учебный год 2023 / Morell, Helsen, The Interrelation of Transparency and Availability of Collateral. German and Belgian Laws of Non-possessory Security Interests

The first and simple argument is that the security interest in the whole business draws its justification from coordination issues. Coordination is always easier under transparency. Therefore, it seems straightforward that transparency would facilitate the coordination that justifies the existence of a security interest covering the whole business.

The second argument is more complex. The German system originally lacked a floating charge-like security interest. The courts responded by successively turning the transfer of title into an institution that could be used in a floating charge-like manner. This amendment led to the problem of excessive security, resulting in courts challenging security interests that covered too much of the business compared to the creditor’s claim. The ensuing legal insecurity made it much more difficult to set up a floating-charge-like security interest and therefore is likely to hamper efficient allocation of monitoring. The new case law entitling the debtor to claim back collateral as soon as it exceeds 150 per cent of the secured claim certainly increased the transaction cost of arranging a floating charge-like security interest, making the delegation of monitoring more expensive. Now collateral may be handed back and forth between the creditor and the delegated monitor, depending on whether the ratio of claim value over collateral value rises or falls. Moreover, the case law only allows those creditors to take a security interest in the whole business who have a claim worth at least 66 per cent of the whole business.123 This complicates setting up a floating charge to delegate monitoring, too, because it shrinks the set of eligible delegated monitors.

Finally, the case law seems to deal with the problem that an over-secured delegated monitor would not bother to monitor at all. However, in fact, the system of delegated monitoring aims at leaving control with the owners in good times – because then bad decisions cut into their profits. Only if times get worse, control shall be shifted over to the delegated monitor. If times do get worse, the value of the business (i.e., the collateral) diminishes. Therefore, a creditor who may be over-secured in good times may not be over-secured anymore once times get tough. So, in tough times, he may take his monitoring task very seriously. In summary, the German case law on excessive security interests therefore seems to seriously complicate providing a floating charge-like security interest. Therefore it seems to hamper an efficient allocation of monitoring.

Because we do not exactly know how useful the German equivalents of the floating charge actually are, we cannot specify whether the described inefficiencies are substantial. However, as long as a register is not substantially costly, even preventing potential inefficiencies can pay off. Furthermore, it may be worth considering amending the German substitutes of the floating charge, for instance,

123 150 per cent of 66 per cent are 100 per cent of the debtor’s business.

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by providing for priority only over security interests taken out after what corresponds to ‘crystallization’.

If Germany had a register of the Belgian kind, conflicts of priority would be cleanly resolved by priority. The case law on excessive security would most likely lose its relevance. Likewise, the complications in setting up a security interest on the whole business caused by this case law would disappear. Thus, to provide a security interest suitable to coordinate creditors in the constellations exposed above, a German register of non-possessory security interests or floating charges would indeed help.

4.Challenges in Setting up a Register

As indicated, Belgium is currently reforming its law on security interests in movables, allowing for non-possessory security interests. In this new system, the old inconsistencies will be done away with, and transparency will be increased by conditioning enforceability of security interests on either registration or dispossession, at the parties’ choosing. However, the practical set-up of the system is still being designed, and many challenges still remain. The Achilles heel of the entire system is the modalities of accessing and using the register.

This section will shed some light on how the accessibility of the register would ideally be designed in order to maximize the economic benefit of security interests. The first question is who should be allowed to search the register and view the entries made (sec. 4.1). Second, we will go into who should be allowed to make entries into the register (sec. 4.2).

4.1.Privacy Issues: Who Is Allowed to Search the Register?

Considerations of privacy will necessarily have to be taken into account, but one should be careful not to let these concerns paralyse the entire system. The whole point of having a security register is to allow creditors easy access to information regarding the security interests granted by their debtor.124 Easy access to this information is the foundation of the transparency required to minimize the social cost of having non-adjusting creditors. One might be inclined to restrict access to the register to banks only, excluding other parties, because banks are easier to identify and regulate, but this would defeat the purpose of having the register: Banks are sophisticated creditors who can monitor more easily and are often secured creditors themselves. They are therefore the exact opposite of the non-adjusting creditors for whom the register is primarily meant to lower the cost

124D. BAIRD & T. JACKSON, ‘Possession and Ownership: An Examination of the Scope of Article 9’, 35, No. 2. Stanford Law Review 1983, p. 186.

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of monitoring.125 Striking the right balance between protecting the private interests of debtors in privacy and allowing creditors easy information to the social benefit is a significant challenge for Belgian lawmakers, but it is essential that the core of the registry system is maintained. Given the efficiency benefits of transparency set out in this article and the very small amount of information actually entered into the register, it seems recommendable to simply allow anyone to consult the register. The minimum accessibility that still seems suitable to promote the efficiencies described above would be to let all individuals consult the register who can prove a claim against the debtor by direct documentary evidence.

In Germany, it seems that privacy concerns feature prominently among opponents to the register. It seems that business is opposed to a register because potential debtors are worried that third parties can learn about their structure of finance.126 In particular, potential debtors seem to worry that competitors will learn about a debtor’s future ability to invest. Although this concern has to be taken seriously, it seems unlikely that substantial information about the debtor’s structure of financing can be derived from the minimal content of a register as described above.127 In addition, the example of Belgium may teach that this concern may be exaggerated. In Belgium, all businesses except for the very small ones have to publish their financial statements at the end of their financial year.128 This is much more detailed information than a security register could ever provide. Nonetheless, it has not been reported that the financial information provided to competitors has been exploited to the detriment of consumers or society. Furthermore, while it is understandable that a debtor may worry about revealing his weaknesses through a register, evidence that this revelation is somehow against the public good is (yet) absent.

The register’s feature of sharing information could be a threat beyond mere privacy concerns. Indeed, it has been claimed that in more bank-centred systems

125This may explain why banks were not keen on introducing the register in Austria. Banks may be the sophisticated secured creditors using collateral to shift value from non-adjusting creditors to themselves, see I. LUTZ, ‘Tagungsbericht über das Symposium: Ein Register für Kreditsicherheiten an beweglichen Sachen und Forderungen. Die Zukunft für das deutsche Recht? – Dogmatische Grundfragen, Tücken der Implementierung und die Rolle der Notare’,

Deutsche Notar-Zeitschrift 2013, p. 88.

126I. LUTZ, ‘Tagungsbericht über das Symposium: Ein Register für Kreditsicherheiten an beweglichen Sachen und Forderungen. Die Zukunft für das deutsche Recht? – Dogmatische Grundfragen, Tücken der Implementierung und die Rolle der Notare’, Deutsche Notar-Zeitschrift

2013, p. 88.

127E.-M. KIENINGER, ‘Die Zukunft des deutschen und europäischen Mobiliarkreditsicherungsrechts’,

Archiv fuer die civilistische Praxis 2008, p. 213.

128Articles 92–93 Belgian Company Code; Wet van 17 juli 1975 met betrekking tot de boekhouding van de ondernemingen (Accounting Law of 17 Jul. 1975); K. VAN HULLE, N. LYBAERT & J.-P. MAES, Boekhoud-en jaarrekeningrecht, Die Keure, Brugge 2010, pp. 49 et seq.

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of finance house banks generate a lock-in effect by first investing in gathering information on a debtor and then granting credit taking all the debtor’s assets as collateral, thereby locking him into the relationship with his house bank. This enables them to recoup their investment in information because the bank can now exploit its monopoly over the debtor.129 The strategy of building barriers to entry by asking excess collateral may be an efficient way to compensate the bank for its monitoring effort, but it can also constitute an inefficient and anticompetitive foreclosure strategy. A register may facilitate scaring off competitors. Through the register, a bank can easily signal that all the debtors’ assets are encumbered. So this mechanism could lead to an extension of monopoly prices on credit, reducing the overall amount of credit.

The concern sounds plausible, but empirical evidence suggests that it is not justified. Indeed, a study comparing seven countries that introduced a register between 2004 and 2009 with different control groups suggests that the introduction of a register indeed coincides with an extension of credit.130

4.2.Gatekeeping: Who Can Make Entries into the Register?

The Belgian register does not provide for a gatekeeper to verify the filed information. It relies mainly on the threat of liability to incentivize parties to file correctly and trusts that this incentive, together with some minor formal screening, will yield largely correct entries. This in itself may seem like a challenge to the Belgian system. As most entrepreneurs protect themselves from liability by limited liability companies, it seems that the threat of liability is a weak incentive, especially to less solvent firms. Therefore, banks may become de facto gatekeepers of the register — either because they will be the only ones to have access to the register anyway or because they are part of the vast majority of agreements setting up security interest so that they are potentially liable for most notifications. This can give banks an incentive to investigate the truth of the notified information more thoroughly and act as de facto gatekeepers.131

In Germany, it seems that the threat comes from excess potential

gatekeepers. Notaries seem to already be lobbying to underscore their tentative

indispensability as gatekeepers for a register of non-possessory security

129 T. STEIJVERS & W. VOORDECKERS, ‘Collateral and Credit Rationing: A Review of Recent

Empirical Studies as a Guide for Future’, 23, No. 5. Journal of Economic Surveys 2009, pp. 936

et seq.

130I. LOVE, M.S. MARTINEZ PERIA & S. SINGH, ‘Collateral Registries for Movable Assets. Does Their Introduction Spur Firms’ Access to Bank Finance?’, World Bank Policy Research Working Paper, 2013.

131The lack of a formal gatekeeper raised questions from the Belgian Privacy Commission during its consultation on the new Pledge Law; see Preparatory Works of the New Belgian Pledge Law,

Parl. St. Doc. 53, 2463/001, 108.

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interests.132 Locating the register with the notaries or merely requiring notary form of the documents to be filed seems like a bad idea. Notary services are vastly expensive in Germany, and indeed, verifying all documentation as an outsider is a cumbersome activity. This would increase the cost of notification dramatically and thereby increase the costs and decrease the availability of credit. The example of Hungary seems to show that this risk is real.133 A role the notaries could play would be to verify a person’s identity when asking to be admitted to the register for the first time. This would be affordable even at a notary’s. However, it would be even more affordable and equally reliable at any private firm offering this service.134

5.Conclusion

In this article, we use a comparison between Germany and Belgium to show that the trade-off between transparency and making more assets available as collateral has ceased to exist. This trade-off has driven the two countries’ evolution of non-possessory security interests for decades. Today, however, transparency and the extension of the collateral base have become complements as a consequence of technological improvement. This provides a justification for the recent Belgian reform adopting a register for non-possessory security interests in movables.

The main question of this article was whether a reform of the Belgian kind could serve as an example for Germany – as the Belgian legislator had hoped. The question has to be answered in the affirmative. We identified three striking differences between German and Belgian laws of non-possessory security interests as it stands today. First, the Belgian register yields a higher degree of transparency than the opaque German system of transfer of title. Second, the German transfer of title displays a key instability that the Belgian non-possessory pledge does not share to the same degree. Third, Belgium offers a registered floating charge, while Germany offers a very extensive unregistered transfer of title. An economic analysis of the three differences revealed that a move in the Belgian direction would, in all likelihood, be beneficial for the German system of non-possessory security interests. The higher the transparency in the system, the lower the social cost of extending secured credit. In addition, the more register transparency immunizes non-possessory security interests against third-party

acquisitions, the more effectively can secured lending prevent asset substitution. Finally, the transparency and the rank order made possible by the register facilitate the efficient allocation of debtor monitoring between creditors

132 L. BÖTTCHER, ‘Vorsorgende Rechtspflege durch Notare bei der Registrierung von

Mobiliarsicherheiten’, Rheinische Notar-Zeitschrift 2013, pp. 285–292.

133E.-M. KIENINGER, ‘Die Zukunft des deutschen und europäischen Mobiliarkreditsicherungsrechts’,

Archiv fuer die civilistische Praxis 2008, p. 204.

134An example is PostIdent offered by the Deutsche Post AG.

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using floating charge-like security interests. Concerning the remaining challenges in setting up the register, we find that neither privacy issues nor the lack of a gatekeeper undermine the Belgian register solution.

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