 2 draft Wet conflictenrecht goederenrecht, footnote 57, supra. See also HR 3 September 1999, NJ 2001, 405.

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reservation of ownership clause pursuant to the law governing that clause. Contractual obligations arising from the reservation of ownership clause that go beyond what the applicable rules of property law allow are effective contractually as between the parties but have no proprietary effect when contrary to the property law of the lex rei sitae. The Dutch legislator has, however, provided for limited party-autonomy in respect of cross-border sales involving reservation of ownership. Parties can agree that the proprietary effects of ownership in goods meant for export are governed by the law of the state of destination if the provisions of that law in respect of reservation of ownership are more favourable to the creditor than the lex rei sitae. Such designation of the applicable law has effect only if the goods are in fact imported into the designated state of destination. In support of incorporating this exception, the Dutch government observed that it would allow sellers, in case of export of goods to Germany, the possibility to choose the more favourable rules of German law on the verlängerter Eigentumsvorbehalt to apply to the proprietary aspects of reservation of ownership. This would allow sellers, according to the government, to ensure that their rights continue in goods manufactured with the goods they have sold. However, that result would also be achieved by applying the lex rei sitae. Essentially, additional contractual clauses aimed at extending the seller's security into newly manufactured goods do not relate to matters of reservation of ownership as such. The ownership acquired in newly manufactured goods by the seller of the original goods is a new right of ownership that is not derived from the ownership in the goods that were originally sold. It is derived from the statutory rules on, for example, specification that, as it is the case in German law, may allow a certain degree of party-autonomy (in designating who shall be regarded as the “manufacturer” that acquires ownership of newly manufactured goods). Issues such as specification relate to general matters of property law and are governed by the law applicable pursuant to the conflict rules that would apply to similar questions arising outside the framework of a transaction involving reservation of ownership. In accordance with the conflict rules regarding (the acquisition and loss of) ownership in general, the lex rei sitae will apply to the acquisition of ownership pursuant to specification and the effect of contractual arrangements in this respect. A similar reasoning applies to the extension of the seller's security into claims that the buyer acquires against his customers from the resale of the goods.59

59

Under Dutch private international law, the proprietary aspects of the assignment or charging of claims are governed by the law applicable to the contract from which the obligation to assign or charge the claim emanates (HR 16 May 1997, NJ 1998, 585; Art. 10 draft Wet conflictenrecht goederenrecht, footnote 57, supra).

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In its recently submitted legislative proposals, the Dutch government has indicated that the conflict rules on reservation of ownership also apply with respect to the proprietary aspects of leasing of goods that are intended for use abroad. As matters related to the creation, effectiveness against third parties and content of security rights in tangibles are, subject to certain exceptions, governed by the lex rei sitae, the question arises whether and to what extent such rights continue to exist, are extinguished or are modified when the asset concerned is transferred to another state. This concerns an issue that is generally referred to as conflit mobile or Statutenwechsel. The legislative proposals submitted by the Dutch government start from the assumption that a right that was effective against third parties under the foreign law under which it was created does not cease to exist but must be converted into an equivalent right under the new lex rei sitae.60 A right in a tangible that is moved to the territory of another state acquires the content of a similar right of that state. This content corresponds with the content of that right under the law of the state where it was created, except to the extent that such is irreconcilable with the law of the state where the asset has been moved to. Depending on the rules of mandatory and suppletive law of the new situs of the asset, the largest possible conformity with the law under which the right was created must be achieved. If goods are moved to the Netherlands, registration in the Netherlands is not required for the continued existence of the right after the movement, even if registration requirements would have been applicable with respect to the creation of such a right under Netherlands law. A right that was not effective against third parties according the laws of State A will not be recognised in the Netherlands and cannot be "perfected' by observing local Dutch requirements. If, for example, an asset was sold and delivered to a buyer under reservation of ownership in State A and the formalities of State A in respect of that reservation of ownership, for example registration, have not been observed, the reservation of ownership will not be recognised in the Netherlands, even though Netherlands law does not require registration. If subsequent to the transfer of the asset to the Netherlands, a security right is created in the asset for the benefit of another party under Netherlands law, Netherlands law as the law of the new situs will determine the 60

In June 2007 (after finalisation of this paper) the legislative proposals were amonded. The relevant provision (Art. 5) now reads (in my informal translation): “Rights in a tangible that have been acquired in accordance with the law applicable pursuant to this Act, remain vested in that tangible even if it is transferred to another state. These rights cannot be exercised in a manner that is irreconcilable with the laws of the state where the tangible is located at the time such rights are exercised.”

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ranking between the two rights. Under the general priority rules of Netherlands law in respect of competing proprietary rights in the same asset, the older right will generally prevail. However, under certain circumstances, the holder of the new right may be protected against an older right that he was not and could not have been aware of. Attachment of assets under Netherlands law does not create priority. However, if a creditor makes an attachment on an asset and subsequently a right of pledge is created in that asset, the attaching creditor will be protected. In relation to the creditor that has made the attachment, the right of pledge will be regarded as without effect (“relatieve nietigheid”) and that creditor may take recourse on the asset disregarding the later pledge. In the relation between the pledgor and the pledgee (and vis-à-vis all other persons, including the liquidator/administrator in the pledgor’s insolvency), the right of pledge will be effective.

Belgium Eric Dirix I.

Introduction

1.

General background; structure of national law re security over tangibles

Belgian law on security provides for a system that is similar to that under French law as it existed before the 2006 reform. The classic security right over tangibles is that of the possessory pledge. In the system of the Belgian Civil Code (“Code civil”) the existence of a pledge without taking actual possession of the collateral is inconceivable (“pas de gage sans dépossession”).1 An alternative to possession of goods can be achieved through possession of negotiable documents representing the goods (Warrant Act) (infra). In practice, other devices using special purpose vehicles (S.P.V.) have been developed (infra). It is not possible to create a non-possessory pledge of a tangible or a group of tangibles (as has now been made possible under the French reform). The only non-possessory pledge is the enterprise pledge which covers all the movable assets of the enterprise (Act of 25 October 1919). The “negative” publicity resulting from taking away the possession from the pledgor is substituted by “positive” publicity through registration in the land register. A similar security right exists for agricultural enterprises (Act 15 April 1884). Publicity is an important feature of security rights. Belgian law is traditionally hostile to hidden security rights. This approach is based on the need to protect third parties and dispelling the false impression of wealth. In recent years, however, different exceptions have been introduced. The new Bankruptcy Act 1997 recognized retention of title by the seller ef1

Under the ancient customary law (before the Civil Code of 1804) non possessory pledges where not uncommon but resulted only in limited protection for the creditor. A preferential right was only possible on condition that the debtor remained in possession (“meubles n’ont point de suite par hypothèque”). In a conflict with a subsequent pledgee in possession, the latter prevailed; cf. Ph. Godding, Le droit privé dans les Pays-Bas méridionaux du 12e au 18e siècle (1987), p. 256 et seq.

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fective against the buyer’s creditors without any publicity. In regard to pledges in receivables, the 1994 Act disposed of the formalities of the old Art. 1690 Cc (assignment) and the need for notification for the pledge of claims. The new Art. 2075 Cc provides that the pledgee takes “possession” of the claim as from the conclusion of the pledge agreement. Belgian law is hostile to ownership transfers for security purposes. It was held by the Supreme Court that a fiduciary transfer has no legal effect vis-à-vis third parties.2 This traditional viewpoint helps to explain why Belgium was one of the last jurisdictions in Europe to recognise retention of title (Bankruptcy Act 1997). An increasing number of exceptions to this principle are however provided for in different statutory provisions. Since security rights are “real” rights that can be enforced against all other parties and in insolvency proceedings, the principle of the numerus clausus of property law applies. The parties cannot create new types of security rights but have to choose from among the types provided by the legal system. Security arrangements other than a recognized type but instead based solely on the parties’ contract are binding only as between the contracting parties. Conflicts with entitlements of third parties and the problems of the ranking of different real security rights are in principle determined by the first-in-time rule (prior tempore, potior jure). This rule is not without exceptions (infra). Another essential feature is the accessory nature of security rights. The purpose of a security right is to secure an obligation. A transfer of a security right without the transfer of the secured obligation is not possible. In order to meet the requirement of accessority, however, the underlying obligation need not necessarily exist at the moment of the creation of the security right. It is sufficient that it exists at the time the creditor enforces its security right. Consequently, the creation of security rights to secure future or conditional obligations poses no difficulty. Another consequence of the accessority principle is that a creditor cannot not obtain a higher amount out of the proceeds of the collateral or retain a higher value of the assets transferred to him, than what is due to him by the debtor. The debtor is entitled to restitution of any surplus. Belgian law is also marked by a complex system of statutory privileges. The Mortgage Act and different specific statutes protect numerous classes of creditors based on the particular nature of their claims by granting them a specific or a general statutory privilege on all or part of the debtor’s assets, thus giving them a preferential position over unsecured creditors but not generally over secured creditors. The unpaid bal2

Cass. 17 October 1996, Pas. 1996, I 992 concl. proc.gen. Piret, RW 1996-97, 1395 note Storme.

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ance of the purchase price, the unpaid rent, the claims of sub-contractors, of carriers, the cost incurred in order to protect specific assets and the unpaid insurance premiums are, amongst many others claims, secured by a statutory privilege. General liens covering the totality of the (movable) estate of the debtor are granted to the tax authorities, the employees and to social security agencies. When the creditors who have a security interest in immovable property (e.g. mortgage) are satisfied, the creditors with a general privilege on movable property have also a preferential right on the remaining proceeds of the immovable property (Art. 19 Mortgage Act). In regard to statutory preferences on movables, no publicity requirements have to be observed. In regard to fungible goods (e.g. inventory), substitution can take place without endangering either the security right or its rank. The only requirements are that the substituted goods be of the same class or category and value as the original goods and that the substitution take place without a significant lapse of time.3 The rights of the security holder cover also the proceeds to the extent that “real subrogation” can be said to take place.4 Accordingly, a security right is maintained despite the loss of its original object through the transfer of the real right onto the substituted asset (Art. 10 Mortgage Act). This principle is accepted without discussion in all cases where the substituted asset is a claim (e.g. sub-sale, insurance). This is true not only for possessory pledgees but also for title-retaining sellers and for sellers that rely on the statutory privilege of the seller (Art. 20, 5° Mortgage Act).5 In these latter cases, the seller’s rights are not extinguished by a sub-sale by the buyer. The seller may claim priority over the proceeds of such a sale to the same extent as its rights in the original sold goods. Likewise, the security interest of the seller under title retention is transferred to the claim arising out of a sub-sale.6 Real subrogation is not accepted for substituted assets other than claims or money and is, of course, limited by the condition that identification of the asset in the estate of the debtor is possible.

3

4 5 6

Cass. 7 October 1976, Pas. 1977, I 154 concl. proc. gen. Krings, RCJB 1979, 5 note Fagnart. Sagaert, Zakelijke subrogatie (2004). De Page, Traité élémentaire de droit civil belge, Vol. VII (1957), p. 180 et seq. Cass. (France) 26 April 2000, Bull. civ. IV No. 89; ERPL 2002, 823 note Sagaert. See also Art. 2372 C. civ. (after the 2006 reform).

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2.

Security devices denominated as such

a)

Possessory devices

The possessory pledge (“gage”/“pand”) is governed by the Civil Code (Art. 2071-2084) and in commercial transactions by the Commercial Pledge Act 1872 (incorporated in the Commercial Code). For the commercial pledge the formal requirements of the Civil Code (written contract that must be “registered”7) are not applicable. The essential requirement is that the collateral is removed from the possession of the debtor and placed under the control of the creditor (or an agreed third party). No further formalities have to be observed. There is no need in commercial transactions for a written contract. Proof of the existence of the pledge may be made by any legal means. The requirement of dispossession of the debtor and the hostility against fiduciary transfers resulted in the need for other solutions to enhance the accessibility of secured credit based on tangibles as collateral. In order to facilitate the use of inventory stored in warehouses for secured financing, a constructive dispossession was made possible as early as 1862 by the Warrant Act through the creation of a transferable document (“warrant”) representing the goods. This document is delivered to the owner of the goods by the warehouse-holder where the goods are stored and who will release the goods only against presentation of the document. The owner can then transfer this document to his creditor. Under this system it is also allowed that the inventory is stored at the premises of the pledgor but only on the strict condition that the goods remain separated from unpledged goods and that the pledgor has no free access to them. This practice, known in some countries as “field warehousing”, has become less frequent as a result of the practical problems in ensuring the segregation of the goods and the many cases where the issuer of the document was held liable towards the security holder when the security right was successfully challenged by other creditors or the insolvency administrator of the debtor. In practice other devices using special purpose vehicles (S.P.V.) have been developed. In some cases the inventory is bought at the request of the enterprise (e.g. a manufacturer) by the S.P.V. The S.P.V. subsequently sells it to the enterprise in accordance to the latter’s needs. This protects the inventory not yet sold to the enterprise against the claims of the enterprise’s creditors. Another possibility is the consignment: the S.P.V. buys the goods and delivers them to the enterprise, which then holds and sells the goods as a consignee. A variation is that an S.P.V. buys the inventory from the enterprise and sells it back to the enterprise under 7

“Registration” means simply the payment of a stamp duty.

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reservation of title. The bank provides credit to the S.P.V. and takes the claim of the S.P.V. against the enterprise as security. The question whether those devices will be honoured in the enterprise’s insolvency proceedings is however uncertain.

b)

Non-possessory devices

There is no non-possessory pledge of a tangible or a group of tangibles under Belgian law. However, a non-possessory pledge, in the form of an enterprise pledge came about by the introduction of a non-possessory security right on the enterprise by the Act of 25 October 1919 (“gage sur fonds de commerce”/“pand handelszaak”).8 The purpose was to enhance the possibility for small and medium enterprises to acquire credit: the pledgor remains in possession of all the assets of his enterprise and is entitled to dispose of them in the ordinary course of his business. It is interesting to note that this took place in about the same period in the th beginning of the 20 century that other jurisdictions such as Germany and The Netherlands introduced the fiduciary transfer. This non-possessory pledge can, however, be granted only to banks and financial institutions. The pledgor must be the proprietor of the enterprise. Contrary to an English floating charge, the enterprise charge can be granted by both individuals and companies. This pledge may secure existing and future obligations. The date on which the secured obligation comes into existence is irrelevant to the ranking of the security right. An important limitation, however, is that the secured obligations result from credit extended to the debtor.9 Art. 4 of the 1919 Act provides that the pledge agreement must specify the encumbered enterprise. The enterprise must also remain identifiable. This requirement can pose difficulty in case of a transfer of the enterprise or a merger. The enterprise pledge comprises all the essential movable assets of the enterprise. There is no need for the parties to describe the different assets or classes of assets, since the pledge is considered to encumber all the 8

9

Prior to the 1919 Act, a similar security right existed already for agricultural enterprises. Loans to farmers can be secured by a legal privilege, which is in fact a nonpossessory pledge, when such is agreed upon in the loan agreement (Act 15 April 1884). Its binding effect on third parties requires the payment of a stamp duty and registration (infra). The moment of registration determines also its rank. There is no limitation regarding the quality of the creditors. The security right covers all the tools, animals, equipment etc. on the farm. Not: extra-contractual debts or the obligation of the debtor as guarantor for a third party: Cass. 23 December 2005, available at www.cass.be (1 August 2007).

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movable assets of the enterprise. Art. 2 of the 1919 Act gives a nonexhaustive enumeration of these classes of assets which are normally included in the pledge, such as tools, equipment, furniture, trademarks, leases and goodwill. All these assets are automatically included in the pledge. The parties are entitled to specify additional classes of assets (e.g. cash, negotiable instruments, claims and inventory) that are not considered as part of the “enterprise” in the sense of the Act.10 A general description of these additional classes of goods is sufficient (for example: “all existing and future claims”). The security right encumbers also the assets that are subsequently acquired by the pledgor. The parties may not limit the collateral to a particular class of assets (e.g. only inventory). The pledge must include the essential classes of assets of the business (equipment, goodwill, trade marks). Immovable property is excluded.11 In regard to inventory, Art. 2 of the 1919 Act provides that its inclusion must be expressly mentioned and that, even in such a case, the security interest is limited to 50 % of the value of the inventory at the time of enforcement. The statute provides thus for a “carve out” – rule to protect the unsecured creditors. In so far as the creditor’s claim exceeds an amount that equals 50 % of the value of the stock and is not satisfied out of the proceeds of the other assets, that excess will be unsecured. This protection of the unsecured creditors applies both in insolvency proceedings and in case of individual enforcement by the pledgee. The pledge agreement must be established in a document, without the need for a notarial deed (Art. 3 of the 1919 Act). The ordinary requirement of dispossession is deemed to be satisfied by publicity (Art. 4 of the 1919 Act), in the form of filing in the land registers. The filing is in the land register of the place where the enterprise is situated (the land registers are not organised nationally but by judicial circumscription, called “arrondissements”). This poses problems in case the enterprise is transferred to another circumscription.12 In order to fulfil this publicity requirement, the pledge agreement must first be “registered”: this is in essence a fiscal requirement. The next step is the deposit of a copy of the pledge agreement and two summaries of the agreement (“borderel”) that contain all the essential elements of the agreement (infra). 10 11

12

Cass. 6 November 1970, Pas. 1971, I 200; RCJB 1972, p. 320 note Fontaine. Except for movables that are considered as immovable property because they are used for the exploitation of the enterprise that is located in the premises of the pledgor: Cass. 26 May 1972, Pas. 1972, I, p. 889. According to some case-law, the pledgee is under no obligation to renew the publicity in the new circumscription.

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Pledgees (both possessory and non-possessory) are protected with a high-ranking legal preference on the encumbered assets (Art. 20, 3° Mortgage Act). Their position is not challenged by the numerous general legal preferences known under Belgian law (e.g. tax authorities, employees, social security agency). Conflicts with entitlements of third parties and the ranking vis-à-vis other security rights are in principle determined by the “first-in-time” priority rule (prior tempore, potior jure). The rank of the enterprise pledge is determined by the time of entry into the registry. The first-in-time priority rule solves the conflicts between the holder of the enterprise pledge and competing rights on the encumbered enterprise (transferee, subsequent pledgee, lien creditor, mortgage holder). This rule applies also in regard to conflicts with entitlements on specific assets of the enterprise, such as a subsequent pledge on inventory (“warrant”),13 the legal preference of the landlord14 or a subsequent pledge of a claim (Art. 2075 para. 3 Cc). The first-in-time rule, however, is not without exceptions. For instance, the conflict between the holder of an enterprise pledge and the statutory privilege of the unpaid seller (Art. 20, 5° Mortgage Act) is not determined according to that rule, but instead a “purchase money priority” rule applies. The statutory privilege of the unpaid seller will thus defeat an earlier enterprise pledge if the seller fulfilled the publicity requirement (infra).15 Also, a title-retaining seller can revindicate the goods notwithstanding the pledge on the enterprise of the buyer. The same applies for the revindication of the lessor (financial leasing). It has also been ruled that in the conflict between the enterprise pledge that included all existing and future claims and the statutory privilege of the sub-contractor on the claim of the debtor (main contractor) against the employer (Art. 20, 12° Mortgage Act), the first-in-time priority rule is not applicable and the statutory privilege of the sub-contractor prevails over an earlier enterprise pledge.16

13 14 15

16

Cass. 19 November 1992, RCJB 1994, 27 note Van Quickenborne. Cass. 11 June 1982, RCJB 1985, 371 note Moreau-Margreve. Cass. 28 September 1972, Pas. 1973, I 103 conclusions advocate general Krings; Cass. 7 May 1987, Pas. 1987, I 1034. The Bankruptcy Act (1997) eliminated the publicity requirement applicable to the statutory privilege of the unpaid seller, but retained it in regard to the conflict with the mortgage holder on fixtures. Since this form of publicity still exists, it is held by legal writers that the outcome of the conflict remains unaltered, cf. Dirix/De Corte, Zekerheidsrechten (2006) 362; Gregoire, Publicité foncière, sûretés réelles et privilèges (2006) 405. Cass. 25 March 2005, RW 2005-06, 62; RCJB 2005, 472 note Gregoire.

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3.

Title-based security devices

Belgian law is traditionally hostile to transfers of property for security purposes. With respect to an intangible, the Supreme Court ruled that a fiduciary assignment is valid inter partes, but that it has no legal effect vis-à-vis third parties (supra). As a result, fiduciary transfers cannot be upheld in insolvency proceedings. Different statutes, however, provide for the recognition of fiduciary transfers in specific areas such as financial transactions.17 In regard to tangibles, examples of security rights based on the ownership of the creditor are: reservation of title and financial lease. Although in these cases the creditor is the owner of the collateral – because he retains ownership or because there is a transfer of ownership – these institutions are considered as security rights.

4.

Existing registries

In regard to security rights on movables there are registries for enterprise charges, charges on agricultural enterprises and the legal privilege of the seller. For security rights on ships the publicity is similar to that for security rights on immovable property (mortgage) (Art. 25-42 Maritime Act).

a)

Enterprise charge

Publicity in regard to the enterprise pledge is organised in the land register. In order to fulfil this publicity requirement, the pledge agreement must first be “registered”. “Registration” is in essence a fiscal requirement, i.e., a revenue-raising device that is functionally a tax on secured borrowing. The costs of registration of the pledge agreement is an amount equal to 0,50% of the secured claim specified in the agreement (which may be stated as a maximum amount). The following step is to submit to the registrar a copy of the pledge agreement and two summaries of the agreement (“borderel”) that contain all the essential elements of the agreement. This summary is copied in the land register and contains the following elements: a) name, address, profession of the creditor, b) name, address, place and date of birth and profession of owner of the enterprise, c) identification of enterprise,

17

In regard to intangibles and financial assets in paper form (see: Art. 12 Financial Securities Act of 15 December 2004).

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d) the maximum amount of the secured obligation and e) whether inventory is included. The additional assets need not to be described in the borderel since the presumption is that the totality of the enterprise is encumbered. However, the fact that the pledge also encumbers the inventory must be mentioned. The land register filing fee is € 58,50 for secured debt up to € 25.000 and an additional € 20,50 Euro per additional € 25.000 of debt. After payment of the pledge agreement registration fee, the additional costs are minimal (stamp duty, fee of land register and cost of obtaining copies). All third parties have the right to file to the registrar a request of information. The response, which relates only the data on the summary (“borderel”), is provided in a written document. The fee for a search is € 30 and the normal response time is one or two days.

b)

Charge on agricultural enterprise

The requirements are: a document that specifies the existence of the charge, the payment of a stamp duty (0,50 % of the amount of the claim) and the entry in a specific register held by the local tax authority (Registers Office). The costs for the entry in the register are € 30 Euro for debts up to € 25.000 and € 12,50 per additional € 25.000. All third parties can apply for information. The fee for a search is € 5 and normal response time is one or two days.

c)

Legal preference of seller

In order to prevail over competing rights of mortgagees and holders of an enterprise charge, the unpaid seller who relies on his legal privilege has to deposit the sales contract (or the invoice) at the law clerk’s office of the commercial court of the residence of the buyer within 15 days after the delivery of the goods. The deposition is without costs except for a stamp duty. All third parties can apply for information. They can do the search themselves (which is free) or apply for a copy of the deposited contract or invoice (at the cost of a stamp duty).

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II.

Case studies

1.

Non-possessory security right in specific existing items of equipment

Belgian law does not allow a non-possessory security right in specific assets. Such an agreement would be valid between the parties, but would not be binding on third parties (or enforceable in insolvency proceedings). It is merely a promise to give security.18 The only non-possessory security right is the enterprise pledge but this must include all the essential assets of the business. An enterprise pledge that is limited to specific equipment would not be effective in regard to third parties.

2.

Non-possessory security right in present and after-acquired equipment (floating security right)

As is said before, the enterprise pledge (Act of 25 October 1919) must include all the essential assets of the business (e.g. equipment, goodwill, trademarks). A non-possessory security right in present and future equipment can be created by way of an enterprise pledge, but only if it includes also all the other assets of the enterprise, and only if it is granted to a financial institution (supra).

a)

Documentation and formalities to achieve effectiveness against grantor and against third parties

The formalities and cost of the enterprise pledge are described above.

b)

Discoverability of earlier-created rights in the collateral

A prospective lender can file to the land registrar a request of information about the existence of earlier enterprise pledges (supra). The position of the pledgee can also be endangered if the pledgor is the owner of the premises where the machines are located and the pledgor has previously mortgaged the immovable property. Tangibles that are fixed on immovable property of the same owner so that they are physically united with it or that are used for the exploitation of such property, are considered as immovable property (Art. 524 and 525 Cc). In regard to the first category, it is held that these tangibles are not included 18

Cass. 7 April 1967, Pas. 1967, I 926.

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in the enterprise pledge. Tangibles in the second category are covered by the enterprise pledge19 and a conflict between the pledgee and the mortgagee can thus arise. This conflict is solved according to the first-in-time priority rule. The lender can obtain information about prior mortgages on the immovable property of the manufacturer by filing a request to the land registrar. The fee for a search is € 30. If the pledgor is not the owner of the premises but instead is a tenant, a conflict can arise between the pledgee and the landlord. The legal privilege of the landlord encumbers all assets that are located in the premises and this is so regardless of their ownership, on condition that the landlord is in good faith (Art. 20, 1° Mortgage Act). This conflict is solved according to the first-in-time priority rule by comparing the date of the registration of the pledge with the beginning of the lease contract (normally: the occupation of the premises by the tenant).20 According to Art. 23 Mortgage Act, the pledgee prevails over the legal privilege of the seller unless the pledgee had knowledge at the time of the pledge that the price was still due. According to case law, the pledgee is deemed to have such knowledge if the unpaid seller of machinery has deposited the sales contract (or the invoice) at the law clerk’s office of the commercial court of the residence of the buyer within 15 days after the delivery of the goods. All third parties can apply for information (supra).

c)

Rights of secured creditor upon sale of the collateral by grantor

aa) Rights in the sold collateral

The pledgee is entitled to enforce its pledge against machines that have been sold to a third party (Art. 11 para. 2). This right to pursue (“droit de suite”) the encumbered assets (“raw material, machinery and equipment”) is limited in time (6 months from the transfer) and rather theoretical. Third parties are protected when they acted in good faith. Good faith is presumed (Art. 2268 Cc). The outcome will depend on the circumstance of the sale: is it a normal business transaction, was the price in line with market value, etc. knowledge of the existence of the pledge will not affect the position of the transferee when the transfer is a genuine business transaction. In principle, third parties are not under an obligation to consult the land registers in order to ascertain the existence of an enterprise pledge. According to case-law, however, such a duty does exist for financial institutions. The courts refuse therefore to protect the buyer/ lessor in the case of a “sale and lease back” of machinery that is covered 19 20

Cass. 26 May 1972, Pas. 1972, I 889. Cass. 11 June 1982, RCJB 1985, 371 note Moreau-Margreve.

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by an enterprise pledge when the buyer/lessor is a financial institution. This holding is based on the reasoning that the buyer/lessor, as a financial institution that is fully familiar with the registration regime, cannot be considered to be in good faith regarding the existence of the enterprise pledge.

bb) Rights in the proceeds of the sold collateral

As long as the purchase price of the subsale is still unpaid, the security right will also encumber the claim against the buyer. The lender may attach the claim in order to prevent payment to the seller. If the purchase price was paid before the opening of insolvency proceedings, the lender will lose, as its proceeds rights do not reach money that has not been mixed with that of Manufacturer’s estate. If the price has not been paid before the opening of insolvency proceedings, the lender will have priority with respect to the claim for the price since mixing of funds with those of the Manufacturer’s estate does not occur when payment is later made to the administrator.

cc)

Rights of secured creditor in replacement collateral

Since the enterprise pledge covers all equipment, however acquired, the security right will encumber all machines, regardless of the time of acquisition, their number or value, so the fact that they may replace original collateral is irrelevant, and the coverage does not depend on the doctrine of real subrogation.

dd) Remedies upon default

The pledgee can exercise its rights against the collateral without the requirement of an executory title. When the debtor defaults, the lender instructs a bailiff to seize the totality of the assets (this does not mean physical seizure, but refers to a judicial act which is noted in a registry at the court21). The purpose of this seizure is to ascertain the existence, and make a list, of the encumbered assets. The next step is the filing for a court order by the president of the commercial court to sell the enterprise as a whole or in parts in order to obtain a preferential payment out of the proceeds. The Commercial Code, which covers all commercial pledges, provides for swift enforcement proceedings: the pledgor is summoned, 21

Art. 1390 Judicial Code.

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the rights of the pledgee are examined in a summary way without the possibility for the court to grant any delay to the pledgor, and an administrator (normally a bailiff) is appointed to sell the enterprise as a whole or in parts (Art. 4-8 Commercial Pledge Act). The sale can be by auction or a private sale. Nonjudicial sale by the creditor is not permitted. Predefault agreements that allow the pledgee to appropriate the assets after default are ineffective (Art. 2078 Cc); however, post-default agreements allowing appropriation are effective.22

ee)

Insolvency of the grantor

The Bankruptcy Act provides for an automatic stay of enforcement by security holders (Art. 26 Bankruptcy Act). In any event, the courts will appoint an administrator of the bankruptcy to liquidate the enterprise and to distribute the proceeds among the pledgee and the other creditors. The pledgee does not have to contribute to the costs of the insolvency proceedings except to the extent that he benefited from them. When disputed, the court must determine the extent and value of any such benefit. Reorganisation proceedings (“concordat”) provide for a general moratorium of creditors during the first six to nine months (“observation period”) (Art. 21 Concordat Act 1997). All enforcement actions by creditors – secured and unsecured – are halted. Once the reorganisation plan is adopted, the position of the unsecured creditors is determined by the plan. The duration of the period of so-called “definitive suspension” cannot be longer than 24 months, with a possible prolongation of 12 months (Art. 34 Concordat Act 1997). The secured creditors, creditors with a specific legal lien, unpaid sellers with a reservation of title and the tax authorities are in principle not affected by the plan, unless they agree to it. When they remain outside the plan, their rights of enforcement are nevertheless suspended for a period of 18 months, on the condition that the plan provides for the payment of current interest (Art. 30 Concordat Act 1997). When this stay causes prejudice to their security or property rights, the court can compensate them with an additional security right.23

22

23

In France Art. 2078 C. civ. was abolished as a result of the 2006 reform (see: Art. 2348 C. civ.). See Dirix/Verougstraete, Belgian Report, in McBryde et.al. (eds.), Principles of European Insolvency Law (2003), p. 114 et seq.

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ff)

Motor vehicles collateral

Motor vehicle collateral is not different legally from other collateral. The registration of motor vehicles is not relevant to the issue of ownership and plays no role in the secured transactions context.

3.

Non-possessory security right in present and future inventory (floating security right)

As has been said before, the enterprise pledge must include all the essential assets of the business. The parties may not limit the collateral to a particular class of assets (supra). The inclusion of inventory, however, is not mandatory, and, if inventory is to be included, it must be expressly provided for in the pledge agreement and mentioned in the borderel summary (and, thus, given special publicity). Furthermore, even in such cases, the security right is limited to 50% of the value of the inventory (Art. 2 of the 1919 Act, supra). If the inventory is included in the agreement, the pledge will encumber the totality of the inventory (up to 50% of its value) without the need for further specification and regardless of its source. The enterprise pledge can secure existing and future, absolute or conditional debts. It is accepted in regard to fungible goods (e.g. inventory), that substitution can take place without endangering the security right or its rank. a) No difference. b) No difference (except that no conflict with a mortgagee can arise and that there is no publicity in regard to the legal privilege of the unpaid seller of inventory). c) The good faith transferee will acquire ownership of the goods free of any encumbrance. d) No difference. e) No difference. f) No difference.

4.

Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third-party secured lender

Manufacturer can choose between (1) buying from a title-retaining seller (Art. 101 Bankruptcy Act 1997), (2) leasing from a financial lessor (Royal Decree of 10 November 1967) and (3) buying from a seller who does not

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retain title but instead relies on its legal privilege on the sold assets (Art. 20, 5° Mortgage Act). A third-party lender that lends money to the Manufacturer to pay the seller cannot obtain a non-possessory purchase-money security right, although he can, by paying off the seller, become subrogated to the ownership24 or legal privilege of the seller. An assignment of claim will have the same result (Art. 1692 Cc).

a)

Documentation and formalities

aa) There are no publicity requirements in regard to retention of title. The only formality is the need for a document stating that the seller is retaining title and that the buyer’s agreement (affirmatively indicated or by acquiescence) is established no later than the moment of delivery. bb) There are no formalities in regard to financial leases. The requirement (Royal Decree of 10 November 1967) that the equipment must be marked with the notice that it is subject to a financial lease has only an administrative nature without impact on the binding effect of the lessor’s rights. cc) The legal privilege of the seller is without formalities. Only in order to protect the seller’s preferential right in conflicts with a mortgagee and a pledgee of the enterprise, the seller of machinery and equipment must deposit the sales contract (or the invoice) at the clerk’s office of the commercial court (supra)

b)

Priority of each credit source v. earlier and later competing claimants and sub-buyers re aa) the initial intangible, bb) proceeds of the initial tangible

aa) The seller under title retention can recover the goods, having priority over all earlier and later security rights (e.g. enterprise pledge). The title-retaining seller’s ownership will prevail against all but a bona fide purchaser and a possessory pledgee who took possession of the goods in good faith (Art. 2279 Cc). As a result of real subrogation the right of the seller will also encumber the claims out of sub-sales (supra). bb) Same answer for financial leasing.

24

For France since the 2006 reform: Art. 2367 C. civ.

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cc) The legal privilege of the seller will prevail against all but a bona fide purchaser, a possessory pledgee that took possession of the goods in good faith and the legal privilege of the landlord who does not have actual knowledge when the goods are brought onto the premises25 that the price is still unpaid (Art. 23 Mortgage Act). (The landlord’s position as bona fide third party is the same vis-à-vis title retention, financial (and operating) lease, seller’s legal privilege and any other owner whose goods are found on the leased premises; it differs only vis-à-vis the enterprise pledge (see above)). Real subrogation will also apply to claims out of subsales.

c)

Remedies

aa) No particular formalities have to be observed. In case the buyer (Manufacturer) refuses to respond to the request for payment or repossession, the seller can obtain a court order to seize the goods (Art. 1463 Judicial Code). The proceedings in order to obtain a court order in such cases are very expeditious. The seller is however not entitled to retain any surplus (infra). bb) Same answer for financial leasing. cc) The seller can seize the goods. The seller will be paid in priority out of the proceeds of the sale.

d)

Insolvency proceedings

aa) After the opening of insolvency proceedings, the seller can recover the goods from the administrator (Art. 101 Bankruptcy Act 1997). There are no formalities to be observed. The only requirement is that the seller declares his title before a specified stage in the proceedings has been reached. The administrator can only oppose the claim of the seller by offering payment of the outstanding balance (Art. 108 Bankruptcy Act 1997). The administrator has also a right of retention for the costs he has expended to preserve the goods. According to the principle that a security right may not procure enrichment to the creditor, it is held by most

25

Cass. 4 December 2003, RW 2004-05, 623 note Storme, available at http://www. cass.be (1 August 2007).

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legal writers that if the value of the goods exceeds the amount of the remaining debt, the seller must pay the surplus value.26 bb) The property rights of the lessor are also upheld in insolvency proceedings. The value of leased object is to be deducted from the totality of the debts of the lessee.27 The lessor is under the obligation to pay the amount by which the value of the property exceeds the amount that is still due from the lessee. Further, it is held by case law that the lessor is not entitled to terminate the contract in case of the bankruptcy of the lessee when the administrator offers the payment of the remaining instalments. cc) The seller has to declare his claim in the proceedings and will receive a priority payment out of the proceeds.

5.

Bona fide acquisition

A third party that buys at normal market price in the ordinary course of business in good faith acquires ownership of the goods free of the enterprise pledge (see following paragraph), the title retained by a seller, the unpaid seller’s privilege and the rights of a financial lessor (Art. 2279 Cc). Even knowledge of the existence of the competing position is likely to be irrelevant, unless there was also indication that the buyer had reason to know that its seller would not pay its secured debt to the competing claimant. The standard may have a different meaning when applied to a buyer that is a professional (e.g., a dealer in used equipment), and an obligation to check the land register exists only for financial institutions (supra). The holder of the enterprise pledge has a droit de suite in case of an unauthorised transfer of “raw material, machinery and equipment” (Art. 11 para. 2 of the 1919 Act). This droit de suite applies only to these types of assets.28 The transferee, however, is protected if he acted in good faith and in the ordinary course so that the sale appears to be a genuine transaction in which the parties were not acting in concert to undermine the security right of the lender. In such cases, the good faith of the buyer

26

27 28

For France: Cass. (France) 5 March 1996, Bull. civ. IV, No. 72; Cass. (France) 23 January 2001, Bull. civ. IV, No. 23. See also: Art. 2371 C. civ. (after the 2006 reform). Cass. 8 November 2002, RW 2003-04, 1459 note Van Oevelen. Cass. 21 October 1999, available at http://www.cass.be (1 August 2007): not to intangibles.

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is accepted and knowledge of the existence of the enterprise pledge is irrelevant.

6.

Possessory pledge – constructive or fictive possession

For a possessory pledge, possession of the collateral by a third person (not the pledgee or its agent) with respect to whom there is an agreement between the parties (Art. 2076 Cc) that such person will serve as pledge holder is sufficient, provided that this person agrees to hold possession of the collateral for the benefit of the pledgee.29 This is actual dispossession of the pledgor. A form of constructive possession might be said to exist under the Warrant Act (supra) in that the possession of the document is considered to be the equivalent of the possession of the goods. Otherwise, Belgium does not recognize constructive or fictive possession.

7.

Over-security

There is no doctrine of over-security under Belgian law. There are other concepts that have potential application in debtor-creditor relations generally, but these are not based on a relationship between the value of the collateral and the amount of the secured obligations. General principles of law such as the doctrine of abuse of rights apply both in the relation between creditor and debtor and in the relation between creditors. There are reported cases about the liability of banks for extending credit.30 There is a growing awareness in political circles against possible abuses by financial institutions,31 particularly in regard to security provided by family members of a debtor.32

29 30 31

32

Cass. 10 July 1941, Pas. 1941, I 295. Simont/Bruyneel, La responsabilité extra-contractuelle du donneur de crédit (1984). See for example the recent proposal by some members of one of the ruling parties for a resolution to be adopted in parliament demanding a parliamentary inquiry on current banking practices (Parl. Doc., Chamber of Representatives, 2006-07, No. 512855/001). Proposal in regard to personal sureties: Parl. Doc., Chamber of Representatives 2006-2007, No. 51-2730/001. See also the proposal to introduce the homestead exemption: Parl. Doc., Chamber of Representatives 2006-2007, No. 51-2873/001.

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Legal (non-consensual) rights of unpaid seller

The unpaid seller is protected by a legal privilege on the sold assets (Art. 20, 5° Mortgage Act). The position of the unpaid seller was changed dramatically by the new Bankruptcy Act 1997 in particular by the recognition of retention of title. In addition, the legal privilege was strengthened. Under the new provisions, the privilege is conferred automatically on any seller (the restriction to equipment is abolished) and without the need to comply with publicity requirements (except for the purpose of ranking in regard to the conflict with mortgagees and pledgees of the enterprise). A peculiar remedy, a relic from ancient customary law, is the rei vindicatio (Art. 20, 5° Mortgage Act) that enables the unpaid seller who was under no obligation to deliver the goods before payment, to reclaim the goods within a period of 8 days after the delivery. The importance of this right in business practice is rather limited.

9.

Special property registries

Belgium has ownership registries only for ships. There exist various other special registries (e.g. for vehicles and aircraft) but with no or doubtful relevance for the determination of the ownership.

a)

Ships

Registered ships can be encumbered by mortgage. The rules regarding the mortgage of ships are similar to those on the mortgage of immovable property (Art. 25-42 Maritime Act).

b)

Aircraft

There is a register for aircraft, pursuant to international treaties (Royal Decree 15 March 1954), but this is an administrative matter, and its effects on ownership are unclear. It is clearly not set up to register security rights. Belgian law contains no specific provisions for security rights on aircraft. A possessory pledge on an aircraft would be very unpractical since it would require that the pledgor lose control over the aircraft. A more feasible way to use the aircraft as collateral is the granting of an enterprise pledge on the company.

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10. Non-possessory security rights in raw materials – effects of processing (commingling, attachment/accession) Security rights in raw materials can be upheld only when the materials are still identifiable in the estate of the buyer and have not been mixed with other goods. Accordingly, the unpaid seller under retention of title will lose his ownership of the materials when the goods have been mixed with other goods of the same species. When all the materials in a commingled batch have been sold by the same seller, most legal writers accept that the seller under reservation of title can reclaim the goods notwithstanding the commingling. If the materials of the same type were supplied by different sellers, it is possible, according to some legal writers, for the sellers to recover the goods jointly. The goods are then distributed among the sellers pro-rata. There are no specific rules or criteria of identification. Whether the object of the security right can be identified must be determined according to common sense. It is not possible to extend contractually the security right of the seller to the goods that are transformed or newly created in a manufacturing process.

11. Cross-border issues The rights in rem are governed by the law of the State on whose territory the asset is located (lex rei sitae) (Art. 87, § 1 Private International Law Code).33 This law also establishes the existence of legal preferences on those assets and their ranking. The validity between the parties of the security right (e.g. pledge agreement, fiduciary transfer) will be governed by the lex contractus. The question of the binding effect of the security right on third parties before a Belgian court will be addressed according to the law of the state where the goods are located (lex rei sitae). This means that a security right created in country A will be recognized in country B only if it is similar to a security right that is recognized under the law of country B or can be translated to an equivalent institution. Accordingly, a retention of title that was validly created under the law of country A will be recognized in Belgium (country B) since Belgian law recognizes such a security device. Its effects will be determined by Belgian law. A “prolonged” retention of title (on claims of sub-sales) created in country A will be recognized to the extent the result would be similar to the outcome under 33

The Code that came into force in 2004 is the result of a joint project of all Belgian law faculties. An English translation of the code can be found at http://www.ipr.be (1 August 2007).

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the principles of real subrogation. On the other hand, a fiduciary transfer, a retention of title that extends to the newly produced goods or to other claims, or a non-possessory pledge on assets located on Belgian territory will be ineffective against competing rights of creditors in a Belgian insolvency proceedings since such types of security rights have no thirdparty effects under Belgian law.

Spain Angel Carrasco I.

General background; structure of national law relating security over tangibles

Security rights in movables as well as upon land are subject to the numerus clausus principle. There is Typenzwang,1 although no statutory rule explicitly says so. Like most continental legal systems, Spanish law divides the field of security rights according to two criteria of classification: security rights in movables/immovables, and possessory/non-possessory security rights. Hereinafter we focus only on security rights in movables.

1.

Assets which may be subject to security: general considerations

Theoretically, all kinds of assets may me subject to security. Spanish law does not differ from other jurisdictions with respect to assets such as land, houses, flats, specific goods and movables in general. The following presentation proceeds to discuss the difficult cases and tries to highlight the peculiarities of Spanish law and practice as to tangible movables. When saying, that as a matter of principle, all assets may be subject to security, it should, however, be borne in mind that due to the characteristics of the registry (as described below, I.4.), and its requirements of asset-description, 90% of the entries are in fact security rights on fully determinable assets (identifiable by number, marks or matriculation devices), only.

1

See L. Diez-Picazo, Fundamentos del Derecho Civil Patrimonial, Vol. II (1978), p. 101-2; N. Bouza, Las Garantías Mobiliarias en el Comercio Internacional (1991), p. 19.

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2.

Assets which may be subject to security: specific security rights

Every item that is not deemed as being real estate may be encumbered with a pledge and an assimilated right (movable mortgage, non-possessory pledge, financial leasing). As to reservation of title, the Ley 26/1998 de Ventas a Plazos de Bienes Muebles (LVPBM)2 renders ineffective reservation clauses concerning assets that are going to be resold or incorporated into land (or: “inventory and assets that become fixtures”). Unlike the estates on land, limited rights on chattels – especially important is the lease on equipment – cannot be encumbered by way of a non-possessory pledge or through a movable mortgage. In my opinion, this prohibition (laid down in Art. 2 Ley de Hipoteca Mobiliaria y Prenda sin Desplazamiento (LHMPSD)3) makes no sense. Generic goods only determined by weigh or measurement may be charged with a non-possessory pledge. Though there is no authoritative decision thereupon and though the extent to which such items can be included in Art. 52 and 53 of LHMPSD is still far from clear, I think there is no barrier to this purpose. In fact, practice knows non-possessory pledges on tons of iron or on cubic meters of stored juice. In favour of the admissability of such security rights one can cite Art. 381 C.c. which upholds the existence of real rights whose object is an ideal share in joint ownership of commingled goods. Future assets may be pledged. Although the efficacy of the right depends on the future acquisition by the pledgor, later established security rights in the same assets are subject to the better ranking of the prior security right. As to the “financial security interest” (security rights upon money/money claims and financial securities, that secure the performance of a duty of cash “settlement” and delivery of financial instruments), this retroactive validity is today recognised by Art. 10 of the Royal Law Decree 5/2005 of 11 March 2005,4 which implements the Financial Collateral Directive.5 The extended retention of title, encompassing the buyer’s claim out of the resale, faces no objection in Spanish Law as a pledge of a claim, because pledges or assignments of future claims are well settled in case law and practice, regardless of any registration requirement.6 But the specification clause in the retention of title cannot be recognised, because 2 3 4 5

6

BOE 14 July 1998. BOE 18 December 1954. BOE 14 March 2005. Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements (OJ 27 June 2002 L 168/43 et seq.). The clearest authority is TS 6 November 2006, Aranzadi Jur. 2006/9246.

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of the registrability requirement imposed on all sorts of non-possessory charges subjecting movable goods. Generally speaking, every kind of security that requires physical delivery or registration, in order to get proprietary, cannot be anticipated by agreement as a proprietary right: the security effect requires that the parties deliver, when the assets come into existence, or register, regardless of the coming into existence. Nevertheless, there is no contradiction to what has been said above on future assets. There are assets like, for example, claims or shares where establishing a security right neither requires delivery nor registration. Also, registered pledges may attach future assets which do not yet exist. As a result, the pledgee already secures for himself a certain rank, even before the assets come into existence.

3.

Enterprises as chargeable assets

Ongoing Businesses may be charged as security by way of a Movable Mortgage. This security right extends to the equipment and inventory and to in-and-out stock-in-trade in the normal course of business. Equipment is also available to be encumbered as part of the mortgaged land, through the so-called “accession clause”. To the extent the debtor keeps the possession of the encumbered equipment, and parties do not agree to charge the whole business, they may create a non-possessory pledge upon them. The goods and stock-in-trade forming part of the commercial inventory may be also charged as a whole with a non-possessory pledge, acting as a “continuous lien” (which means a non-possessory pledge over stored goods in trade and raw material as such, not as a part of the business, Art. 53.2º LHMPSD). Non-possessory pledge is also the easiest way to charge livestock and harvest as a part of an agricultural undertaking. However, this sort of floating charge cannot encumber future equipment of the charged enterprise in advance; and new fixed charges must be created to this purpose.

4.

Parties

Leaving out consumer transactions, there is, as a matter of principle, no difference between legal and natural persons. The only exceptions are Collateral Financial Securities, as regulated in the Royal Law Decree 5/2005, implementing the Financial Collateral Directive. This exceptional body of law is applicable to financial transactions entered into by financial corporations (banks, investment companies and so on) and entrepreneurial corporations, excluding – but for the netting agreements – natu-

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ral persons. Therefore it can be said, that regulated financial institutions are granted a more suitable legal regime for creating and enforcing security interests.

5.

Priority Rules

a)

Super-preferred claims

Outside an Insolvency Proceeding, employees’ salaries, taxes and duties to the Social Security System are super preferred credits, though posterior in time. The creditor can execute against any asset but the superprivileged creditor may intervene in the execution process by way of a “claim from better right” and get the proceeds up to the superprivileged amount with priority. Inside an Insolvency Proceeding, creditors who hold security interests are deemed to have the same priority as a pledgee. The pledge is ranked above any other insolvency creditor up to the price the creditor is able to get by selling the encumbered asset. There are no super-preferred claims in insolvency. Although it might be regarded as inconsistent, to protect superpreferred creditors only outside but not inside insolvency, this decision was taken by the legislator.

b)

General priority rules

Among creditors holding competing registered and possessory security rights, the leading rule is the first in time rule. However, there is an exception regarding the non-possessory pledge. According to the most authoritative scholarly opinion, the LHMPSD deprives the first in time registered pledge of any priority vis-à-vis the later possessory pledgee who acquires its right in good faith, at least when the affected asset is removed from the place, which is stated in the deed of registration as being the location of the asset.7

7

J. Vallet de Goytisolo, Planteamiento y cuestiones generales de la ley de 16 de diciembre de 1954 sobre hipoteca mobiliaria y prenda sin desplazamiento, Rev. der. Not. 8 (1955), 104. The reason for this opinion is that the non-possessory pledge is “stored” through a debtor-based system – not through an asset-based one and that the goods for which this pledge is available are not determined enough as to permit a droit de suite against a third party who takes possession. Lack of confidence in the success of this new security technique might have been another reason. J. Vallet de Goytisolo was the inspirer of the Law.

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Prior security holders upon equipment, machinery and inventory loose priority vis-à-vis a later real mortgagee (who has agreed an extension to fixtures), provided they have omitted to file the security interest also in the Land Registry (Art. 75 LHMPSD).

II.

Security devices denominated as such

1.

Possessory devices

Pledge is the classical form of possessory right in movable goods (Art. 1863 C.c. et seq.; Art. 12 et seq. of the Catalonian Act 19/2002 on Security Rights). Non-possessory (and not-registered) pledge of movables is today only accepted as a way to encumber receivables and intangible rights.

2.

Non-possessory devices

From 1954 onwards, Spanish Law broadened the classical security right framework in order to enable the debtor to grant security rights in movables without relinquishing possession of the charged goods, because, regularly possession is necessary for the debtor to earn the revenue which he needs to discharge the debt. Entry in Public Registries (since 1998, the Movable Goods Registry) has been the substitute for possession for this type of goods. Depending on the nature of the encumbered goods, non possessory pledge and mortgage over movables are the allowed forms of non possessory right security in movables.8 The rules governing these two kinds of registered security rights are slightly different, as we will see later, but the underlying principles and rules of operation follow the same logic.

III. Title-based security devices 1.

Reservation of title

Up to now it remains still dubious whether reservation of title, which is statutorily regulated since 1956 by the Instalment Sales Law (LVPBM 1956, abrogated by the LVPBM 1998), is a security device or simply retained full ownership. Furthermore, it is also under discussion whether 8

For an overview see A. Carrasco/E. Cordero/M. Marín, Tratado de los derechos de garantía (2002), p. 727 et seq.

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Spanish Law recognises some third party effect to retention of title on movable goods when the right is not registered in the Movable Goods Registry (see below, para. IV.1.). The new Bankruptcy Act 2003 (“Ley Concursal (LC)”)9 and the implementation of Art. 4 of the Directive 35/2000/EC on combating late payment in commercial transactions10 through the Act 3/2004 of 29 December 2004,11 have not solved these questions but rather added more confusion to the past obscurities.

2.

Security ownership

Security ownership is a security device commonly used in Spain for financial transactions, both commercial and private (consumer). However, the body of case law relating to security ownership is still inconclusive as to the effect of this contract and the rights which the security owner has in case of the debtor´s default. This is especially paradoxical when traditionally the Common, as well as the Catalan and the Navarre civil legislation, upheld the validity of the contract of sale to which the parties add a clause of sale-back. The distinction between security transfers and saleand-resale contracts has become one of the most obscure fields of private law,12 and has given rise to contradictory judicial statements.13

3.

Lease back

In accordance with the existing ambiguities, also the lease back contract is still a figure immersed in doubts. If we ought to give now a conclusive answer as to the question of validity of this security transaction, Spanish case law condemned this security transaction as an ineffective device of transferring ownership from the owner (debtor) to the creditor.14 However, the recent Supreme Court Judgement of 2 February 200615 seems to be a definitive recognition of the validity of the lease-back transaction. 19

10 11 12 13

14

15

BOE 10 July 2003. See A. Carrasco, in R. Bercovitz (ed.), Comentarios a la Ley Concursal (2004), p. 586 et seq. OJ 8 August 2000, L 200/35 et seq. BOE 30 December 2004. See A. Carrasco, Los derechos de garantía en la Ley Concursal (2004), p. 204-205. For references see A. Carrasco, Los derechos de garantía en la Ley Concursal (2004), p. 204 and R. Rosado, Fiducia y pacto de retro en garantía (1998), especially p. 148 et seq. TS 10 February 2005, No. de Recurso 3559/1998, available at http://www.poderjudi cial.es/jurisprudencia (1 August 2007). Aranzadi Jur. 2006/494.

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Trust

Spanish Law neither recognises nor uses trust as security device. Security ownership by way of fiducia is the nearest approximation to the trust available in transactions subject to Spanish Law. Doubts casting upon the security transfer are applicable to the trust.

IV. Existing Registries 1.

Kinds of Registries for Tangible Movables

Currently, Spanish Law has two different kinds of registries. The first is the Mercantile Registry (as regulated by the Decree of 14 December 195616) in which transfers of ownership and mortgages (as well as other legal privileges) on ships and aircrafts are to be registered. The second is the Movable Goods Registry (as regulated in a recent Regulation of 19 July 199817). It is reserved for movable mortgages on movable assets in general, copyrights, vehicles and other transportation devices aircrafts18 and enterprises. The Movable Goods Registry also covers nonpossessory pledges upon machinery, cattle, raw material and stock-intrade. Also, reservation of title clauses relating to movables ought to be registered in this Registry. Registration of financial leasing is optional for the creditor. Securities over company shares and receivables do not have access to the Registry, unless the attached item is to be deemed as a financial security in the sense of Art. 2 of the Security Market Law of 28 July1988.19 In this case, transfers and security transactions should be entered into the private financial book-accounts held by an intermediary institution (intermediated securities in the sense of the Hague Convention of 5 July 2006 on the Law Applicable to Certain Rights in respect of Securities held with an Intermediary).

16 17 18

19

BOE 7 March 1957. BOE 20 July 1999. The registration of aircrafts is regulated in two ways. Ownership, limited rights and liens are to be registered in the Mercantile Registry. But movable mortgages have to be registered in the Movable Goods Registry before they can be registered in the Mercantile Registry. BOE 29 July 1988.

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2.

Depossession and Registration requirements

Looking into the classical kinds of security rights regulated in the Civil Code (possessory pledge and mortgage), Spanish Law must be counted among those legal systems that impose strict publicity requirements for security rights in rem being able to affect third parties. Pledge requires both transfer of possession (Art. 1863 C.c.) and public notary deed (Art. 1865 C.c.). There is neither case law nor scholarly construction trying to “weaken” this requirement by allowing some spiritualised forms of delivery (like the constitutum possessorium). This feature of the Spanish legal system has been confirmed during the 20th century by the regulation of Non-Possessory Pledge and Mortgage on Movables. In both cases, the law requires registration in the Movable Goods Registry. This homogeneous legal picture shifts into the more confused and partly illogical current situation, if we regard the lack of publicity requirements for the pledge of receivables, reservation of title and leasing.

a)

Pledge of receivables

The encumbrance of receivables by way of pledge does not require any additional step for being perfected; the contract itself suffices thereto. Although the Spanish Civil Code does not contain any special provision referring to this sort of pledge (unless, marginally, in Art. 1868 C.c.), scholars and courts – since 199720 – unanimously agree on the possibility for debtor and creditor to assign as security receivables or claims that the latter holds against a third party (which may be a private or public body).21 The contract as such is regarded as sufficient. Like the assignment of receivables, the pledge of receivables may be brought about solo consensu. Nonetheless, the Supreme Court Judgement of 19 April 199722 left the question open as to whether the opposability vis-à-vis third parties requires notification of the account debtor. The Civil Code does not

20

21

22

TS 19 April 1997, Aranzadi Jur. 1997/3429; TS 7 October 1997, Aranzadi Jur. 1997/7101; TS 13 November 1999, Aranzadi Jur. 1999/9046 and the note of C. A. Martin, CCJCiv. 53 (2000) § 1437; TS 12 December 2002, Aranzadi Jur. 2003/305. As for the assignment of claims against the Public Administration, see Art. 100 of the Public Contracts Act, as amended by the Act 44/2002 (Financial System Reform Act). Aranzadi Jur. 1997/3429. See comments by J. M. Finez, CCJCiv. 45 (1997) § 1210; F. Pantaleón, La Ley 1997-6, 1460 et seq. and J. M. Fugardo, CDC 25 (1998), 265 et seq.

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contain any provision to that effect. However, the analogy with Art. 1527 C.c.23 suggests that the only consequence of a lack of notification is that the bona fide third debtor who pays the chargor, is freed from the debt.24 Article 90.6º LC25 supports this solution by giving the creditor a privileged rank in the liquidation regardless of whether the pledge on claims satisfies any form of publicity. Several professional and corporate associations have for some years tried to have the pledge of claims and intangible movables in general submitted to the registration system. The recent enactment of the Bankruptcy Law proves the failure of this attempt. In connection to these last remarks, it should be emphasised that the transfer of property by way of security and the granting of pledges on financial instruments and securities,26 in the framework of inter-bank settlement systems or in netting agreements, are effective regardless of any formality, apart from registration in the book entry securities´ registries created by the Securities Market Act of 28 July 1988. These sorts of pledges can be created by written (but not publicly authenticated) contracts or by unilateral statement made by the grantor, including electronic devices.27 This regime has been recently extended to guarantees settled before the Bank of Spain, the European Central Bank and other national EU central banks.28 Recently, the Royal Law Decree 5/2005, implementing the Directive 47/2002, confers the Financial Collateral Agreements the privilege of being effective against third parties “without any other requirement for their perfection, validity, efficacy as to third 23

24

25 26

27

28

This provision refers to the full assignment of receivables and states that the debtor becomes liberated when he pays to the original creditor, if it does not get any notice of the transfer. Recent scholar contributions agree thereon. See F. Pantaleón, Cesión de Créditos, An. der. civ. 1988, 1044, at 1065; J. M. Fínez, Garantías Sobre cuentas y depósitos bancarios, La prenda de créditos (1994), p. 159, at p. 162; M. Peña, Derechos Reales, Vol. II (1999), p. 70; A. Carrasco/E. Cordero/M. Marín, Tratado de los Derechos de Garantía (2002), p. 875. BOE 10 July 2003. And whatever sort of security right, such as deposit accounts, lien, “repos”, seizure right, “and other transaction that attaches to any realizable asset, including cash” (Art. 7 Financial System Reform Act 44/2002). Securities Market Reform Act 37/1998 (Additional Provisions 6ª and 10ª, as amended by the Financial System Reform Act 44/2002, in compliance of the Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements (OJ 27 June 2002 L 168/43 et seq.); Settlement Finality in Payment and Securities Settlement System Act 14/1999. Bank of Spain Autonomy Act 13/1994, as amended by Art. 7 of the Financial System Reform Act 44/2002.

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parties, enforcement or means of evidence”. Beyond these legal institutions, pledges and charges on securities and financial instruments held in private financial accounts are subject to the registration system created by the Securities Market Act 1988. However, the filing in private financial book accounts held by financial intermediaries does not confer sufficient publicity.

b)

Movable mortgages/Non-possessory pledges

Non-possessory pledge on tangible goods requires registration in the Movable Rights Registry. As already said, there are two sorts of nonpossessory contractual charges regulated in this Act (LHMPSD). The mortgage on movables is the non-possessory charge that can be created upon aircrafts, machinery, vehicles, enterprises, copyrights, patents and trademarks. The public deed is a condition for the transaction’s validity, also among the parties to the contract; registration is only an opposability requirement with regard to third parties.29 Every clause laid down in the contract has to be recorded in the file, provided that it may have effects towards third parties. The contract must be embodied in public (notary) deed. By way of agreement, the non-possessory pledge can attach other movable assets excluded from the movable mortgage, provided that they are identifiable.30 This pledge has limited effects; presumably (the question remains undecided) the charge is not opposable to bona fide purchasers, and does not hinder the acquisition of priority rights by subsequent creditors who acquire possessory pledges upon the charged property.31 Neither mortgages nor pledges confer priority against prior creditors who have taken possession as pledgee or seized the assets in a judicial enforcement procedure. Purchase money creditor, even unregistered, also prevails against the secured finance creditors. In the discussions held during the reform of Spanish Bankruptcy Law (enacted July 2003) it has been (unsuccessfully) proposed to submit the pledge on receivables to the rules of the Mortgage on Movables and NonPossessory Pledge Act, as requirement for getting prior rank among other creditors. There is a widespread opinion that held inefficient and unfair granting priority to charges that lack any publicity device. However, 29

30 31

However, this question is not unanimously resolved. See references in N. Bouza, Garantías Mobiliarias en el Comercio Internacional (1991), p. 32. There is no legal definition of the word “identifiability”. See J. Vallet de Goytisolo, Planteamiento y cuestiones generales de la Ley de 16 de diciembre de 1954 sobre hipoteca mobiliaria y prenda sin desplazamiento de posesión, Rev. der. Not. 8 (1955), p. 96 et seq; A. Carrasco/E Cordero/M. Marín, Tratado de los derechos de Garantía (2002), p. 958.

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others believe that the foreseen costs caused by filing in the Public Registry must be higher than the benefits arising out of an increase in publicity.

c)

Reservation of title

Reservation of title lacks any validity in rem (against third parties) if not registered, according to the LVPBM.32 It is doubtful whether this registration requirement likewise impairs the validity as regards the contractual parties.33 Pursuant to the Supreme Court Judgement of 22 June 1992,34 lack of registration doest not hinder inter partes the validity of the reservation, but impedes efficacy as regards third creditors and subsequent purchasers. In other words, registration becomes inter partes a lex contractus subject matter, and, as regards third parties, a lex rei sitae issue.35 It seems to be the most plausible opinion.36 The current Movable Rights Registry is the merger of the former Registry of Mobile Reservation of Title and the historical Registry of the Mortgage on Movables and Pledges. Finally, registration requires the contract to conform to the official model published or approved by the General Directorate of the Registry. The LVPBM only covers identifiable and non-consumable goods. Neither claims nor commingled, nor future or non-identifiable goods, may be subject to retention of title regulated by this Act. Goods acquired for resale are also excluded. Since 1965 (the date on which the first Instalment Sale Act was enacted) that situation has brought about a lot of confusion and dispute, because some economically important goods and assets were not covered by the Act, and the legal rules did not afford any clear answer to the question as to whether parties in a contract of sale could create a retention of title, that would be valid and grant them priority as against third creditors, if the asset in question was not covered 32

33

34 35 36

As to whether the buyer in bad faith is also protected against the not registered reservation of title, see, with contrary opinions, R. Bercovitz, Comentarios a la Ley de Ventas a Plazos de Bienes Muebles (1977), p. 276 and S. Sánchez, Garantías Reales en el Comercio Internacional (1993), p. 124. According to the opinion sustained by R. Bercovitz interpreting the old Instalment Act of 1965 (Comentarios a la Ley de Ventas a Plazos de Bienes Muebles (1977), p. 172-173). In the recent doctrine, M. Peña, Derechos reales, derecho hipotecario, Vol. 2 (4th edn. 2001), p. 397. Aranzadi Jur. 1992/5459. See S. Sánchez, Garantías Reales en el Comercio Internacional (1993), p. 79. See the clear challenge in this sense in TS 23 October 1991, Aranzadi Jur. 1991/7235.

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by the Act and thus the retention of title could not be registered. This confusion was deepened by a discontinuous, contradictory, and up to now not completely abandoned, chain of court decisions, that grant full validity to not registered retention of title clauses, provided these are settled in contracts whose date were certain as to third parties.37 Surprisingly, the recent Act to implement the Late Payment Directive into Spanish law (Act 3/2004 of 29 December 200438) has changed this situation and now enables creditors and debtors to agree on reservation of title with respect to goods which are not subject to the Instalment Sales Act, making them free of any registration requirements.39 However, this kind of informal reservation of title has only effect among the contracting parties. It is easy to discover the profound absurdity of such a rule. The Instalment Sales Act does not provide for any regulation of the transfer of risk, and the best solution continues to be that the risk passes with the delivery of the goods, whether this occurs before or after registration of the retention of title.

d)

Financial leasing

Registration of leasing in movables is optional for the lessor. But in this latter case the question is still under discussion as to whether the nonregistered lease enjoys efficacy against a third registered or unregistered party. The answer would probably be negative as regard third acquirers in good faith. To the contrary, there is a large body of judicial decisions that grant the lessor the right to take the good out of the individual or collective creditor’s enforcement procedure.40 Nevertheless the position 37

38 39

40

See TS 10 June 1958, Aranzadi Jur. 1958/2142, TS 26 March 1984, Aranzadi Jur. 1984/1434. The opposite doctrine in TS 24 November 1970, Aranzadi Jur. 1970/543, TS 22 June 1982, Aranzadi Jur. 1982/3436, TS 20 June 1983, Aranzadi Jur. 1983/3635. See for a summary of this debate in German E.-M. Kieninger, Der Eigentumsvorbehalt im Wirtschaftsverkehr mit Spanien nach der Novellierung des spanischen Abzahlungsgesetzes, RIW 1994, 287 et seq. BOE 30 December 2004. But “offsetting” this advantage with the new burden of these clauses being incorporated in notarial deeds. See TS 18 November 1983, Aranzadi Jur. 1983/6487; TS 26 Februar 2000, Aranzadi Jur. 2000/1019; TS 28 May 2001, Aranzadi Jur. 2001/3873. Likewise in the scholar literature F. Blasco, Las ventas a plazos de bienes muebles (2000), p. 43; M. A. Parra, CCJCiv. 46 (1998), § 1260; J. Alfaro, Leasing, in A. M. Melgar (ed.), Enciclopedia Jurídica Básica Civitas, Vol. III (1995), p. 3920; criticising this trend R. Bercovitz, El Pacto de reserva de Dominio y la Función de Garantía del Leasing Financi-

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and privileges of the lessor are far from clear, because Courts continually “check” the leasing contracts in order to decide whether “untrue” leasing “disguises” a true security interest and, therefore, must be subject to the requirements laid down in the Instalment Sale Act (LVPBM). It is also quite controversial under which circumstances a judge can legitimately rule that a leasing contract circumvents the requirements for a secured transaction strictly speaking.41

3.

Characteristics of the Registries

Every registry existing in Spanish Law is a documentfiling registry. There are very complete and burdensome deeds of registration (in case of movable mortgage and real right on ships) and slightly lighter requirements for the reservation of title and financial leasing transactions. Deeds of registration – but for reservation of title and financial leasing, which may adopt simple written form, provided that the form of the contract conforms with that approved by the General Directorate of Registries – must be documented by a notary. Registration of a movable mortgage or a non-possessory pledge requires that every clause laid down in the contract has to be recorded in the file, in order to have effects against third parties. As to the description of assets, it may be said that the registration system in Spain is mainly limited (90% of the entries) on fully determinable assets, identified by number, marks or matriculation devices. The pledge on inventory and goods in trade is scarcely practised, due to the monitoring cost borne by creditors, the limited scope of protection for the creditors42 and the difficulty to trace the encumbered goods in case of enforcement or insolvency. In this kind of pledges, goods are described by identification of the warehouse or site in which the goods should be deposited. Future and global description (all assets clause) are forbidden in Spanish Law, but for inventory, raw material and stock-in-trade. Art. 22

41

42

ero, in U. Nieto/M. Munoz (eds.) Tratado de Garantías en la Contratación Mercantil, Vol. II (1996), p. 377 et seq. and M. Ureña, Tercería de Dominio y Tercerías de Mejor Derecho en el Contrato de Leasing (2001), p. 56. As instances of the confusing method of deciding the cases, see TS 28 May 1990, Aranzadi Jur. 1990/4092, TS 21 November 1998, Aranzadi Jur. 1998/8750, TS 29 May 1999, Aranzadi Jur. 1999/4383, TS 29 May 2001, Aranzadi Jur. 2001/3874. This pledge has limited effects; presumably (the question remains undecided) the charge is not opposable to bonae fidei purchasers, and does not hinder the acquisition of priority rights by subsequent creditors who acquire possessory pledges upon the charged property.

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Angel Carrasco

LHMPSD states that the mortgage on ongoing business embraces intellectual property rights, equipment, furniture, tools and any other “instrument” of production or working, and, as stock-in-trade, the present and future goods for reselling . Other difficulties remain. In my opinion, there is no objection to create a non-possessory pledge upon a quantity of commingled goods, on the basis of Art. 52.2 LHMPSD, although no authoritative decision can be afforded thereon. Unregistrable pledges and security rights in movables are normally subject to a so called omnibus (all sums) clause. This is today expressly permitted in Catalan Law, provided the parties agree on an maximum amount. However, as to the registrable security rights on movables, (basically, movable mortgage) it rules the (developed by the General Directorate of the Registries in the field of the real mortgage) principle according to which omnibus clauses are not authorized. Spanish commercial practice has not followed the German example to allow the creditor to use the reservation clause to cover claims other than the purchase claim. “Extended reservation of title” is known in academic circles/literature, but unknown in daily financial practice and not yet discussed before courts. However, bearing in mind that in Spanish statutory law, the reservation of title is regarded as a kind of undisclosed pledge, there should not be any objection to extend the scope of the reservation of title so as to cover non-purchase claims. As to the searching devices, there is electronic access for searching in the Movable Goods Registry, though still limited to motor vehicles. The searcher has to know the license plate or chassis number. Cost for searching ranges between € 6 and € 9. There is no electronic filing up to now unless for motor vehicles, but steps are taken to enlarge the scope of electronic filing. The electronic net is run by the Colegio de Registradores de la Propiedad y Mercantiles,43 and it is foreseen that in the imminent future it will cover any registrable items and concerned persons (debtors, guarantors). The question, how searching is to be organised if it cannot be done by number plate or chassis number, is still undecided. For the remainder of items and rights, the electronic filing requires the electronic signature of a public notary. The time to file does not exceed five days. Unlike under the UCC system, everyone may have access to the whole body of clauses and conditions of the registered contract. The purpose is to spare third parties the search for more information outside the Registry. 43

Through a publicly accessible website at http://www.registradores.org (1 August 2007).