учебный год 2023 / Wibier, Proprietary Securities in DCFR
.pdf
Article 7:104 of Book IX, giving any party or third person whose rights are violated by enforcement measures or by resistance to justified enforcement measures the opportunity to call upon a competent court is likely to make things worse because it may invite endless legal proceedings as to questions of the reasonableness of the enforcement measures taken by the secured creditor and its willingness to cooperate with the security provider. In any event, the article would give rise to years and years of litigation before it would become clear what these articles mean in practice.28 Vague rules need to be filled in by case law before it is clear what they mean. Rules of enforcement should (and can) be clear and non-ambiguous without the need of obtaining further clarification through case-law precedents. In addition, any security that cannot be readily enforced upon default is worthless. It will probably not count as risk reducing from a regulatory perspective and it will probably not lead to lower costs of borrowing.
Also, the rules in relation to enforcement seem to be far too detailed. Worse, however, is that there are various rules in Book IX of the DCFR which are unclear or do not make sense. Here are a few examples illustrating the point made.
First, the rule of article 7:204. This rule obliges the secured creditor to inform the third party debtor as precisely as possible in the circumstances of the nature, amount and maturity of the security provider’s right to payment against the third party debtor, if the encumbered asset is a right to payment from a third party debtor. It is hard to see why the third party debtor should be informed by the secured creditor. The secured creditor probably does not even have this information. In addition, the article is almost illegible due to its complexity.
Second, article 7:208(1), which determines that a secured creditor may exercise its right to dispose of the encumbered asset only if the secured creditor gives notice of its intention to do so, is much too vague to be practical. It is unclear to whom notice should be given, when this should be done, for what purpose and how notice should be given. These questions are hardly answered by article 1:109 of Book I of the DCFR which deals with notices in general, but even if they were, the rule itself should be clear precisely because it is an enforcement rule.29
Third, article 7:212 obliging the secured creditor to realise a commercially reasonable price for the encumbered asset. Using such vague terms may create a lawyer’s paradise for cases where such price is not the market price obtained at a ‘recognised market’ (whatever that may be) because then, pursuant to article 7:212(3) the price is commercially reasonable if the secured creditor took such steps as “could be expected” to be taken in the circumstances. The meaning of this rule will only become clear after the courts have applied for at least a decade, possibly longer. Rules this vague should not form part of enforcement law.
Fourth, article 7:214(3) which states that a debtor of an encumbered right to payment (not being a negotiable instrument) may refuse payment unless the secured creditor sends a notice indicating the amount duet (sic), triggers the question why the secured creditor should provide this information. Moreover, it does not seem warranted to give the debtor of a claim that has been encumbered an additional defence which would entitle such debtor to refuse payment. A simpler system would oblige the debtor to perform the obligations towards the secured party. The security provider and the secured party should then deal with the question whether the
28This is a more general point which is further discussed in the next paragraph.
29Some of these questions may still be answered by the commentary in the full version of the DCFR but any such comments cannot take away the fact that the rule itself is unclear.
11
secured party needs to reimburse the security provider for any amounts received in excess of the secured liabilities.
These type of rules are not very helpful from the perspective of sophisticated lenders and borrowers, mostly because they are too vague and invite all kinds of defences . It is important that secured creditors can liquidate the secured assets in a timely manner and that the rules for doing so are clear and unambiguous. This lead to my final remark in relation to Book IX of the DCFR.
2.5Complexity, new problems and the lack of a legal tradition to fall back to
International finance practice prefers clear rules and certain outcome to open norms and uncertainty. When the new Dutch Civil Code came into force on January 1, 1992, it had been discussed in academic forums and in legal literature for at least thirty years. In addition, the judiciary had already anticipated the new code by applying its rules to cases that were governed by the old civil code, often because this code left certain issues open that were covered by the new code. The reasoning often was that the new code reflected existing law in the field even though the new code was not yet legally binding.
The new Dutch civil code introduced a limited number of concepts that were new. The most relevant concept for the purpose of this paper was the introduction of a silent right of pledge over receivables. This opened the possibility to validly create a right of pledge over receivables without giving notice to the debtor of the receivable.30 The introduction of the new civil code is now more than 15 years ago and still the Dutch Supreme Court is dealing with issues in relation to this undisclosed right of pledge. the new law had been extensively discussed but it was not until it actually came into force that various problems and questions emerged that had to be dealt with through litigation.
Introducing new law31 will always be problematic from this perspective, but in a European context there are a number of additional problems. First, it may be harder to have an EU-wide discussion on the DCFR and its rules. Although a relatively small number of academics may find these discussions interesting and useful, it will be very hard indeed to actively involve legal practitioners in these discussions. Second, the DCFR will be a fundamental change for almost all EU jurisdictions, a change that is far more fundamental than the relatively smooth transition in the Netherlands from the old civil code to the new civil code. This is so because the DCFR necessarily will not reflect the legal tradition of any of the EU member states. The DCFR seeks to capture a common European tradition meaning that it is by its very nature different from each individual EU legal tradition. Third, Book IX of the DCFR is a brand new, complicated system of rules in relation to the creation and enforcement of security. It will lead to hundreds if not thousands of unanswered questions once put into practice and there is no legal tradition to fall back on to answer these questions. It would only seem possible to introduce EU-wide rules in the field of security if the number of rules is kept to an
30Notice of course does remain relevant albeit not for creation of the pledge. Without giving notice to the debtor, the secured party cannot collect the claim from its debtor.
31Oficially, the aim of the DCFR is not to introduce new law. In paragraph 19 of the introduction it is described as a ‘legislator’s guide’ or ‘toolbox’. However, it cannot be denied that the DCFR has been drafted as a law that could be introduced and should be viewed as at least a first step towards a European Civil Code and, more importantly my objections still stand if the DCFR is to be seen as a toolbox. Moreover, it would be very hard to start discussions on the merits of the DCFR if it would not be viewed as potentially new law. Any argument against a proposed rule could then be set aside by the argument that it was never meant to be introduced as a rule. The DCFR would then be beyond criticism.
12
absolute minimum in order to avoid complexities arising from the sheer number of rules and concepts involved.
These problems mean that it will be that much more difficult to make sure that the DCFR gives parties the same certainties that they enjoy under a national legal system that has developed naturally through decades of application and use.
In the field of secured transactions uncertainty is deadly. It would seem unavoidable that introduction of book IX of the DCFR would lead to decades of uncertainty in the field of secured finance transactions and therefore the current proposal is unsuitable for the needs of international financial transactions between sophisticated parties.
3.Conclusion
This paper has argued that Book IX (Proprietary security rights in movable assets) of the DCFR is not very well suited as a model law for EU wide security law as far as international transactions involving sophisticated lenders and borrowers are concerned. It does seem strange that the drafters of the DCFR did seem to have had these type of transactions in mind because if there is any field where there actually is a European market of secured finance it is precisely in relation to these sophisticated lenders and borrowers.
13