Discussions

has already been mentioned in the context of products1 and all-money clauses.2 Here, the foundations will be more fully explained.3

§ 930 BGB allows the parties to transfer ownership without actual delivery. A contract by which the transferor agrees to possess the collateral on behalf of the transferee (constitutum possessorium, § 868 BGB)4 is substituted for actual delivery. It is contained in the so-called Sicherungsvertrag (security agreement) which also represents the contractual basis of the transfer.5 The contract will usually also specify the conditions under which the transferee (A) may realise the security, by taking possession of the collateral and selling it. In general, the statutory rules on the realisation of a pledge do not apply.6 Security transfer of ownership and the underlying agreement contain elements of a fiduciary relationship.7 The transfer gives the creditor more rights than are justified for the purpose of obtaining security in case of non-payment. The rights which extend beyond what is necessary for this purpose are held by the creditor in a fiduciary capacity. One consequence is that the creditor, although formally the owner, can only take possession of the collateral if the debtor is in default of payment. If, however, the debtor fails to pay, the security owner is entitled to take possession of and to sell the collateral to realise its value.8 Usually, the amount of the debt will be higher than the value of the collateral. If, however, it turns out that the value of the collateral taken by the creditor exceeds the outstanding debt, the creditor is obliged to return to the debtor those goods which are not needed to cover the debt. A creditor who fails to do so becomes liable for damages.9

If the parties have concluded an agreement for security transfer of ownership and if, subsequently, a creditor of B executes against the cars, A can bring an action in court resisting the execution (§ 771 ZPO).10 Upon such an action, the execution will be stopped and set aside. In the event

7Reinicke/Tiedtke, Kreditsicherung nn. 449 f.; Bülow, Recht der Kreditsicherheiten n. 932; see further Gernhuber, JuS 1988, 355.

10See BGH 4 Feb. 1954, BGHZ 12, 232 (234); BGH 28 Feb. 1978, BGHZ 72, 141 (143); BGH 13 Feb. 1981, BGHZ 80, 296 (299); BGH 25 Feb. 1987, WM 1987, 539 (541); BGH 12 May 1992, BGHZ 118, 201 (207); Jauernig, Zwangsvollstreckungsund Insolvenzrecht § 13 IV 1 a; Stein/Jonas/Münzberg § 771 ZPO n. 26; Bülow, Recht der Kreditsicherheiten n. 1085. Some authors contend, however, that the security owner can only exercise the rights of a

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of B’s insolvency, A has the same rights as a pledgee, which means that he can claim preferential payment out of the realisation of the collateral (§§ 50 s. 1, 51 n. 1, 166 ff. InsO11). In both situations, A thus takes priority over B’s general creditors.

It is necessary to consider some of the general principles of property law that might be invoked against the validity of the security transfer of ownership:

(i) Principle of publicity

The only security right in movable property that the BGB explicitly provides for is the possessory pledge (§§ 1204 ff. BGB). Yet, prior to the introduction of the BGB, the Reichsgericht had already accepted as valid the transfer of ownership for the sole purpose of creating a security right for the transferor. In a decision of 2 June 1890,12 the Reichsgericht spoke of security transfer of ownership as being an established institution according to ‘predominant opinion and long-standing jurisdiction’. This did not change on the entering into force of the BGB13 although, in essence, security transfer of ownership amounts to a non-possessory pledge, and thus circumvents § 1205 BGB, which requires, for the creation of a pledge in movables, the pledgee to take possession of the collateral. From the travaux préparatoires it is apparent that §§ 1205 ff. BGB were not intended to put an end to previously established practice.14 The reason why the courts and the legislature accepted the praeter legem lies in the acute economic need for secured credit and hence, for the use of movables as collateral, in circumstances where it would not be practicable for them to be handed over to the creditor.15 Today, the validity of security ownership and security assignment is completely without doubt and is sometimes even referred to as customary law (Gewohnheitsrecht).16

pledgee (§ 805 ZPO), which means he cannot resist the execution, but only claim preferential payment out of the proceeds, see: Baumbach/Lauterbach/Hartmann § 771 ZPO n. 26; Münchener Kommentar/Schmidt § 771 ZPO n. 29. As to § 771 ZPO in general, see supra, German report, case 2.

11This is now expressly stated in § 51 n. 1 InsO. Under the old Insolvency Code (KO), this was judge-made law: see RG 9 Apr. 1929, RGZ 124, 73 (75); BGH 24 Oct. 1979, ZIP 1980, 40 (42). As to the procedure, see also supra, German report, case 7(d).

14Cf. Gaul, AcP 168 (1968) 351 (357 ff. with further references).

15Ibid. (359 with further references).

16Baur/Stürner, Sachenrecht § 57 n. 1; Serick, Eigentumsvorbehalt und Sicherungsübertragung

25--26.

However, the Commission for the Reform of Insolvency Law suggested in its first report that the rights of creditors with non-possessory security rights such as security ownership should be curtailed.17 Some scholars have also expressed concerns about the fact that the security transfer is in no way apparent to other creditors.18 Yet, these proposals and criticisms have led only to marginal alterations19 and it seems unlikely that any significant changes will be made in the near future.

(ii) Prohibition of forfeiture clauses (pactum commissorium)

According to the rules governing the pledge of movables, the parties cannot agree prior to the debtor’s default that the secured creditor should obtain unrestricted ownership of the movable (see § 1229 BGB). This rule is not regarded as a statutory prohibition of security ownership, which nota bene restricts the rights of secured parties through its fiduciary character. However, clauses which derogate from the fiduciary constraints imposed and provide that the secured creditor should obtain unrestricted ownership of the collateral are widely regarded as invalid, at least if they are contained in the general conditions of the seller.20

(iii) Unconscionability

Until recently, the courts have frequently considered security ownership (especially of stock-in-trade), or global security assignments, as invalid if the security agreement did not contain a properly framed waiver when the realisable value of the collateral exceeded the outstanding debt, or the credit line, to a considerable extent.21 The decisions were based

17Bundesministerium der Justiz, Erster Bericht der Kommission für Insolvenzrecht 298. These suggestions were heavily criticised: see Serick, Eigentumsvorbehalt und Sicherungsübertragung: Band IV, 846 ff.; Serick, BB 1990, 861 ff.; Dorndorf/Frank, ZIP 1985, 65 (79).

18Drobnig, Gutachten F zum 51. Deutschen Juristentag F 35; see also Baur/Stürner, Sachenrecht

§ 57 n. 35.

19Under the old Insolvency Code (Konkursordnung), security owners were able to realise their rights outside of the insolvency proceedings. Now, such creditors must at least wait until the report meeting. Also, under the new law, secured creditors must bear the costs of assessing and realising their rights: see supra, German report, case 6(b).

20Cf. Reinicke/Tiedtke, Kreditsicherung nn. 530 ff. Others regard such clauses to be invalid by an analogous application of § 1229 BGB: see Staudinger/Wiegand, Anhang zu

§§ 929--931 BGB n. 234.

21See further infra, German report, case 11(d); cf. from a German--Italian comparative perspective, also Greving, Der Treuhandgedanke bei Sicherungsübertragungen im italienischen und deutschen Recht 83 ff.

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on § 307 BGB22 and the principle that the court will not restrict the operation of an unconscionable clause to its valid extent (§ 306 BGB23). In 1997, this jurisdiction was changed fundamentally by a decision of the BGH.24 Today, an appropriate waiver is implied into the security agreement.25

(b)Under a sale and lease-back agreement, A would have the rights of a full owner. In B’s insolvency, A would be entitled to vindicate the cars (§ 47 InsO).26 This right presupposes that the leasing contract has been terminated, in order to put an end to B’s entitlement to possess the cars.27 Prior to the commencement of insolvency proceedings, A would be entitled to terminate the contract if B defaulted in the payment of the leasing rates;28 after the commencement, this right rests with the insolvency administrator.29 If the cars are executed against on behalf of B’s creditors, A can resist the execution (§ 771 ZPO).30

Although a sale and lease-back agreement would provide A with a better right in B’s insolvency (a rei vindicatio instead of a right to preferential payment), security transfer of ownership is much more commonly used in circumstances where the provision of security is the sole purpose of the transaction.

(c)Security transfer of ownership can be used in respect of any corporeal movables. For special rules as to revolving stock-in-trade, see infra, case 11.

22§ 307 BGB (prior to 1 Jan. 2002: § 9 AGBG) transposes article 3 n. 1 of the Directive 93/13/EEC of 5 Apr. 1993 on unfair contract terms in consumer contracts (O.J. No L 95/29 of 21 Apr. 1993) into German law.

23Prior to 1 Jan. 2002: § 6 AGBG.

24BGH (Großer Zivilsenat) 27 Nov. 1997, NJW 1998, 671 = BGHZ 137, 212.

25See infra, German report, case 11(d).

26Martinek, Moderne Vertragstypen I 215 f.; Leible, Finanzierungsleasing und ‘ar rendamiento financiero’ 195 with further references.

27BGH 5 Apr. 1978, WM 1978, 510; BGH 24 Nov. 1993, BB 1994, 239.

28If an application for the commencement of insolvency proceedings has already been made, the lessor can only terminate the contract if the lessee has not been in default of payment prior to this application (§ 112 n. 1 InsO).

29See § 103 InsO. Other than in the case of retention of title (see § 107 InsO and supra, German report, case 3), the administrator is not entitled to postpone his decision until after the report meeting: see von Westphalen, Der Leasingvertrag n. 1533.

30General opinion, cf. Leible, Finanzierungsleasing und ‘ar rendamiento financiero’ 193; Martinek, Moderne Vertragstypen 215; von Westphalen, Der Leasingvertrag n. 1451.

(d) If the parties have agreed upon a security transfer of ownership, B will still have a right to vindicate the cars if A becomes insolvent,31 provided that B pays back the loan.32 This is one of the consequences of the fiduciary nature of A’s position.33 Rather than being the full owner, he has only a security right.

a u s t r i a

(a)B’s car fleet, which he already owns, cannot be used as collateral for a bank loan. Due to the publicity requirement, the cars would have to be handed over to A. This, however, is impracticable, because B would be unable to make use of them.

The only way for A to obtain a ius ad rem in the cars would be to grant B a loan, which would be used by B to purchase the cars. If the contract between a third-party seller and the buyer (B) contained a reservation of title clause, and A paid the seller the credit sum as payment for the cars, then the seller’s claim arising from the contract of sale could be assigned to A. In such a case, it would be open to A and the seller to agree that title to the cars would pass to A, provided that B is instructed by the seller to hold the cars on behalf of A. This type of transaction is very common in Austria, because retention of title is the only security in respect of which the publicity requirement does not apply.

(b)A sale and lease-back arrangement is not a feasible alternative, because, in such a situation, it would be classified as being a credit transaction and the publicity requirement would thus apply.

Note, however, that there are no decisions of the OGH34 where the Court lays down criteria as to the classification of sale and lease-back contracts. In a paper on this problem, Czermak35 proposes a solution to

31RG 5 Nov. 1918, RGZ 94, 305 (307); Reinicke/Tiedtke, Kreditsicherung n. 588; Baur/Stürner, Sachenrecht § 57 n. 39; Serick, Eigentumsvorbehalt und Sicherungsübertragung III § 35 II 2 a; Bülow, Recht der Kreditsicherheiten n. 1067.

32If B does not pay, he can claim only the difference between the proceeds and the remaining debt: see Reinicke/Tiedtke, Kreditsicherung nn. 588 f.

33Bülow, Recht der Kreditsicherheiten n. 1067.

34There is one decision, however (22 Mar. 1988, 6 Ob 575/86; MietSlg 40.105), in which the OGH holds that the publicity requirement does not apply to sale and lease-back contracts. Given the fact that the Court was obviously unaware of Czermak’s paper, it is doubtful whether the decision, which does not consider the classification problem, will be upheld if the OGH is asked to decide a similar case.

35ÖBA 1987, 232--249; cf. Schwimann/Binder § 1090 n. 60.

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it. She distinguishes between two situations, depending on whether the total amount the lessee has to pay corresponds to the price paid for the cars plus the financing cost plus the net profit of the lessor (situation (a)) or not (situation (b)). In situation (a), she argues that the contract should be classified as a credit transaction if ownership of the goods reverts to the lessee at the end of the contract or if he has a right to buy at a price which does not reflect adequately the value of the goods at that time. In situation (b), she argues that the contract should be classified as a credit transaction if ownership of the goods reverts to the lessee at the end of the contract or if he has a right to buy them back from the lessor at all. If the lessor has the option of reselling the cars to the lessee if he wishes, Czermak does not classify the contract as a credit transaction.

(c)The answer is limited to objects that can be handed over in corpore to the creditor. For other objects, see case 11.

(d)As a consequence of what has been said under parts (a) and (b), this question cannot be answered.

g r e e c e

(a)The following possibilities might be considered by the parties.

(i)The parties could stipulate a security transfer of ownership of the cars to A. Security ownership is not regulated by law. It has developed in practice to serve commercial needs. In view of the disadvantages of the possessory pledge, which, in order to be validly constituted, requires corporeal delivery of the movable by the owner, B would, under security ownership, be able to transfer ownership of the cars to A under a constitutum possessorium (articles 1034, 977 A.K.).

The validity of security ownership has been disputed in Greek law.36 As to the question whether security ownership circumvents article 1213 A.K., which prohibits the constitution of a pledge through a constitutum possessorium, the prevailing view37 suggests that the

36See in general Georgiadis, EEmbD 1973, 301; Mazis, NoV 27, 311; Bosdas, ArchN 1975, 313; Spyridakis, Comments, NoV 24, 639 and NoV 33, 242; Vouzikas, EEN 18, 657.

37Ef of Aegean Sea 113/1974 Arm 28, 550; Ef of Athens 6395/1976 NoV 25, 406; Ef of Athens 236/1976 NoV 24, 638; Georgiadis, Empragmato Dikaio II 231; Balis, Empragmaton Dikaion para. 200; Kornilakis, I katapisteutiki ekchorisi ton apaitiseon 73. Contra Ef of Patras 76/1949 Them 61, 310; Ef of Patras 74/1950 Them 61, 995; K. Simitis, I anamorphosis tou plasmatikou enechyrou 44. See also Doris, in: Empragmati Asphaleia 114 ff.

principle of the freedom of contract supports the validity of security ownership. Greek scholars have also considered the problem of whether the securing of a claim is a valid cause for the transfer of ownership. According to the prevailing view38 it is not, consequently security ownership of an immovable is invalid. However, according to this view,39 security ownership of a movable should be considered as valid, because of its abstract character. A third opinion40 suggests that the agreement creating an obligation to transfer ownership for security purposes should be considered a iusta causa of the transfer, therefore security transfer of ownership of a movable is valid. For the valid constitution of security ownership no form or publicity is required. However, the parties have the option to register the security transfer of ownership of the cars pursuant to article 10 of L. 2844/2000.

If B’s creditors execute against the cars, the ownership of which has been transferred to A, A can resist the execution (article 936 KPolD). In B’s insolvency A has the rights of a pledgee.41

(ii)If the cars were tour coaches, the parties could create a registrable charge over them according to article 11 of L. 711/1977. This charge secures any claims of any creditor.

(b)The parties could also stipulate a sale and lease-back agreement.42 The lessee sells the assets and transfers their ownership to the leasing company, which cedes the use of the things to the lessee for a rent. A right of the lessee to take back the things against a purchase price is agreed. In contrast to security transfer of ownership, the leasing contract, the duration of which in respect of movables must be at least three years, must also be concluded in writing and registered on a special register which is kept at the Athens Court of First Instance. As a consequence of the registration, the rights of the lessee deriving from the contract are opposable to any third party. The leasing company must be an anonymous society specialising in this form of business. In reality a sale and lease-back agreement is a statutory form of security ownership.43 This form of financing is not very common.

38AP 369/1978 NoV 27, 173; AP 733/1975 NoV 24, 138; Balis, Empragmaton Dikaion para. 61; Toussis, Empragmato Dikaio 945 ff.

39Toussis, Empragmato Dikaio 944.

40Ef of Athens 1142/1957 NoV 6, 557; Georgiadis, Empragmato Dikaio II 232; Kornilakis,

I katapisteutiki ekchorisi ton apaitiseon 58 ff. and others.

41See further Greek report, case 11(b).

42For this form of leasing (which is provided by article 1 L. 1665/1986) see Georgiadis,

Nees morphes symvaseon tis sygchronis oikonomias 45 ff.; Paparseniou, I symvasi chrimatodotikis misthosis 40 ff.

43Mazis, I chrimatodotiki misthosi -- Leasing 57 ff.

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(c)Security ownership can apply to any kind of movable. Lease-back, in contrast to finance leasing, applies only to movables. Any kind of movable may be used as the subject of a lease-back transaction, e.g. aircraft (although the duration of a lease-back agreement for aircraft must be at least five years).

(d)When security transfer of ownership is stipulated and A becomes insolvent,44 B has the right to pay the debt in full, even before it becomes due. If ownership of the cars was transferred to A under the resolutive condition of full payment, B would acquire ownership automatically on payment. If the security agreement did not contain a resolutive condition of full payment, B has a right to claim the retransfer of ownership back to him. Consequently, if the insolvency administrator claims ownership and possession of the cars, B will oppose his right (dolo facit, qui petit, quod statim redditurus est) and thus ensure that the administrator’s claim is rejected pursuant to article 281 A.K. (prohibition of the abuse of a right). Before the debt becomes due, if B chooses not to pay the debt in full, he may refuse to return the cars, as he is entitled, as owner, to possess the cars (articles 1095, 987, 984 A.K.).

After the debt has matured, if B defaults in payment during A’s insolvency,45 the administrator, acting for the creditors, may claim ownership of the cars and sell them according to the provisions of pledge (article 1237 A.K.), which are by analogy applicable. The insolvency administrator is obliged to follow the procedure of compulsory sale (e.g. by public auction) even if an agreement has been stipulated between the parties that, in case of B’s default, A can keep the collateral permanently. Such an agreement would be contrary to article 1239 A.K. which prohibits lex commissoria and is applicable, according to the prevailing view, by analogy to security agreements.46 B will receive the difference between the proceeds of the sale and the outstanding debt.

In the case of lease-back, if A goes bankrupt, the insolvency administrator may not terminate the contract.47

44See Georgiadis, Empragmato Dikaio II 241.

45Ibid.; also N. Rokas, Stoicheia ptocheutikou dikaiou 45.

46AP 448/1964 NoV 12, 1078; Georgiadis, Empragmato Dikaio II 238; Kornilakis, I katapisteutiki ekchorisi ton apaitiseon 102; Stathopoulos, Enochiko Dikaio 615; contra Simitis, I anamorphosis tou plasmatikou enechyrou 34.

47Georgiadis, Nees morphes symvaseon tis sygchronis oikonomias 96; Kotsiris, Nees morphes symvaseon tis sygchronis oikonomias 353; N. Rokas, Stoicheia ptocheutikou dikaiou 52; Mazis, I chrimatodotiki misthosi -- Leasing 159.

Therefore, if A’s creditors claim the cars before the expiration of the lease, B can resist the claim based on his own right of possession (article 1095 A.K.). The insolvency administrator has the right to terminate the contract only if B defaults in payment.

f r a n c e

(a)B would find it difficult to use his car fleet as the collateral for any loan from the bank, A, because presumably B would wish to remain able to use the cars in the course of his business. In consequence, any security interest which requires the debtor to surrender possession of the collateral is excluded (as required in respect of the ordinary pledge governed by C. com, articles L. 521-1 ff.). Nor can the special pledge of vehicles be used (Loi Malingre), as the credit is not advanced for the purpose of the purchase of the cars (see case 5(c)). Therefore, the best means available for A to secure a real right in the cars would be to use a contract of lease-back.

(b)The contract of leasing credit-bail was introduced into French law by Law No 455 of 2 July 1966, modified by Ordinance No 837 of 28 September 1967. The provisions are applicable only to equipment used in professional activities (e.g., machinery) and the lessors must be commercial enterprises or individual traders. This type of contract is commonly used in respect of vehicles, as the numerous cases involving cars attest.48 The particular contract applicable to this case would be a lease-back cession back, because the lessee first sells the assets to the lessor and then buys them back progressively, based on a lending agreement coupled with an option to repurchase -- in fact a leasing agreement.49

To qualify as a leasing agreement, the agreement must (article 1) provide the lessee with an option to acquire all or part of the leased assets at the end of the letting term, for a price that must, at least to some significant extent, take into account the amount previously paid in rent.

48E.g., Com 11 May 1993, Rev huiss 1993, 982, 3rd case, note Vidal.

49The arrˆeté of 29 Nov. 1973 defined this variation of the leasing contract (JO of 3 Jan. 1994, JCP 1974, III, No 41218). See Parléani, RTDCom 1973, 699. It seems in practice that the distinction between leasing and lease-back is not always clear, as is apparent in a decision of the Cour de cassation of 19 May 1999 (BRDA 1999, No 11, 7). The Court rejected the classification of a contract by the parties as being one of lease-back. A bank bought the premises of a craftsman, and then rented them back to him with an option to purchase. The court viewed this as a leasing contract.

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It is this unilateral promise to sell that distinguishes the leasing contract from a pure letting agreement.50 The leasing contract must also be registered on a registry held by the Commercial Court which has jurisdiction over the lessor. Registration must be renewed every five years. In the absence of registration, the lessor will not be able to enforce his title against third parties, unless he can prove that these third parties had actual knowledge of his title (article 8 of the decree). As a result, if A has not registered the leasing contract, he will not be able successfully to assert his title to the cars vis-à-vis B’s creditors. As B has an apparent title to them, B’s creditors would be able to execute against them. Registration also has consequences in the event of B’s insolvency. Pursuant to C. com, article L. 621-116: ‘the owner of an asset is relieved from declaring his title over it when the contract concerning this asset has been published’. Moreover, pursuant to C. com, article L. 621-43, para. 1, he is entitled to be personally informed of the commencement of insolvency proceedings against his debtor. Finally, if the insolvency administrator decides to continue the leasing contract, he must immediately make the payments due (C. com, article L. 621-28) -- unless the creditor agrees to defer payment.

(c)Leasing and lease-back can apply to any type of asset, whether movable or immovable.

(d)The question is whether the commencement of insolvency proceedings against A affects the leasing contract. Since A is the owner of the assets, the insolvency administrator could, pursuant to C. com, article L. 621-28, decide to suspend the leasing agreement and sell the assets. In fact, the lessee’s title does not depend on the payment of the rent, but is independent of this. Should the lessee fail to pay the rent when it falls due, the lessor would be entitled to claim the return of the assets and would retain a claim for the unpaid rent and additionally any penalty stipulated by the contract in the case of default. Thus, if A went bankrupt, there is no question that A’s insolvency administrator would be entitled to suspend the leasing contract, perhaps paying B an indemnity for the early termination of the contract. The cars would then be sold; B would be unable to claim ownership of them.

50Com 14 Apr. 1972, Bull civ IV, No 105; JCP 1972, II, 17269, note Alfandari; Com 30 May 1989, Bull civ IV, No 167; RTDCom 1990, 93, obs. Bouloc.

b e l g i u m

(a)Belgian law does not recognise a fiduciary transfer of property for security purposes. Such a transfer is valid as between the parties, but will have no external effects vis-à-vis the creditors of B.

(b)In respect of a finance lease, the ownership of the lessor in the event of the insolvency of the lessee was expressly recognised by the Supreme Court (see Belgian report, case 14). It is generally assumed that the position of the lessor in a sale and lease-back operation will be the same.

(c)Leasing is limited to financing equipment used exclusively for business purposes (article 1, 1◦ Royal Decree of 10 November 196751). It cannot

be used for collateral of a different kind.

(d)The position of the lessee will not be altered in event of the insolvency of the lessor.

p o r t u g a l

(a)Cars are movable things subject to registration. So, in this case, it would be possible to establish a charge (hipoteca) over them (articles 688o f. C.C.). The charge provides a real right in immovables, or in movables that are subject to registration, that accords to the holder of the charge priority in payment over those creditors without priority arising from registration (article 686o no1 C.C.). In a case such as the present, the bank would ask for a charge over the cars. The charge would have to be registered, otherwise it would be ineffective (article 687o C.C.).

(b)Portuguese law recognises the possibility of creating leasing contracts by DL 149/95 of 24 June 1995. However, this legislation contains no rules concerning lease-back. Only legal writers have referred to it.52 They support the creation of this kind of contract, on grounds of freedom of contract (article 405o C.C.). Therefore, the lease-back contract is available under Portuguese law and it has been used by several financial

51Art. 1, 1◦ reads as follows: ‘. . . bedrijfsmateriaal uitsluitend gebruikt voor beroepsdoeleinden’.

52See Leite de Campos, ROA 43 (1983) 319 (342); Menezes Cordeiro, Manual de Direito Bancário 554; and Martinez, Contratos em especial 311.

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institutions. However, it must be considered that there is a risk that this contract will be regarded as a sham charge. If so, the transaction will be illegal: it is forbidden for the creditor under a charge to become owner of the things charged without a judicial sale (pacto comissório, article 694o C.C.).

(c)Besides cars, the only movable assets that can be charged are ships and aircraft. The answer would apply equally to them.

(d)The insolvency of A would be a very unusual occurrence indeed, because the supervising authorities would not let a bank collapse. In this situation, however, if B had granted a charge over the cars, his position would not be affected, because the charge would be extinguished with the payment of the loan to the insolvency administrator (article 146o CPEREF). If the parties have agreed a contract of sale and lease-back, by analogy with the rule applicable to leasing contracts (article 170o CPEREF), the insolvency of the lessor does not affect the rights of the lessee, so he will be able to require that the insolvency administrator fulfils the contract.

s p a i n

(a) A lease-back contract is the transaction most likely to be employed.53 Other securities prove ineffective or have other disadvantages. For example, a charge over movables (hipoteca mobiliaria) is impractical because the goods must be carefully identified, and also because it requires a public deed. A lease-back contract can be concluded by means of a more expeditious public deed. The financial institution, usually a bank, draws up four copies of a document using standard clauses, many of which incorporate general contractual terms. Once the contract has been drawn up, it is delivered to a notary who checks its legality and the identity and legal capacity of the parties to the document. Moreover, the notary explains to B the financial conditions that the bank has offered to the latter. The contract establishes the leasing instalments, and once it has been signed, this contract gives rise to a swift executive procedure. A’s rights will be recognised in the event of B’s insolvency. Furthermore, as

53Spanish law admits of both leasing of immovables and leasing of movables. See Vicent Chuliá, Compendio Crítico de Derecho Mercantil II 273.

it appears in a póliza mercantil, it has priority over and above other debts (e.g. those deriving from private contracts, bills, delivery notes, etc.).54

On the other hand, a much slower procedure applies to charges over movables (hipotecas mobiliarias).55 Both contracts have to be drawn up by a notary using a public document, in order to acquire legal status and thus have access to executory proceedings. Transaction costs are increased by the fact that the charge has to be drawn up by a notary (as distinct from a financial institution) and also has to be recorded in the Registry. Another potential disadvantage of using a charge over movables is that the relevant Law (LHMPSD) was enacted half a century ago and is nowadays obsolete. On the other hand, a leasing contract can be recorded in the Chattels Registry. In sum, although all these forms of security have similar effects in business practice, a lease-back contract formalised on a póliza mercantil is more common.

In Spain, leasing of movables is closely connected but not identical to hire-purchase sales. The principal differences are as follows. First, unlike hire-purchase sales, leasing involves a third party, a financial institution. Secondly, the purchaser enjoys ownership of the movable so financed, without the need for any reservation of title agreement. It is a contract by virtue of which possession of the movable is awarded in exchange for a price, with a clause added by virtue of which the lessee is allowed permanently to acquire the movable on the expiry of the agreed period.56 Such leasing is not subject to the formal and substantive requirements of Law 28/1998.

For leasing to be opposable to third parties, it must apply to physical goods which must be identifiable yet not consumable.57 The possibility of registering the leasing contract on the Chattels Registry provides the parties with an expedient security.58 If the leasing contract is not drawn up in a public deed it is still perfectly valid, but has no executive character, and hence the corresponding action in court will be more protracted. If the contract has not been recorded in the Chattels Registry it will not be opposable to third parties.59

54See Raga Blanch, Subrogación por pago y juicio ejesutivo basado en pólizas de contratos mercantiles y escrituras públicas 111.

55See García-Pita, Lastres, in: Tratado de garantías en la contratación mercantil II-1 197.

56See Rojo Ajuria, ‘Leasing’ mobiliario 33.

57See Vicent Chuliá, Compendio Critico de Derecho Mercantil II 272.

58The leasor may proceed by way of a summary oral trial if the contract was legalised in a public deed or was drawn up in the fill-in form (article 250.10-11 LEC).

59See Bercovitz/Rodríguez-Cano, in: Tratado de garantías en la contratación mercantil II-1 379.

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The security transfer of ownership (venta en garantía) is not expressly regulated by the Civil Code; however, it has been accepted under case law.60 Nonetheless, in financial practice, the use of lease-back is preferred. Supplementary Provision 1 LVBMP enables lease-backs to be recorded in the Chattels Registry, which offers an important advantage not offered by fiduciary sale.

The reason why security transfer of ownership does not exist explicitly in Spanish law arises from article 1859 CC, which prohibits the creditor from appropriating to himself goods subject to a pledge or charge. According to this, an agreement that allows the creditor to appropriate goods charged or pledged in the event that the debtor defaults in payment would run up against the prohibition of forfeiture rule (pacto comisorio).61 Hence the sale of the debtor’s assets is organised either by a court or a public notary by means of a public auction.62 This notwithstanding, security transfer of ownership has evolved to such an extent in commercial transactions that Supreme Court decisions have stated on several occasions that the agreement between assignor and assignee, by virtue of which the assignee will become holder of the debt as security up to the point when the debt has been liquidated, is lawful and does not run contrary to the legal nature of the non-binding agreement.63 Moreover, this agreement is unaffected by the insolvency of the assignor.64

On the other hand, in certain regions of Spain, which have particular civil laws (derechos forales), explicit regulations governing security transfer of ownership do exist. The sale with a repurchase agreement (venta a carta de gracia or empenyorament) is a peculiarity of Catalan civil law, applicable both to movable and immovable property, and is of fiduciary character.65 The fiduciary debtor passes ownership to the fiduciary creditor, but reserves the right to recover the thing sold within a maximum period of thirty years with respect to immovable property, and six years with regard to movables (article 326 CDCC). The price of reacquisition is

60See Díez-Picazo, Dictámenes Jurídicos 25.

61See Reglero Campos, in: Tratado de garantías en la contratación mercantil II-1 421.

62If the debt was secured with a charge, the court usually organises a foreclosure proceeding to sell the charged property in order to satisfy the debt (articles 131 LH and 225--235 RH). Still, the charge deed may validly include a covenant on non-judicial foreclosure proceedings, in which case the sale would be organised by a notary (articles 129,2 LH and 234--236 RH). If the debt was secured with a pledge, the sale is organised by a notary (articles 1872 CC and 14 LGP).

63See STS of 19 Apr. 1997 and 7 Oct. 1997.

64See Pantaleón Prieto, in: Garantías reales mobiliarias 191.

65See Pozo Carrascosa, La venda a carta de gràcia en el dret civil de Catalunya 43.

repayment of the principal debt with interest. This price for the recovery of the goods may be paid in instalments.66 This is in fact a money loan from the buyer to the seller with a real security on the ‘sold’ object, disguised as a contract of sale. In business reality, however, for immovables, financial institutions prefer the use of lease-back to the sale under carta de gracia. A similar instrument exists under the law of Navarre (pacto de retro en garantía). Basically, both these ‘sales under guarantee’ carry out a function which is similar to that of lease-back. In financial practice, the latter is used more often, as far as movables are concerned, than other contractual forms.

(b)Yes, it can be achieved and it is frequently used in the automobile business.

(c)The lease-back contract also applies to other goods, specifically machinery, railway carriages and immovable property. In principle, practically any form of movable property can form the subject matter of a lease. Nevertheless, for a leasing contract to be registrable in the Chattels Registry, it has to apply to physical goods which are identifiable but not consumable. Goods would be regarded as identifiable if, for example, the factory number appears indelibly on, or is inseparable from, one or more of the movable’s basic components. The most important thing is that the goods must be distinguishable from other, similar types of goods.

(d)A is a financial institution subject to insolvency law under the CCO. Accordingly, B’s cars would form part of the insolvency estate. Nevertheless, B would remain entitled to possession of the cars as long as he paid the instalments due under the lease. At the end of the contract, he would be entitled to exercise the option to purchase and, by paying the residual value, obtain full ownership of the cars. This option to purchase is binding on the insolvency administrator and other creditors.

i t a l y

(a) It is possible to create a non-possessory security right in the cars, by registering a type of charge (ipoteca) over them, pursuant to the Civil Code rules applicable to registrable movables (article 2810 c.c.). This

66See Ysàs Solanes, in: Comentarios al Código Civil y Compilaciones Forales 583, 643; Pozo Carrascosa, La venda a carta de gràcia en el dret civil de Catalunya 250.

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regime was established for cars and other vehicles that are registered in the pubblico registro automobilistico (on the P.R.A., see the Italian report to case 5(a)). Any vehicle that has an Italian licence plate is registered on the P.R.A. The formalities that must be observed in order to create the charge (ipoteca) are set out in detail by Royal Decree n. 436 of 1927. They basically consist of registration of the notarised document, which witnesses the agreement of the parties to the creation of the ipoteca, on the pubblico registro automobilistico, which is held by the Italian Automobile Club. The costs of creating this security are not prohibitive, but the market for securities rights in used cars in Italy has not flourished, possibly because used cars rapidly lose their value. Refinancing operations, whereby used cars are offered as collateral, are not advertised in Italy, nor do they seem to be widespread. Of course, if the car fleet in the present case is a going concern, the same facts could be analysed as amounting to the transfer of an entire business undertaking. Such a transaction could fall under the provision of article 58 of the Italian banking law, which is discussed in cases 11 and 13(d). On the basis of the facts given above, this appears a remote possibility.

(b) Alternatively, the parties could establish a sale and lease-back contract. According to most commentators,67 and to a number of recent decisions of the Corte di cassazione68 and of lower courts,69 the contract is valid in principle, on the basis of the autonomy of the parties. It may, however, be null and void, if it is not concluded in the ordinary course of business.70 In such a case, it would be considered as contrary to current interpretation of the Civil Code provision against pactum commissorium (article 2744 c.c.), that invalidates any alienation of movables or immovables for security purposes only. In Italy, the transfer of ownership of the cars from the lessee to the lessor must be registered in the P.R.A. in order to be effective vis-à-vis the lessee’s executing creditors, or his insolvency administrator.

67Ferrarini/Barucco, in: Trattato di diritto privato diretto da Rescigno 24--27; Bussani,

Proprietà-garanzia e contratto 147 ff.; Luminoso, Giur. comm. 2000 II, 489 ff. For an instructive overview, see Fiorentini, Riv. dir. civ. 2000 II, 253, 281 ff.

68Cass. 15 Apr. 1998, n. 4095, Foro it., 1998, I, 1820, obs. Simone; Cass. 19 July 1997, n. 6663, Foro it., 1997, I, 3586; Cass. 16 Oct. 1995, n. 10805, Foro it., 1996, I, 3492, obs. Monti; Giust. civ., 1996 I, 1739, obs. Schermi; Giur. it., 1996 I, 1, 382, obs. Cinquemani.

69E.g., Trib. Roma, 22 May 1996, Arch. civ. 1997, 44, obs. Santarsierre.

70This is the opinion of most commentators and of leading decisions such as Cass. 16 Oct. 1995, n. 10805, cited above. The opinion was first advanced by Bussani, Contr. e impr. 1986, 558; De Nova, Riv. it. leasing 1985, 307; 1987, 517.

Sale and lease-back contracts are only rarely used in practice, with respect to cars. Leasing companies and bank departments that operate in this economic sector usually acquire title to new vehicles, not to used ones. Nevertheless, the writer has been informed by practitioners that some sale and lease-back transactions have been carried out in respect of durable vehicles of a certain value, such as big trucks, or imported luxury cars. This last example requires some explanation. The importation of cars into Italy is subject to a certain number of administrative formalities. Banking and financial institutions are not prepared to attend to these formalities. Hence, they are not able to acquire title to and finance the purchase by means of sale and lease-back of new, imported cars as readily as they would like. This is the reason why some importers buy cars from foreign manufacturers, acquire title to them, import them into Italy, and then immediately obtain financing for their deal by arranging a sale and lease-back transaction in respect of the new cars they own.

(c)The answer would be the same for other registrable movables or immovables. The sale and lease-back of immovables and of ships is not unknown in Italy, despite the fact that our Codes allow for the registration of charges (ipotecas) over both such assets.71

(d)If the transaction is a sale and lease-back, and the lessor becomes bankrupt, most commentators hold that the contract shall continue with the insolvency administrator, either by analogy to the rule on ordinary leases (article 80.2 l. fall.), or by analogy to the rule on sale under retention of title (article 73 l. fall.).72 There are, however, court decisions to the contrary, and some commentators support them.73 These decisions hold that the insolvency administrator should be free to decide whether to terminate the contract, or to maintain it in being, especially if the value of the lessee’s redemption right is substantial. Furthermore, one decision rendered by the Corte di cassazione held that the insolvency

71For a lease-back operation concerning an immovable, see Cass. 18 Oct. 1995, n. 10805, cited above.

72Ferrarini/Barucco, in: Trattato di diritto privato 31 ff.; Bussani, Proprietà-garanzia e contratto 93 ff.; Vigo, I contratti pendenti non disciplinati nella legge fallimentare 149 ff.; Bonfante, I rapporti pendenti nel fallimento e la locazione finanziaria 86 ff. For a different opinion, Apice, Il contratto di leasing nelle procedure concorsuali 342--343. App. Torino, 23 Nov. 1984, Giur. comm. 1986, I, 76.

73Decr. Trib. Napoli, 22 Jan. 1992, Fallimento, 1992, 1040; Decr. Trib. Roma, 29 Oct. 1990, 21 Nov. 1990 (both cited in Apice, Il contratto di leasing nelle procedure concorsuali 53); Cintioli, Banca borsa 1997 I, 475.

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administrator is not bound by the lessee’s redemption right.74 The reasoning supporting this conclusion is that the lessee’s right against the insolvency administrator is a personal right. The soundness of this conclusion is questionable, inasmuch as this solution is contrary to the initial allocation of the benefits and burdens of the contract.75

t h e n e t h e r l a n d s

(a)In order to provide A with the desired security, B could create a pledge over the cars in favour of A. As in the case of charges over claims (see case 5), the Code provides for two types of pledge over movables: those with and those without ‘publicity’. The former, vuistpand, requires that the movables over which the pledge is to be created are brought into the hands of A or a third party (article 3:236(1) BW). The main drawback of this type of pledge is that B would therefore no longer be able to use the cars. The latter type of pledge, known as the ‘silent’ pledge, is essentially non-possessory. This type of pledge is the most suitable one, assuming that B wishes to continue to use the cars. The ‘silent’ pledge was first introduced by the new Civil Code of 1992 and was to replace the customary practice of fiduciary transfers, although it was not intended materially to affect credit practice. A fiduciary transfer cum creditore is now prohibited in the Code, which provides that such a transfer does not constitute a valid causa traditionis (article 3:84(3) BW).

In order to create a ‘silent’ pledge, the Code requires, as it does for the transfer of all property interests, a valid causa, the power to dispose, and a ‘delivery’ or, more appropriately in this case, an ‘act of creation’. The formalities required for this latter act consist of a notarised or registered deed (article 3:98 in conjunction with articles 3:84 and 3:237(1) BW). This requirement fixes the moment at which the pledge comes into existence, which above all prevents antedating. If a notarised deed is not used, the deed must be registered in a non-public register. As it is a non-public register, third parties, more particularly creditors of the pledgor, have no access to this register.

(b)The use of ownership as security within a sale and lease-back transaction is problematic because the Dutch Civil Code expressly prohibits security (or fiduciary) ownership (Art. 3:84(3) BW) under which

74Cass. 12 Dec. 1990, n. 11792, Fallimento, 1991, 457 (a case of ordinary leasing).

75Ferrarini/Barucco, in: Trattato di diritto privato 32--33; Bussani, Proprietà-garanzia e contratto 110--112; Bussani/Cendon, I contratti nuovi: Leasing, factoring e franchising 98.

circumstances exactly judges would consider a leasing arrangement to amount to a (prohibited) security transfer of ownership is unclear.

Sale and lease-back arrangements are used in various ways. They may serve as a means of obtaining both purchase-money credit and cash for collateral already owned. The latter arrangement, in particular, would appear to be inconsistent with, if not the letter, then at least the spirit of the Code’s prohibition on fiduciary transfers.76 Essentially it allocates all the risk, that is the economic and legal liability, to the seller/lessee (B in the above case).

The Dutch Supreme Court, however, endorsed exactly this type of credit arrangement, holding that it did not come within the ambit of the prohibition on fiduciary transfers.77 The Court held that the prohibition forms no bar when parties intend a ‘genuine transfer’, that is a transfer where the buyer is to obtain ownership without restrictions, such as a right only to the proceeds rather than to the thing itself. The Court continued by stating that this would also apply if the transaction involved the provision of some kind of credit to the transferor/seller/lessee.

On the other hand, sale and lease-back will not in all circumstances avoid the prohibition of fiduciary transfers. The Court indicated that there might exist additional facts from which it could be inferred that the parties merely intended to evade the Code’s prohibition. In such a case, the transfer would be void.

In the present case, it would, therefore, also be possible for B to sell the cars to A, who would then lease them back to B. The fact that B was to obtain credit, or that B already owned the cars, would not, of itself, be sufficient to conclude the transaction amounted to a prohibited fiduciary transfer.

(c)Though cars are in fact a popular example, the above analysis also holds true for different types of collateral. There has been some debate as to the validity of the so-called ‘techno-lease’, which involves the sale and lease of ‘know-how’. The problem would appear to lie in the question of whether, and if so to what extent, ‘know-how’ qualifies as ‘goods’ for the purposes of property law.

(d)The effects of the commencement of insolvency proceedings against the credit institution, A, differ according to whether the parties agreed on a pledge or on a sale and lease-back arrangement.

76Cf. conclusion of Hartkamp in Hoge Raad 19 May 1995, NJ 1996, 119.

77Hoge Raad 19 May 1995, NJ 1996, 119 (Sogelease).

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If A had taken a pledge over B’s cars, the security interest and A’s claim against B would form part of the insolvency estate. The insolvency administrator would be entitled to sell the claim of A against B to a third party. With the assignment, not only the claim itself would pass, but also the security interest, viz. the pledge (due to the accessory principle, article 3:7 in conjunction with article 3:82 BW). The insolvency administrator would not be entitled to sell the cars, as B is the owner. Consequently, a possible insolvency of A does not substantially affect B’s position. B remains owner of the cars, and cannot be forced to repay the loan at any point earlier than that which was agreed in the original contract.

If A and B had agreed on sale and lease-back, however, the cars would become part of A’s insolvency estate. B’s position would, on the whole, appear to be more troublesome. A contract of lease is not regulated as such by the Code. But in classifying the lease arrangement, some support may be found in known types of specific contract, such as rental (huur) and hire purchase (huurkoop).78 In both cases the lessee is protected against the sale of the goods subject to the lease by the lessor or, as the case may be, by the lessor’s insolvency administrator. The transfer does not operate to the detriment of the lessee.79

e n g l a n d

(a) The first thing to ascertain is the nature of the security. It cannot be a pledge, which confers a legal (as opposed to equitable) interest in A, for that requires A to be in possession. The American system of field warehousing never gained a hold in England. It is possible that the interest described would be a fixed charge (or fixed mortgage), but more likely that it would be an enterprise charge (f loating mortgage or charge). Whether fixed or floating, the charge would have to be registered if it is to be asserted against B’s insolvency administrator (trustee-in-bankruptcy or liquidator). A charge gives rise to a limited real right (an equitable property interest) and not a legal one. The common law does not permit mortgages of future assets: there would have to be a separate conveyance

78The essential difference between these types of contract is that the latter implies that the intention of parties is that, at the end of the lease agreement, the goods, B’s cars, are to become the property of B again.

79Article 7A:1576l(2) BW (hire purchase) and article 7A:1612; see also article 7:226 (draft) BW (rental). Currently, in case of hire-purchase agreements, a separate assignment by the lessor, or the lessor’s trustee, is necessary, Hoge Raad 25 May 1962, NJ 1962, 256.

of those assets as and when they came into existence (i.e., were acquired by B).80 This is wholly impracticable in the case of stock-in-trade or equipment. But equity permits a mortgage or charge of future property so that future assets automatically fall into the charge as soon as they come into existence.81 Furthermore, there is no such thing as a legal charge. (The distinction between a mortgage and a charge is a subtle one that need not be brought out here.)

If the car fleet represents equipment (for example, the cars that B supplies to its employee sales representatives) then A should take a fixed charge which puts it in a strong position against executing creditors of B and also against creditors of B benefiting from a statutory privilege (preference creditors).82 In the case of equipment, A is in a better position than a bank taking a charge over a dealer’s stock which is to be sold in the ordinary course of trade. In such a case, A would have to take a f loating charge since it would be impracticable to obtain permission from A every time a car was sold on by B: freedom to deal with charged assets in the ordinary course of trade is the badge not of a fixed but of a f loating charge. A f loating charge would put A at a disadvantage against B’s preference creditors83 and would also put A at risk against B’s execution creditors in the period leading up to crystallisation of the charge. In the case of a f loating charge, B’s freedom to deal in the ordinary course will be to do so in such a way as to embrace the normal consequences of being sued to judgment.84 Hence, the courts will not permit selective intervention by a debenture holder with a f loating charge in order to defeat a particular execution creditor.85 But a crystallisation of a f loating charge, determining the debtor’s authority to continue dealing with the stock, is a different matter and can be brought about, as a matter of contract, by any event stipulated in the debenture. The stipulated event will often be a matter of implication, such as liquidation (the commencement

80Lunn v Thornton [1845] 1 CB 375.

81See Tailby v Official Receiver [1888] 13 App Cas 523.

82See ss. 40 and 175 of the Insolvency Act 1986; s. 196 of the Companies Act 1985. Preference creditors are listed in Schedule 6 of the Insolvency Act 1986.

83These are the following -- see Insolvency Act 1986, s. 386 and Schedule 6 to the Act (statutory numerus clausus): 1, debts due to the Inland Revenue (as deductions made by the insolvent under the Pay As You Earn (PAYE) scheme); (2) debts due to Customs and Excise (previous six months, mainly VAT and alcohol); (3) social security contributions that an insolvent employer ought to have made; (4) contributions to occupational pension schemes; (5) remuneration of employees (previous four months up to £800 (trivial)); (6) European Coal and Steel Production levies.

84See Morse, Palmer’s Company Law § 13.138.

85Evans v Rival Granite Quarries [1910] 2 KB 979, a very important case.

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of insolvency proceedings against a company) or the appointment of a receiver.

When a f loating charge crystallises, this has an effect on the priority position between execution creditor and debenture holder. The latter will certainly prevail if the charge crystallises before the bailiff (sheriff) sells the assets seized.86 It is likely (the point has not been settled) that the latter will also prevail if crystallisation occurs before the sheriff distributes to the execution creditor.87

(b) Sale and lease-back is a common transaction in English law, particularly in the fields of aviation and railway rolling stock financing. It is an example of off-balance-sheet activity. The key question in English private law is whether it will be regarded as a disguised charge. If so, it will have to be registered under section 395 of the Companies Act if it is to be opposed to third parties (including for present purposes the seller’s insolvency administrator, that is their liquidator or trustee-in- bankruptcy). There is little case law.88 In one case,89 a sale and resale arrangement was characterised as a charge, largely because of errors in drafting. The document, for example, referred to ‘interest’ and to a line of credit. Since English law in this area is preoccupied with freedom of contract, and routinely underestimates the importance of distributional considerations, a well-drafted document will probably be recognised as a sale and lease-back. It should not be assumed that courts, in giving effect to the substance as opposed to the form of the transaction, will draw the line between those two things in the same way as an accountant applying financial reporting standards or statements of standard accountancy practice.

It is impossible to be confident in predicting the attitude of courts in matters of construction. It may be relevant that, objectively, the seller is paying a finance price rather than a genuine rental sum. It should not matter much in such a case that, at the end of the lease term, title to the cars revests automatically in B. But, in matters of construction, little things can add up and tip the balance. If the arrangement is seen as a charge, then it will have to be registered on the Companies Register

86Evans v Rival Granite Quarries; Re Standard Manufacturing Co. [1891] 1 Ch 627; Morse, Palmer’s Company Law § 13.138.

87Morse, Palmer’s Company Law § 13.138.

88Re Curtain Dream plc [1990] BCLC 925; cf. Welsh Development Agency v Export Finance Co. Ltd

[1992] BCC 270.

89Re Curtain Dream plc [1990] BCLC 925.

at Cardiff. Incidentally, although the question does not raise issues of title transfer, the seller will be regarded as a seller in possession for the purpose of section 24 of the Sale of Goods Act (providing that possession is unbroken).90 Despite holding the goods as a lessee, the seller has the power (even if he does not have the right) to transfer title to a bona fide purchaser for value without notice of A’s interest. The marking of the goods, as a matter of fact, could affect purchasers with notice.

(c)The above discussion is not confined to cars.

(d)English law gives no clear answer to the question whether the possessory interest of a lessee may be asserted against third parties and against the owner’s insolvency administrator. One commentator takes the view that a lease creates only a personal interest and that no more than any other contract does it bind third parties who are strangers to the contract that created it.91 The same commentator is not persuaded to the contrary by the right of a person in possession to sue in the tort of conversion for the full value of the chattel those who interfere directly with possession (a right subjected to certain limitations in the Torts (Interference with Goods) Act 1977). Other writers have opined that the lessee has a real interest that may be asserted in insolvency.92 If the matter came up for full discussion and determination, it is submitted that a court would find that the lessee obtained a real interest that was good in the lessor’s insolvency. Equipment leases have become far too important as financing devices to be jeopardised by a hole in the development of English personal property law. If, however, the former view is correct, it is worth examining the legislative and general insolvency position. A’s insolvency administrator is immune from personal liability on contracts that he concludes on behalf of the insolvent.93 A fortiori he will not be liable on contracts concluded between A and B prior to A’s insolvency. Any other result would outflank the statutory prohibition on bringing actions against companies in liquidation without the leave of the court.94 But does it follow from this that the liquidator may lawfully repossess A’s chattel from B, the lessee? Sections 178 (liquidators) and 315 (trustees-in- bankruptcy) of the Insolvency Act 1986 allow for the disclaimer of onerous

90Pacific Motor Auctions Pty Ltd v Motor Credits Ltd [1965] AC 867.

91See Swadling, in: Palmer/McKendrick, Interests in Goods 491 ff.

92Calnan, JIBFL 11 (1998) 530; Furey, in: Interests in Goods 787 ff.

93Re Anglo-Moravian Hungarian Junction Railway Co. (1875) 1 Ch 130, 133.

94Insolvency Act 1986, s. 130(2).

has been (re)paid in full. However, South African courts have up to now been unwilling to accept transfer by means of constitutum possessorium in this case. The courts treat these agreements as simulated transactions, disguising what is in effect a non-possessory pledge, a type of secret charge not allowed in South African law. There are, however, indications that our courts would accept security transfer of ownership as a valid causa for the transfer of ownership by constitutum possessorium, as long as the transaction is couched in the correct form, indicating that it was the intention of the parties to resort to this form rather than to create a pledge. Lack of bona fides, in the form of there being no real intention to transfer ownership to A, would render the transaction void as being an attempt to create a non-possessory pledge of a movable.98 Security transfer of ownership is, however, still awaiting recognition by South African courts and there is a distinct possibility that the motor industry will confront the Supreme Court of Appeal with a test case to settle the matter.

Legislative reform in South Africa has in the meantime endeavoured to tackle this problem in the guise of the Security by Means of Movable Property Act.99 This Act expands the scope of the pledge device by contemplating a non-possessory pledge. Movables furnished as security can be ‘specified and described’ in a special notarial bond, and this bond may be registered. If this is done, the particular movable is deemed to have been pledged and delivered to the pledgee. Although this system has been welcomed by at least one academic writer,100 it is submitted that it is not suitable for commercial practice, especially not for the automobile industry. The main objection is that the Security by Means of Movable Property Act101 requires the goods to be specified as well as described, ‘in a manner which renders it readily recognisable’. However, in the present case, this clumsy method can be used as long as each car in the fleet is clearly identified as subject to a notarial bond in favour of the bank.

(b) This question would only be relevant once the South African courts have recognised the security transfer of ownership construction. In such a case, B would presumably like to be in a position to sell the cars in the fleet even before he has paid back the loan. This he could do as hirepurchaser, but not as lessee, of the motor cars. The sale and resale with

it did not expressly or by inference clothe the hire-purchaser with a real interest.103

d e n m a r k

(a)If A wishes to obtain a real right to the cars which is protected against B’s creditors, A can take a sort of charge over the cars. A charge over a car has to be registered in a public register called the Car Register, cf. section 42(d) of the Registration of Property Act. The registration cannot as such be made in respect of the car fleet as a whole because this charge can only be registered in respect of specific assets. Therefore, a charge has to be registered for each car.

In Denmark it is debated whether A in a sale and lease-back agreement can claim a right to the asset when B’s creditors execute against the asset. The usual way for A to obtain a right in an asset which is already in B’s possession is by way of charge.

(b)In Denmark the question arises of whether A, as a lessor in a sale and lease-back agreement, can claim ownership of the asset when B’s (the lessee’s) creditors execute against the asset. The background to the discussion surrounding this question is that a security on movables can only be created as a charge or as a pledge. One contention is that the sale and lease-back agreement is a financial transaction in which A lends money to B and attempts to get a security right (through ownership) in the cars in the event that B fails to repay the outstanding debt. Since a security right can only be created as a charge or a pledge, such a transaction is, under this analysis, regarded as an evasion which should not be effective as against B’s creditors.104

A differing interpretation is that sale and lease-back is an ordinary transaction, which should be recognised as valid if the asset has been sold at a fair price and the conditions stipulated in the contract are in line with normal conditions in such a contract. Ownership should probably not automatically pass to B at the end of the contract period as this would be indicative of a credit sale.105

However, in a case reported in the Danish weekly law reports 1983 p. 783, the High Court ruled that a sale and lease-back agreement

105 Cf. Andersen/Werlauff, Kreditretten 186 ff. and Elmer/Skovby, Ejendomsretten I 75 ff.

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permitted the lessor to claim ownership of the assets as against B’s creditors. The decision notes that there was no strong indication that the lessee had a right to have ownership of the assets retransferred to him.

This case did not bring the debate to an end. Unless a case is brought to the Supreme Court, the discussion may continue indefinitely. Therefore, sale and lease-back agreements are not very common.

(c)The answers to parts (a) and (b) also apply to other assets. However, some difficulties arise when the assets are not cars. If B owns the immovable property from which he is running his business and the property has been charged, then the charge will include machinery and technical plant used in the enterprise, cf. section 37 of the Registration of Property Act. These rules include all machinery and technical plant and nothing else. Claims against third parties or goods in stock cannot be used as security under these sections. Under section 37 machinery and technical plant will be included in the charge as equipment when it becomes a part of the enterprise, unless a special right (charge, retention of title or leasing) has been established in respect of such machinery and plant before that. In this case the machinery and technical plant has already been used in the enterprise at the point at which the bank wished to obtain security. Therefore, the bank cannot get a right without respecting any charge over the immovable property.

If B does not own the land and buildings from which he is running his business he may have charged the machinery and technical plant. Under these circumstances he might have charged all the machinery and technical plant of the enterprise under section 47(2) (b) of the Registration of Property Act. Such a charge is very common and will have an effect similar to that of section 37 of the same act.

(d)If A has a registered charge over the car he is entitled to the proceeds from the sale of the car. But he has to wait for the estate to sell the car. The main rule governing the position in respect of registered security rights when the owner of the asset has been declared bankrupt is section 85 of the Bankruptcy Act. Under this section a compulsory sale of the debtor’s assets may only be made upon the request of the estate or with the consent of the estate. This mainly comprises a charge on immovable property and a charge on chattels. If the estate has not requested a compulsory sale within six months of the day on which the insolvency

was declared, a chargee who has a due claim can demand that the estate realises the charged property.106

s w e d e n

(a) Under the Enterprise Mortgage Act 1984 (lagen om företagsinteckning), a debtor may charge all his personal property, subject to a few exceptions (property that can be charged under other legislation, shares, promissory notes and debentures intended for the public, cash and claims on banks). In other words, it is an enterprise charge on most of the debtor’s personal property. However, the debtor may freely dispose of the property (even pledge it with transfer of possession), so long as he does not sell the whole business. Consequently, a purchaser can take priority over the chargee in the property. If A wishes to ensure that no third party will take priority over his right in the car fleet, he must buy the cars and either take possession of the cars (which is not a practical solution; a constitutum possessorium is not permitted) or register his purchase under the Bills of Sales Act, applicable to chattels (lösöreköpslagen, from 1835 and later amended). Then he is entitled to a ius separationis. In order to extinguish A’s right, a later purchaser must have acted in good faith and taken the cars in his possession (the 1986 Good Faith Purchase Act, lagen om godtrosförvärv av lösöre), also applicable to chattels. A’s right in the purchased goods is not invalidated by the fact that A might have granted the seller, B, a lease of the goods. If the buyer has permitted the seller to substitute new goods for the individually registered goods, the buyer is protected as owner in respect of the original goods, but has no right to the substitutes (NJA 1927, 369).

Up to 1835, there was no doubt that a purchaser acquired title and became protected against the creditors of the seller by the conclusion of the agreement of sale. In that year, the first Bills of Sales Act was enacted, however. According to this legislation (later amended), a purchaser who leaves chattels in the possession of the seller is protected against the creditors of the seller only if he has registered his purchase at a court (specifying the goods affected) and thirty days have elapsed

106However, some security rights may be enforced independently of insolvency. S. 91 of the Bankruptcy Act states that a pledge of chattels, the charge of a claim and the charge over registered securities are not affected by insolvency proceedings and hence the creditor may realise the collateral irrespective of them. Cf. Munch, Konkursloven 529 ff. and Ørgaard, Konkursret 201 ff.

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since registration before insolvency or execution supervene. The purpose was to prevent debtors, when faced with an execution, from pretending that the property had been sold to someone else, who would confirm the statement, which had been all too easy to do in the past. According to case law, it is quite clear that a purchaser who leaves the goods in the possession of the seller without registration has no protection against the seller’s creditors, no matter whether it was in fact a genuine sale (see e.g. NJA 1925, 130). It does not help the buyer that the goods have been individually specified in the agreement and can be identified in the execution. For many years it was debated whether registration pursuant to the Bills of Sales Act could be effective also when the purchase was for security purposes, notwithstanding that a pledged chattel must be handed over to the pledgee (chapter 10 section 1 of the Commercial Code from 1734). In NJA 1912, 156 it was decided that the Bills of Sales Act registration applied and gave protection also to security transactions. In such a case, the purchaser has a right of separation in insolvency and execution, but must account for any proceeds of realisation in excess of the secured claim (see the mandatory section 37 of the Contracts Act 1915). The Bills of Sales Act is not widely used, since the purchaser does not take priority over enterprise charges granted prior to or within thirty days of the registration of the purchase. Many authors argue that genuine sales (but not sales for security purposes) should also be effective against the seller’s creditors simply by the fact of their agreement; and that frauds should be tackled by the existing presumption in the Execution Code that chattels in the possession of the debtor belong to the debtor.107 A reform has recently been proposed regarding sales to consumers by a committee whose terms of reference were limited to this issue (SOU 1995:11).

(b) Sale and lease-back arrangements with registration of the buyer’s right under the Bills of Sales Act are practised (but hardly common), for instance when a private person wants to borrow money using individually specified chattels, such as a sailing boat, as collateral which the seller shall retain. Otherwise, the enterprise charge is the remedium. A constitutum possessorium, or a time-limited transfer of possession, will not suffice (NJA 1925, 535). A lessor has a right of separation when the lessee

107See e.g. Göranson, Traditionsprincipen. In NJA 1997, 660 the Supreme Court declared that the requirement of tradition or registration cannot be changed by a precedent.

defaults, but forfeiture and damage clauses may be modified pursuant to the Contracts Act.

(c)The answer is applicable to all chattels, except ships and aircraft, to which special rules apply in certain respects. There is also special legislation applicable to livestock and to agricultural equipment which a landlord leases to his tenant (chapter 9 section 35 Land Code, jordabalken). Here the requirement of individualisation of the leased chattels is deserted; the cows and hay-forks may float within a fixed value.

(d)Should the finance company, A, become bankrupt, the insolvency estate will step into A’s shoes. For instance, B may separate goods that he may have assigned and transferred into A’s possession for security purposes, just as if A had been a pledgee. Things may differ in respect of leases, however. The starting point, based on principles contained in the Commercial Code of 1734, is that a lessee does not have protection against the creditors of the lessor. This would imply that the insolvency administrator could elect between the continuation or termination of the lease, termination giving rise to a claim for damages by the lessee that lacks priority. It has been much discussed in the literature whether this principle should be restricted when the lease is of the financial kind, especially if the lessee has, on the expiration of the lease, an option to buy at a price that does reflect the value of the goods. Patent and trademark leases (i.e. licences) have recently been afforded third-party protection, because of their economic importance. No precedents exist concerning finance leases, but it presumably would be possible for the Supreme Court to provide the lessee with protection.108

f i n l a n d

(a) The safest way for A to acquire a real right in the cars would be by the registration of a vehicle charge. This type of charge may be used if the motor vehicle in question is a bus, lorry, truck or similar, but not if it is a car. The problem with this kind of charge is that it must be registered separately for each vehicle; the vehicle fleet cannot, as such, be registered as a whole. On the other hand, the vehicle charge gives a

108See Håstad, Sakrätt rörande lös egendom 431 ff. Leases of real property have long been protected against the landlord’s insolvency through legislation.

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preferential right of first class and it cannot be extinguished by a bona fide purchaser.

Any type of motor vehicle can be used as collateral for the purposes of an enterprise charge.109 An enterprise charge comprises practically all the movable property used in the business concerned and there is no need to individualise that property in more detail. The weaknesses of the enterprise charge include, however, a relatively inferior preferential status and the possibility that the charge may be extinguished by a sale in the ordinary course of business or by a bona fide purchase.

Both arrangements are used on a relatively large scale. No exact statistics are, however, available.

(b)The rules concerning sale and lease-back arrangements are unclear.110 There is no clear precedent of the Supreme Court and some lower courts have given inconsistent rulings in the few reported cases. Obviously, such agreements have certain attractions to financiers, some of whom have already made use of them. The negative attitude of the doctrine is, on the other hand, mainly based on the argument that this kind of contract has essential similarities with a typical transfer for security purposes and, as such, it must be regarded as an effort to evade the rules concerning pledge.

(c)The rules described above generally apply also to items other than motor vehicles. The registration of a charge relating to specific items of property is, however, possible only in special cases. This regime covers, in addition to lorries, trucks and similar vehicles, also: (1) vessels; (2) vessels under construction; (3) aircraft; (4) aircraft under construction;

(5) patents and other industrial property rights; and (6) publicly traded shares, bonds and other securities.111

(d)The insolvency of A does not affect B’s position, if the parties have used a charge. The insolvency administrator cannot require the debt to be paid prematurely. After payment, B’s property is freed from any

109See further e.g. Havansi, Esinevakuusoikeudet 286 ff. and Ojanen/Sutinen, Yrityskiinnitys 47 f.

110See e.g. Tepora, Oikeustiede -- Jurisprudentia 1988, 245 ff. and Tuomisto,

Omistuksenpidätyksestä 224 ff.

111See the Vehicle Mortgage Act (autokiinnityslaki/lag om inteckning i bil), the Vessel Mortgage Act (aluskiinnityslaki/lag om inteckning i fartyg) and the Aircraft Mortgage Act (laki kiinnityksestä ilma-aluksiin/lag om inteckning i luftfartyg). Vessels do not fall within the ambit of an enterprise charge.