Case 14: Finance leasing of computers

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for. Austrian doctrine9 regards the finance lease as a mixed contract, which contains elements of both the lease and the contract of sale.10 The ownership of A is recognised because the situation is the same as that in the case of a contract of sale with retention of title.

(b)The existence or absence of an option for the lessee to buy the computer at the end of the contractual term is irrelevant.11

(c)There is, in respect of the rights of the creditor, no difference of significance between a leasing agreement and a retention of title construction; due to the publicity requirement, a security transfer of ownership would be impracticable.

(d)As A owns the computer, it forms part of the insolvency estate. It may only be reclaimed from B, however, if the leasing contract is terminated. The insolvency of A is not a ground for termination,12 unless otherwise agreed.13

g r e e c e

(a) In this case A, by purchasing the computer in its own name from the supplier, S, indirectly finances B (finance leasing).14 B, instead of expending capital to buy the computer from S, prefers to ‘lease’ it from the leasing company, A, which must be a company specialising in this

9Fischer-Czermak, Mobilienleasing, Rechtsnatur, Gewährleistung und Gefahrtragung;

Schwimann/Binder § 1090 ABGB nn. 56 ff. As in Germany, there exist a number of

different theories about the nature of the leasing contract.

10Depending on the context, either the legal rules governing lease contracts or the legal rules regulating contracts of sale are applied to such contracts. If the lessee is a consumer, and the consumer has the right to purchase the object at the end of the contractual term, the contract is classified as an instalment purchase, regulated by the special provisions of the Consumer Protection Act on instalment sales (cf. Schwimann/Apathy § 17 KSchG n. 2). If real property is leased, such a contract is regarded as a contract of tenancy, regulated by the special provisions of the Tenancy Act (cf. OGH 14 May 1996, 5 Ob 2099/96 immolex 1997, 20).

11It may be relevant, however, for tax purposes.

12According to § 24 (1) KO, a lease contract is not affected by the insolvency of the lessor.

13It is argued by Binder (in: Schwimann § 1090 ABGB n. 73) that the administrator can cancel the contract in accordance with § 21 KO in so far as B is granted an option to buy the computer at the end of the contractual term. He argues that such an option is typical for a contract of sale to which § 21 KO applies.

14For the compound contract of leasing see in general Georgiadis, Nees morphes symvaseon tis sygchronis oikonomias. Also Paparseniou, I symvasi chrimatodotikis misthosis.

form of business. Law 1665/1986, which regulates finance leasing of movables and immovables, after its modification by L. 2367/1995, provides the lessee with a right to purchase the thing or renew the lease.

B’s insolvency entails the termination of the finance leasing contract (article 4 § 3 L. 1665/1986). After the lease expires the lessor, A, can require the return of the leased computer either by virtue of its contractual rights or by exercising its rights of ownership (article 1094 A.K.).

If during the period of the lease the computer is executed against by another creditor of B, A can resist the execution (article 936 KPolD). Even if the lessor does not, however, the highest bidder cannot acquire ownership of the computer, because, according to article 4 § 2 L. 1665/1986, ‘third parties cannot acquire ownership or any other right in rem over the thing before the expiry of the finance leasing in any way’.

The leasing contract must be concluded in writing and must be recorded on a special register kept at the Athens Court of First Instance. The cost of registration is minimal.

As during the leasing contract third parties cannot acquire ownership of or any other real right in the thing, even if they are in good faith, it makes no difference whether the ownership of the lessor is marked on the goods or not.

(b)If the lessee, B, has been provided with a right to purchase the computer at the end of the contractual term, in the event of his insolvency he will not be entitled to exercise or transfer this option, as it belongs to the insolvency estate (article 2 § 4 L. 635/37). The administrator can exercise and transfer the right with the permission of the judge rapporteur (article 576 EmbN).15

(c)Other securities, such as fiduciary transfer of ownership and leaseback, serve similar purposes. Nevertheless, the taxation of leasing agreements is more favourable.

(d)If A goes bankrupt, the insolvency administrator is not entitled to bring the contract to an end by a termination notice.16

Therefore, B will be able to resist a claim, on the grounds of his own right to possession, by A’s creditors to the computer made before the

15See further, Georgiadis, Symphonon proaireseos kai dikaioma proaireseos 265.

16Georgiadis, Nees morphes symvaseon tis sygchronis oikonomias 96; Kotsiris, Ptocheutiko Dikaio 353; N. Rokas Stoicheia ptocheutikou dikaiou 52; Mazis, I chrimatodotiki misthosi -- Leasing

158.

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expiry of the finance leasing (article 1095 A.K.). The insolvency administrator has the right to terminate the contract only in the event of B’s default in payment.

f r a n c e

(a)The leasing contract is especially designed to be used as the basis of this type of agreement, involving machines and industrial equipment (see Law No 66-455 of 2 July 1966, article 1).17 As seen in case 10, the leasing contract must be registered by the lessor on a register held at the Commercial Court having jurisdiction over the lessor, and the registration is to be renewed every five years. Absence of registration would result in the lessor being unable to enforce his title against third parties, unless he could prove that these third parties had actual knowledge of his title (article 8 of Decree No 72-665 of 4 July 1972).

(b)The inclusion of an option to purchase is a necessary condition for a transaction to be regarded as one of lease. If the contract stipulates that at the end of the rental period, the lessee is to become the owner of the asset automatically, the contract would not be regarded as one of leasing, but possibly one of sale under suspensive condition, which may affect the title of A to the computer.

(c)Under the lease, title remains with the lessor, providing a better protection than that of a security right, such as pledge. In contrast to the special charge on machines and industrial equipment provided by the Law of 18 January 1951,18 the secured creditor is entitled to apply for the asset to be sold in order to be paid out of the proceeds of sale. The procedure is governed by article L. 521-3 of the Commercial Code on the enforcement of pledges: on the date of payment, the pledgee must notify the pledgor, by registered letter, that payment is due. He must wait eight days before proceeding with the sale of the asset by auction. He will then be paid in priority to the unsecured creditors, but he has no

17See Duranton, ‘Crédit-bail (Leasing)’, Encyclopédie Dalloz, vol. Commercial, 1999.

18The Act was adopted with a view to encouraging modernisation of and investment in machines and equipment used in business activities. See Ripert, D 1951, Chr, 41. The conditions for the creation of the charge are cumbersome: the contract must be a deed signed before a notary or a contract signed by the parties and subsequently registered on a register held by the Commercial Court. Registration must be done by the creditor-chargee within two weeks of the date of the charge contract (article 3).

right to the machine itself.19 Clearly, leasing offers the best protection available, that is, ownership. Retention of title will also be effective and, as discussed previously, does not require publication.

(d) If A becomes bankrupt and insolvency proceedings are commenced, the question is whether the insolvency administrator will continue with the leasing contract. The insolvency administrator could, pursuant to article 37, decide to terminate the ongoing contract and claim rei vindicatio of the computer, since A has never ceased to be the owner (see case 10(d)).

b e l g i u m

(a) The lessor (A) remains the owner of the computer. The lessor can recover the leased objects from the insolvency estate or can resist an execution against the equipment by other creditors. Finance leasing is partially regulated by a Royal Decree of 10 November 1967. According to these provisions, the finance lease is limited to equipment; the duration of the contract must correspond to the estimated working life of the equipment; the instalments must amortise the capital cost; and the lessee must have the option to acquire the equipment at its residual value at the end of the lease. The equipment must be marked with a notice stating that it is subject to a finance lease. All these statutory provisions are however of an administrative nature, in the sense that they have to be observed by financial institutions in order for them to be allowed to offer their services to the public in this capacity. The Cour de cassation has ruled that the fact that equipment was not marked by the lessor is irrelevant in so far as the effectiveness of the lessor’s rights as against third parties is concerned.20 Likewise, lower courts have ruled that the question of whether the lessor is an authorised institution under the Royal Decree of 10 November 1967 is irrelevant to the question of whether the contract is valid and whether the ownership of the lessor is effective as against third parties.

19A clause purporting to allot the machine to the chargee in case of non-payment (‘pacte commissoire’) would be void. However, a court could decide to allot the machine to the chargee if he decides not to pursue the sale of the machine. See Ass plén, 26 Oct. 1984, D 1985, 33, Conc Cabannes, note Derrida; JCP 1985, II, 20342, Rapp Viennois, note P. Corlay.

20Cass. 27 Nov. 1981, Pas 1982, I, 434, RW 1981--82, 2141 concl. proc. gen. Dumon.

pledged or charged, without a judicial sale (pacto comissório, articles 694◦ and 678◦ C.C.). In the case of lease-back, it would therefore be possible to use the leasing agreement as a security. However, the statute governing leasing contracts (DL 149/95, of 24 June) does not contain any rule about lease-back. Only legal writers have referred to it.22 If a lease-back is used in order to grant a security to a creditor, it is possible that the courts would treat it as a sham pledge or charge and subject it to the rules applying to pledges and charges (article 241◦ C.C.).

The use of the leasing contract as a substitute for retention of title is not very common, because the protection offered to the creditor under retention of title would not be different.

(d) In this case, by analogy with the rule applicable to contracts of lease (article 170◦ CPEREF), the insolvency of the lessor cannot affect the rights of the lessee, so he will be able to require the insolvency administrator to perform the contract.

s p a i n

(a) A remains the owner of the computer and may therefore enforce his ownership against the unsecured creditor of B, who is executing against B’s goods.

A’s right does not depend on any further prerequisites. However, if A either holds a public deed of this transaction or has registered the contract of sale, according to the fill-in form available at the Chattels Registry, then A may execute more expeditiously against the secured goods. If the contract has been legalised in a public deed (article 517.4◦--5◦ LEC) the corresponding procedure will be the executive suit for nonpecuniary goods (articles 699 ff. LEC). If, on the other hand, the contract has been legalised in accordance with the fill-in form which is available at the Registry and has been recorded in the Chattels Registry, then the corresponding procedure will be the summary oral suit (article 250.11◦ LEC). If B becomes bankrupt, the leased goods will not be included in B’s insolvency estate and therefore the goods should be at the leaseholder’s disposal, after the contract has been brought before the judge. The insolvency judge will recognise the leaseholder’s right and order that the goods be separated from the insolvency estate.23

22See Menezes Cordeiro, Manual de Direito Bancário 554 and Romano Martinez, Contratos em especial 311.

23See Supplementary Provision 5/II LVBMP.

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(b)Leasing includes an option to purchase the financed movable. This distinguishes it from renting, which does not incorporate an option to purchase the financed goods. B, on exercising his option to purchase, will become the owner of the computer and the consequences of A’s insolvency will not affect him. It goes without saying that, in order to exercise his option, he must have paid all the leasing instalments.

(c)Leasing of movables is not the most common type of security right used in Spain. Reservation of title and the statutory restriction of transfer are more common. From a very general point of view, they all serve a common economic goal. However, a reservation of title clause is usually set out in a contract of sale and provides the seller with a specific guarantee with regard to the goods sold, whereas a leasing operation has basically a financing goal for commercial or industrial establishments. Although the aim may be similar, there are other differences of importance between them: (1) property transfer occurs in the reservation of ownership, whereas in leasing, transfer of property does not happen;

(2) a leasing operation enjoys certain tax advantages, which makes it more appealing to potential consumers; (3) leasing is usually carried out between, on the one hand, a financial institution, and, on the other hand, a businessman, a self-employed person or professional, or a firm, but not between private individuals. In sum, both the financing aspects and the tax benefits make the leasing contract very appealing to companies which deal either in consumer goods or in goods the life-span of which is rather short. These are, surely, noteworthy reasons that may help to explain why the leasing of movables is most often used to secure the acquisition of some commodities, for example, computers, machinery, cars, office equipment, etc.

(d)If the financial institution, A, becomes bankrupt, the insolvency administrator may require B to pay the leasing instalments due prior to or at the point of A’s insolvency. On the other hand, B could exercise his rights against the insolvency estate to maintain his option to buy the computer. This is the case if a special agreement was reached in the leasing contract which allows the lessee (B) to provide the full payment (leasing payments plus option to purchase) for, and subsequently to acquire, the computer.

The insolvency administrator cannot terminate the leasing contract with B, as long as he (B) keeps up with the agreed payments. In other words, insolvency does not destroy the contractual bonds that exist

between the lessee and the lessor. If the contract of leasing was agreed within the suspect period, the contract would be declared invalid. On the other hand, if the leasing contract was agreed outside the suspect period, the contract is valid and the insolvency administrator must comply with its clauses. The debtor (B) can continue paying the instalments until he has paid off the whole debt. In the end, he will have the right to exercise his option to purchase, if he wishes.

i t a l y

(a) The fact pattern of this case is by now extremely common in Italy, though it was almost unknown before 1970.24 The lessor purchases goods from the seller, which are then leased to the lessee. The lessor, a leasing company, is the owner of the goods during the period when they are used by the lessee. The rent, which is fixed by the leasing contract, reflects the discounted value of the goods, and the finance charges of the operation. At the agreed time, the lessee has the option to purchase the goods, or to return them to the lessor.

The lessor is the owner of the goods that are leased to the lessee. He may therefore claim that the leased goods are not to be subjected to an execution by an unsecured creditor of B, on the ground that the goods in question do not belong to the debtor. Article 619 c.p.c. governs how execution is opposed.25 Despite the fact that the Civil Code does not establish a requirement of form applicable to leasing contracts, such as that which governs the enforcement of reservation of title clauses against creditors (article 1524 c.c.), the lessor’s right will be protected in case of execution only if the lessor establishes the contract of lease by documentary evidence showing the reason why the goods in question are on the business premises of the debtor. That evidence will usually consist of a written document bearing a certain date which precedes attachment to the goods. The judge may, however, relax the requirement of proof if the trade or profession of the debtor, or that of the third party, of itself explains why goods belonging to the third party are found by the executing creditor at the debtor’s place of business

24Hence there is no Civil Code provision which regulates leasing as such. The UNIDROIT Convention on International Financial Leasing of 1988 entered into force in Italy on 1 May 1995 (l. 14 July 1993, n. 259); however, it is not relevant to the point raised by this case.

25For a full discussion of the protection of the lessor’s right: Bussani, Proprietà-garanzia e contratto 103 ff.

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(or in his house). Article 621 c.p.c. establishes these exclusionary rules of evidence by expressly prohibiting witness evidence or presumptive inferences concerning the rights of third parties over assets kept on the debtor’s business premises or at his house. Though the Insolvency Act does not contain a similar rule, these exclusionary rules of evidence govern insolvency proceedings as well.26 Hence the lessor’s right to the leased goods will be protected in the case of insolvency only if he can prove it by documentary evidence having a certain date, which precedes the commencement of the insolvency proceedings, or if he is able to persuade the judge that the requirement of proof should be relaxed, because of the trade or profession of the insolvent.

It is debated whether the Civil Code rules on the restitutionary claims following the rescission of sales with retention of title can be applied to leasing contracts if the insolvency administrator of the lessee decides to rescind the leasing contract instead of adopting it.27

According to article 1526 c.c., if the sale with retention of title is terminated due to the buyer’s non-performance, the seller must return the instalments he has received, subject to his right to fair compensation for the use of the things and for damages. If it was provided that the instalments paid should be retained by the seller as indemnity, the judge may, according to the circumstances, reduce such indemnity. The Civil Code states that the same rule applies if the contract is in the form of a lease (locazione), if it is provided that, at the end of the lease, ownership of the thing will pass to the lessee as a result of payment of the agreed rent. This provision was not enacted to deal with leasing contracts such as those with which the present case is concerned. Yet its possible application to the present circumstances must be considered.

The approach to the question differs according to the specific content of the particular agreement in question. In particular, whenever the option price at the end of the leasing period is considerably lower than the residual value of the goods, and there are grounds to infer that the agreement of the parties at the time when the contract was formed was that the goods would eventually be acquired by the lessee, retention of title in favour of the lessor is considered by authors and cases to be the predominant feature of the contract. In this instance, therefore, rules on

26Bonfatti, in: Ragusa Maggiore/Costa 435.

27For a succinct presentation of the various alternatives: Maffei Alberti, Commentario breve alla legge fallimentare sub-articles 72--83 VIII, 291--292.

sale with reservation of title (article 1526 c.c.) apply by way of analogy to the leasing contract. Hence, if the lease is rescinded, the lessor will be entitled to recover the leased goods and to equitable compensation for their use by the lessee. However, the lessor will have to pay back to the insolvency administrator the instalments that he received from the bankrupt before the commencement of insolvency proceedings.28

On the other hand, if the leasing contract was concluded to finance the use of the object of the lease by the lessee, and a transfer of ownership of the leased goods to the lessee is only a remote possibility, despite the fact that the lessee may exercise an option to purchase at the expiry of the contract, the consequences of the insolvency of the lessee will be different. In this case, the lessor will be entitled to recover the thing that was leased. The lessee is not entitled to restitution of the instalments paid until the commencement of insolvency proceedings, inasmuch as those payments were due as consideration for the use of the object of the lease, by analogy with article 1458 c.c., which provides that the termination of a contract for continuous performance does not have retroactive effects with respect to performance already made.29

In this case, A owns the computer, and can therefore enforce his real right against any creditor executing against B.

In the case of B’s insolvency, the prevailing opinion is that article 72 of the Insolvency Act is fully applicable. Therefore, the insolvency administrator will be entitled to decide whether to perform the leasing contract or terminate it.

(b)As seen under part (a), an option to purchase in favour of B may be relevant, especially in order to establish a certain interpretation of the will of the parties concerning the transfer of ownership in favour of the lessee at the end of the leasing period.

(c)Whilst leasing contracts are not considered invalid if concluded in the normal course of business, transfer of ownership for security purposes

28Cass. 22 Mar. 1994, n. 2743, Fallimento, 1994, 1119; Cass. 22 Feb. 1994, n. 1731, Fallimento, 1994, 591; Cass. s.u., 7 Jan. 1993, n. 65, Fallimento, 1993, 521; Cass. 24 Aug. 1993, n. 8919, Fallimento, 1994, 39; Cass. 18 June 1992, n. 7556, Fallimento, 1992, 1118. The fons and origo of this line of cases is traceable to: Cass. 13 Dec. 1989, n. 5569, 5570, 5571, 5572, 5573, 5574. For in-depth commentary see Bussani, Proprietà-garanzia e contratto 76 ff.

29See the cases cited in the previous footnote.

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is null and void under the current interpretation of article 2744 c.c. on foreclosure agreements (pactum commissorium).

(d) See part (d) of case 10.

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

(a) Although, strictly speaking, it is not necessarily the case, in practical terms the lessor will almost always prove to be the owner of the object of the lease.30 It will therefore be assumed that the lessor is the owner in the discussion of this case.

A contract of lease as such is not a specific contract governed by mandatory rules of Dutch law. However, the agreement may sometimes be classified as either a rental agreement, particularly in the case of an operational lease, or as hire purchase, in particular the finance lease. Both the contracts of rent and hire purchase are subject to specific rules of Dutch law. Care should be taken in the process of classification, however, paying due regard to the particular facts of the case in question.

In most instances of the operational lease, the lessor is a ‘normal’ owner of the object of lease. Execution against the property by the lessee’s creditors, in this case against the computer by B’s creditors, would not be possible. The lessee has no real claim to the leased property whatsoever. If B, the lessee, fails to pay because he or she has become bankrupt, the lessor will be able to terminate the contract and rely on rei vindicatio to claim back the property.

With regard to finance leases, it is possible that the lessee will have a real claim to the leased property.31 In particular, this would be the case when the contract of lease is regarded as one of hire purchase. The latter contract requires that ownership is to pass automatically to the buyer under the contract, B, after he or she has made all the periodical payments.32 It is sometimes said that such contracts concern a situation where both the seller and the buyer have ownership: the lessor under a resolutive condition, the lessee under a suspensive condition.33

30Van Hees, Leasing 19--20.

31See the study by Van Hees, Leasing, in particular chapters 4 and 5, the latter addressing the situation of an unsecured creditor seeking to execute against the property as well as the situation of one of the parties being adjudicated bankrupt. A summary of the dissertation has been translated into English.

32Article 7A:1576h BW.

33This view is not without controversy; it implies the recognition of an

Anwartschaftsrecht. See Van Hees, Leasing 98 ff.

In practice, most leases do not envisage the automatic transfer of ownership at the end of the term of lease. Usually, the lease is not a conditional transfer of ownership but only grants the lessee an option to buy the property at the end of the lease. This would in principle prevent the agreement from being classified as one of hire purchase.

(b)The Code defines the contract of hire purchase as a contract under which ownership automatically passes to the buyer/lessee at the end of the term of lease upon full payment (article 7A:1576h BW). This would normally imply the use of a retention of title clause and a conditional transfer. An option to buy the property instead of an automatic transfer would thus normally prevent the contract from being subject to the rules applicable to hire purchase. However, parties will not be allowed to circumvent these mandatory rules by agreeing that ownership will not pass automatically but only upon payment of a token price.34

(c)Lease agreements in various forms are quite common in practice.

Even though the lessor essentially assumes the position of a fiduciary owner, the lessor is not treated as a holder of a security right (in rem). In particular, unlike the holder of a charge or a pledge, the lessor is not obliged to execute against the property by means of a public sale nor is he or she under a duty to return any surplus if he or she was to sell the property. The latter may be different if the contract is regarded as one of hire purchase.35

It should be noted in this regard that a security transfer of ownership as such is prohibited by the Code.36 This prohibition became of particular relevance in a case concerning a ‘sale and lease-back’ arrangement. The Supreme Court, however, saw no infringement of the Code’s prohibition.37 In the Court’s view, the prohibition is essentially confined

34Pitlo/Reehuis/Heisterkamp, Het Nederlands burgerlijk recht III n. 975.

35Article 7A:1576A BW.

36Article 3:84(3) BW. Before the introduction of the new Civil Code in 1992, fiduciary transfers in combination with a traditio constitutum possessorium were the accepted means of creating a non-possessory security right. The fiduciary owner was, however, treated analogously to the holder of a pledge. Thus, he was not allowed to appropriate the property but was bound to execute by public sale and return any surplus realisation. The fiduciary ownership was difficult to reconcile with the closed system of real rights under Dutch law: ownership does not know these restrictions. The Civil Code introduced the silent or non-possessory pledge (and charge) which was to replace the fiduciary transfer. The prohibition underpins the closed system.

37Hoge Raad 19 May 1995, NJ 1996, 119 (Sogelease).

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to preventing parties from creating real rights other than those recognised by the Code. As the parties did not intend to restrict the rights of the lessor as owner in any way, it was not regarded as a prohibited transfer.38

(d) The effects of the insolvency of the lessor depend on whether the lease concerned a conditional transfer (such as hire purchase or retention of title in general) or not. If it did, B as the lessee would have become the owner under a suspensive condition, whereas A would only have ownership under a resolutive condition. A’s insolvency administrator would therefore only function as a conditional owner. A sale by the administrator would result only in the transfer of ownership under the same condition. Consequently, B’s position would not be affected.39

Where the lease agreement does not involve a conditional transfer, the lessor would be regarded as having retained full title to the property. The lessee’s claims would therefore be in personam only and B would not have any real right. A’s insolvency administrator would therefore take free of any rights and B would in principle be left with a simple claim in insolvency.

It has been argued that the limited scope of ownership, i.e. security for debt, must have consequences for the owner and therefore also for his or her creditors.40 In particular, third-party acquirers should be bound by the lease agreement. In other words, the lessee’s claims should be accorded a degree of droit de suite.41

e n g l a n d

(a)This is a straightforward transaction in English law. As the owner of the computer, A can assert its real rights in B’s insolvency. A is not required to register its ownership.

(b)If B has an option to purchase, then the contract will be one of hire purchase. To a degree, English hire-purchase law treats the option as

38Vriesendorp, AA 1995, 872; Rank-Berenschot, NTBR 1995, 207.

39See Hoge Raad 25 May 1962, NJ 1962, 256. Hoge Raad 28 Apr. 1989, NJ 1990, 252 (Puinbreker). Transfer of the lease property by (a creditor of) the lessor will therefore often be combined with the assignment of the remaining payments to be made by the lessee.

40The lessor is in fact a fiduciary owner.

41See Van Hees, Leasing 143--145 and 208 (summary).

an item of property in its own right.42 Unless the contract excludes the possibility, B’s insolvency administrator may take steps to perform the contract,43 which the administrator will be disposed to do if the value of the computer exceeds the sum of remaining instalments.

The difference in English law between genuine hire purchase (where there is an option to purchase) and conditional sale (where ownership automatically vests at the end of the instalment plan) does not matter for insolvency purposes, but it does matter as regards the disposing power of the hirer/buyer. A hirer will have disposing power in respect only of motor vehicles (Part III Hire Purchase Act 1964), whereas a conditional buyer under a non-consumer transaction (Sale of Goods Act 1979, section 25) has disposing power in respect of all types of goods.44

(c)This type of transaction is common: it has certain accountancy advantages. It is neither easier nor more difficult than conventional security, apart from the absence of any registration requirement in the case of lease and hire purchase.

(d)If A goes into liquidation (the insolvency proceedings applicable to companies), then, as discussed previously, this does not as such amount to a repudiation of the contract. A’s insolvency administrator (liquidator) may choose to perform the contract if it is profitable. Otherwise the liquidator will disclaim the contract.45 The consequence of this is that B will have to prove as an unsecured creditor in A’s liquidation.

i r e l a n d

(a) The answers given in relation to case 10 basically apply here. The issue turns on whether there is a genuine lease of the computer and, prima facie, the question must be answered in the affirmative notwithstanding the fact that A, the financial institution, does not itself have any immediate economic need for the computer. Finance leasing is quite a common and well-established form of business financing. Neither the nature of the goods as computers nor the fact that the

42See Whiteley v Hilt [1918] 2 KB 808; Transag Haulage Ltd v Leyland DAF Finance plc [1994] BCC 356.

43Insolvency is not as such a repudiation of the contract entitling the other party to terminate it: Jennings’ Trustee v King [1952] 2 All ER 608.

44Forthright Finance Ltd v Carlyle Finance Ltd [1997] 4 All ER 90.

45S. 178 of the Insolvency Act 1986.

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transaction is a three-party one demands a different analysis from that supplied in relation to case 10 above. The aforementioned principles still apply.

(b)The fact that B has an option to purchase the computer at the end of the contractual term does not fundamentally affect the analysis or the ‘genuineness’ of the transaction. In fact, ‘hire purchase’ under which consumer goods are rented for a period, at the end of which period the hirer has an option to purchase, has traditionally been the main method of consumer finance in Ireland. Often the option to purchase may be exercised for a trifling sum which is rolled up with the last rental payment. In economic substance, the consumer is paying the ‘full’ price of the asset over the duration of the contractual hiring period, but legal theory is different.

(c)It is difficult to generalise on this issue, but basically the Irish courts look sympathetically at both transactions of charge and finance leasing. Both forms of transaction are quite common and it is difficult to say that there is a discernible difference in judicial handling of the respective matters. Finance leases and hire-purchase transactions do not have to be registered.

(d)Basically, B can continue the contract in the event of A becoming insolvent. If, however, the contract is unduly onerous from A’s point of view, then A’s insolvency administrator (liquidator) can disclaim it, in which eventuality B would have to submit a claim in the insolvency proceedings applicable to A’s estate (liquidation). The claim would be as an unsecured creditor for any loss suffered as a result of the discontinuance of the contract. The power to disclaim in the insolvency legislation is designed to facilitate the efficient and speedy administration of an insolvency estate.

s c o t l a n d

(a)A is the owner of the computer. There was a valid contract of sale between S, the original owner, and A, and there is nothing to prevent ownership from passing. Delivery is not necessary.

(b)The example given is a straightforward ‘finance lease’. In ‘hire purchase’ the arrangement is similar except that B has the right to acquire

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interpreting the contract as a simple lease rather than a hire-purchase agreement.

(c)As already stated, the finance leasing transaction can also be construed as a hire-purchase agreement between the finance company

(A) and the customer (B), with the finance company (A) retaining title to the computer. A strong indication to this effect is if the contract contains a clause transferring ownership of the computer to the customer

(B) at the end of the useful life of the computer. Since A retains ownership under both constructions, the courts’ approach to leasing and to a security right in the form of retention of ownership is equally favourable to A. The only difference would be that in the case of a hire-purchase agreement, the hire-purchaser’s/seller’s (A’s) ownership of the computer would, according to section 84 of the Insolvency Act, be replaced by a security right (a tacit hypothec) in his favour.49

(d)Once the computers have been delivered to B, the insolvency of the financial institution (A) will not affect the lease if the insolvency administrator has notified the lessee (B) that he intends to abide by the lease. In general, the insolvency of A has no other effect than to place the insolvency administrator in the shoes of the bankrupt, neither rescinding the obligations of either party, nor imposing new ones, nor anticipating the period of performance on either side. The insolvency administrator will for instance be bound if the lease contains an option for renewal: he will not be able to compel B to return the computer so long as B continues to pay his monthly rental. Since the insolvency administrator has title of the computer, he may sell it to an outsider. Such purchaser, however, steps into the shoes of the administrator and must allow B to remain in possession on the same terms if the administrator has elected to abide by the lease. If the administrator does not elect to abide by the lease and terminates it, notifying the lessee accordingly, the insolvency will take precedence over the lease and the computer can be claimed by the administrator on behalf of the creditors of A. The lessee will then have nothing but a claim for breach of contract against the estate of A.50

49See supra, case 3.

50See Smith, The Law of Insolvency 161--164; Smith/Sharrock, in: The Law of South Africa XI para. 175.

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become owner of the computer when all payments are made. In such a case, the transaction would have been one of purchase, but reservation of title would most probably have been implied and A would still have had a real right, unless he had permitted B to dispose of the computer prior to full payment. It does not matter whether or not the lease corresponds to the expected useful life of the computer. Reservation of title is valid, even if the instalment period corresponds to the expected useful life of the goods, provided that the purchaser is not permitted to dispose of the goods prior to full payment. Since the computer never belonged to B, no requirement of publicity applies.51 As there is no leasing legislation applicable to movables, and no general rules on the subject in the Bankruptcy Act, and no precedents, it is unclear whether a clause providing that the lessor can terminate the contract should the lessee go bankrupt is valid even if the insolvency administrator demands fulfilment.52

(b) If B has an option to buy the computer at the end of the contractual term, there is no doubt that A will be regarded as having retained title and will have a right of separation, when the option requires B to make payment immediately on the exercise of the option and prior to obtaining any power to dispose of the computer. Should B be entitled to exercise the option in circumstances where payment is deferred, but the entitlement to dispose is acquired immediately, it could be argued that the policies of the rules on reservation of title demand that A should not have a ius separationis (even during the period before the option is exercised). However, as stated previously, a commission principal has a ius separationis pursuant to section 53 of the Commission Agency Act even if the agent may buy the goods for himself; the statute is silent on the issues of deferred payment and the intermediate prohibition on disposals (see case 7(c)). Also, in these circumstances, an acquisition by the agent may be the ordinary termination. No Supreme Court case exists, but it may be assumed that the expectations of commercial life and the fact that the goods are not yet assigned will distinguish the case from perfected transfers with a void reservation of

51As to sale and lease-back, see supra, Swedish report, case 10. Tenants of immovable property are protected against the termination of their leases by a bankrupt landlord by legislation.

52Concerning leasing in general, see Möller, Civilrätten vid finansiell leasing.