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specified, readily recognisable movable property. Every replacement would, however, require a new notarial bond to be registered and a new notice to be fixed. This evokes memories of the clumsy phenomenon of the ‘field warehousing’ construction formerly employed in the United States to overcome this problem.103

(b)If the parties could convince the court that the structure of their agreement achieved a security transfer of ownership, then A would retain his ownership, which would mean that the stock would not fall into C’s insolvency estate nor be subject to execution by C’s creditors. If the cumbersome method of registering notarial bonds over existing stocks and keeping registering bonds over future stocks and clearly identifying them was followed, the secured party (A) would be in the position of a pledgee with a preferential right to the proceeds of the sale of a particular motor vehicle in the event of C’s insolvency. If another (unsecured) creditor executes against the stock, A’s position as a secured creditor would rank higher.

(c)Framework agreements (floorplan agreements) embodying a security transfer of ownership are frequently used in practice, especially by the motor industry.104 It is expected that the question of their validity will come before the Supreme Court of Appeal of South Africa in the near future for clarification.

(d)If a security transfer of ownership to the financial institution (A) is attempted and the purchase price in the contract of sale is either fictitious or not serious in that it is not proportionate to the market value of the vehicle, it would suggest that the sale and resale transaction was a ‘simulated’ pledge rather than a serious attempt to create a security right by means of transfer of ownership.105

Variation

If created within the six months preceding the commencement of insolvency proceedings in respect of C, the security right (if recognised) could,

103Under this system, goods were held on the site of the trader, but in a physically cordoned-off area. In this way, they were possessed not by the trader, but by a warehouseman who held them for the financier. This allowed the use of the pledge construction, but it was hardly a model of modern commercial efficiency.

104See e.g. NedcorBank Ltd v Absa Bank Ltd 1998 2 SA 830 (W).

105See e.g. Delport v Strydom 1977 3 SA 325 (O); Vasco Dry Cleaners v Twycross 1979 1 SA 620

(A).

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(New locks should be fitted to the room and A should regularly check that C has not been able to gain possession of the assets in some way.)

Since the charge and pledge are the only ways by which a security may be taken in stock, it might be said that security cannot be taken in circulating stock in Denmark. One might have a charge in an asset which is to be stored for a long period. If C was permitted to sell the asset, the contract should stipulate that C had to settle with A when the asset was sold and A had to make sure (on the premises) that the asset has not been sold in the same way as in a credit consignment agreement (see general remarks under cases 1 and 2). This is not stated in legislation but is discussed by most authors.

It may also be possible to pledge such a stock. The requirement that C should not be able to take possession of the pledged assets would however confine its operation to special circumstances.

If A had a valid charge or pledge, A would be entitled to preferential payment from the proceeds of the sale of the goods. If not, A is just an unsecured creditor.107

(b)If the assets are subject to a valid charge or pledge, the right will be protected against creditors who execute against the debtor. The right must also be respected if the debtor is declared bankrupt.

(c)In Denmark, it is rather difficult to take security in a stock. The common way to have a security right in a stock is by means of a pledge where the assets are stored by a third party (who has to be notified of the pledge), or by having reserved title to the goods under a credit consignment agreement. The charge or pledge are ill-suited to the creation of security over goods stored on the debtor’s premises. Such arrangements are uncommon.

(d)According to Danish law, there are no limits with respect to the value of collateral in relation to the amount of the secured loan. On the other hand, in Denmark the secured creditor can only claim payment of the amount of the loan, and the interest on it, from proceeds of the sale of the collateral. It is also perhaps worthy of mention that the debtor can give secondary rights to another person who will give a loan.

107Cf. for more details Andersen/Werlauff, Kreditretten 108 ff. and 137 ff.; Rørdam/ Carstensen, Pant 340; and Ørgaard, Sikkerhed i løsøre 16 f. and 27 f.

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10 Euros out of a claim of 100 Euros against a bank is charged.109 It is also argued that a value-defined pledge should be accepted at least when the pledgor may retain all objects before the debt becomes due (in execution, a pledge is always limited to the value of the debt), but also otherwise, provided that the value which the pledgor did not dispose of, although it exceeded the pledged value and was permissible for disposition, can be avoided as a favour to the pledgee as if it had been inserted on the same date (see further variation, below110).

The practical solution in the present case would be for the wholesaler, C, to charge his revolving stock pursuant to the Enterprise Mortgage Act (lagen om företagsinteckning, from 1984). Under this Act, all the debtor’s property, actual or future, is encompassed by the enterprise charge, with the exception of goods that may otherwise be charged (such as immovable property or airplanes; shares; promissory notes; debentures intended for the public; claims against banks; and cash). Technically, the debtor takes out a letter (certificate) of charge from a court and transfers the letter to the chargee as a security for his debt. The chargee has a priority in insolvency (and, if necessary, in execution) superior to taxes and wages but subordinate to pledges. The chargor may be, and normally is, entitled freely to dispose of the goods, and the buyer need not concern himself with the charge, as long as the chargor does not sell his whole business or a part of it. The chargee’s right in the goods is replaced by a right in the claim on the buyer. If the chargor sells the whole or part of his business, however, the charge remains valid, for a specified period, in the sold goods in the possession of the buyer, enjoying priority over any enterprise charge granted by the buyer. In insolvency the charge crystallises on the insolvency day. This would suggest that any subsequent increase in the values of raw material or claims, etc., vests in the insolvency creditors.111

(b)See part (a) above.

(c)Enterprise charges are very frequently encountered in practice. Why should banks forgo such a security, even if they would have been prepared to extend credit on an unsecured basis, when the debtor need only pay an initial fee of 1 per cent and when other creditors seem to

109Quantity-defined pledges of money are accepted, NJA 1987, 105 and 1989, 705.

110Håstad, Sakrätt rörande lös egendom 333 ff. Disputes in major insolvencies have been settled accordingly, without litigation in the courts.

111NJA 1982, 900.

be prepared to continue to deal with debtors on an unsecured basis? Such charges are less common, however, in two particular cases. The first of these is in respect of fledgling enterprises, with no employees and limited or non-existent collateral. In such circumstances, banks typically take a personal guarantee against the directors of the enterprise. Secondly, in respect of large enterprises, financial institutions often rely upon contractual covenants (i.e., to not grant security to others, to maintain certain financial ratios, etc.).112

(d) The collateral may have any value in relation to the secured loan. However, if the security is given for future credit and the lender controls whether the credit will be extended, the lender must give up the security in favour of other creditors that seek execution in the security. Thus, when a revolving credit facility within a certain limit is granted with the proviso that there will be security, the collateral subject to that security may be executed against when no debt is outstanding (since the bank then has a right to terminate the credit agreement). This would not be so of a security for a bank guarantee that may be called upon beyond the control of the bank. A special rule governs the enterprise charge, which could be granted all too readily, as it permits the chargor to remain in possession of the charged assets. If another creditor seeks to execute against an asset subjected to an enterprise charge, the enterprise chargee can successfully resist the execution only if he does not have adequate security in other assets. In insolvency a pledgee must immediately surrender his pledge on full payment. In principle, the borrower himself would be able to ask for modification under section 36 of the Contracts Act if an excessive security is unconscionable, but no such cases are reported. Normally he has to rely on borrowing against security with secondary priority.113

112The enterprise charge has recently been thoroughly discussed in SOU 1999:1. The legislation committee proposed that the charge should be able to encompass all the debtor’s property, but would be valid only to 50 per cent of its value. This would very much simplify the administration of the charge prior to and in insolvency, and also increase the amount remaining for unsecured creditors. The committee report, controversial in respect of its proposal to confine the enterprise charge to 50 per cent of the estate, analyses the advantages and disadvantages of secured credit in the context of the supply of credit and the behaviour of creditors prior to and in insolvency.

113If the borrower is entitled to expand the credit with primary security in spite of the existence of a secondary pledge, the secondary pledge ought to be void, since the secondary pledgee then has no control over the available collateral; the situation is