A Secured Transactions’ Regime for Europe: Treatment of Acquisition Finance Devices and Creditor’s Enforcement Rights

Author:Anna Veneziano
Position:Professor, University of Teramo

1. The scope of a secured transactions regime: Introduction - 2. The case for a functional approach to retention of title devices - 2.1. European national laws - 2.2. Recent international instruments - 3. Functional approach and special treatment of acquisition finance devices - 4. Other issues of scope: Sale of receivables, true consignment, and 'true lease' - 5. Creditor's enforcement rights:... (see full summary)


Anna Veneziano

Professor, University of Teramo

A Secured Transactions' Regime for Europe: Treatment of Acquisition Finance Devices and Creditor's Enforcement Rights

1. The scope of a secured transactions regime: Introduction

In the preceding contribution, by Hugh Beale, the issue of what kinds of devices should be covered by the rules on secured transactions was intentionally left open. It will be addressed here, together with the suggested treatment of another area that is key for the creation of an effective secured transactions regime - the creditor's enforcement rights outside insolvency. It must be noted at the outset that both of these topics are still under discussion in the working group on security in movable property led by Ulrich Drobnig within the Study Group on a European Civil Code. The considerations here expressed are not intended to reflect a common position reached within said group. Furthermore, they relate mainly to commercial security, leaving aside issues of consumer protection, unless specifically stated otherwise1.

The scope of the scheme is arguably one of the most debatable questions as regards a possible future European regime for secured transactions. We can try to put the problem in the simplest way possible: should it matter whether the transaction formally creates a limited real right in favour of the creditor or whether one party retains 'title' to the collateral but does so to secure a monetary claim toward the other party (i.e., retention of title in a sales contract, financial lease)?

This is often referred to in the context of a contrast between a 'functional' and a 'formal' approach to personal property security devices. I wish to argue that the mentioned contrast of approaches is less radical than one might think at first and that at least some 'formalistic' legal systems in this respect have shown a tendency to apply a functional reasoning. This having been said, it is still quite a difficult area to tackle at a European level, and the possible solutions, as we will see, may largely depend on how we shape the secured transactions regime as regards other key issues, such as publicity, priorities, and enforcement rights.

Before entry into discussion of the subject matter at hand, a word should be spent on the acquis communautaire in the area of retention of title devices. As is well known, there is very little of this, and what there is proves not particularly helpful. I am referring to article 4 of the Directive on Late Payments in Commercial Transactions 2 , which contains a short and quite obscure rule on simple clauses on retention of title in sales contracts (that is, when the seller retains title only to the sold goods until full payment of their price). Apart from the obscurity of the text, a recent decision of the European Court of Justice stated that the formal requirements set forth in this directive apply only to the inter partes effects of the retention of title clause.non-performance of an obligation gives the injured party reasonable reason to believe that the party cannot rely on the other party's future performance3 The conclusion is that the directive is of little relevance as far as we are concerned.

2. The case for a functional approach to retention of title devices

The question I would like to address is how a future European secured transactions law should treat retention of title devices.

One possible approach is, of course, to exempt them altogether from a general secured transactions regime, in view of their different formal structure. Both seller and lessor are 'true owners' of the assets and deserve to be considered as such. The opposite solution may appear to be excessively influenced by the modern secured transactions regimes modelled on article 9 of the Uniform Commercial Code, that is the Personal Property Security Acts of the various Canadian provinces and the more recent New Zealand legislation, and not tailored to the basic characteristics of most European property law systems.

I would like to argue against the formalistic approach. It is true that most European legal systems still accord importance to whether one party is formally vested with 'title' - i.e., 'ownership' - of the goods. Thus, in retention of title devices the creditor is considered the 'owner' of the assets and may act as such and not just as if entitled to a limited right. Retention of title devices are usually governed by general and specific contract law and are not subject to special publicity requirements4. Furthermore, they are mostly dealt with, from a systematic point of view, in quite different parts of the relevant legislation (be it the relevant civil code or ad hoc statutes). When we look at the individual legal systems, however, these statements are qualified by a number of exceptions. Moreover, the rules are not always the same for the different types of retention of title devices - sale with reservation of ownership and financial lease.

2.1. European national laws

In considering the legislation of individual countries, first of all one should note that some European jurisdictions do require certain formalities and even registration in the case of sale with retention of title, though it must be admitted that the manner and the effects of such formalities vary considerably and are not always crystal clear5. Registration is also exceptionally required for leases, in order to render the lessor's right opposable to third parties'6.

More importantly, the nature of the retention of title where security is concerned is given practical recognition in many legal systems. Even putting aside the example of Germany (where retention of title clauses extended to future receivables deriving from the resale of the original assets and to future products manufactured with the original assets are treated as security rights in the buyer's insolvency) 7 , several countries have taken the security function of such devices into account. The recent French reform of secured transactions law, for instance, has integrated the clause de réserve de la propriété, thereby openly recognising its character as a security. This characterisation entails, among other things, the debtor's right to receive any difference between the value of the assets and the outstanding debt: 2371 (3) c.c8.

2.2. Recent international instruments

When we turn to international instruments dealing with secured transactions, we find that two important texts have appeared in recent years: the 2001 Cape Town Convention on International Interests in Mobile Equipment and its protocols (the 2001 Aircraft Protocol and 2007 Railway-Rolling-Stock Protocol) 9 and the draft UNCITRAL Legislative Guide on Secured Transactions10. They both choose a 'functional' approach and, in particular, include retention of title devices in the general regulatory framework for secured transactions.

Certainly, they do so in somewhat different ways. The UNCITRAL Legislative Guide shows a marked preference for what it calls a 'unitary approach' to acquisition financing devices (defined so as to encompass both traditional security devices enabling a person to acquire assets and title retention arrangements with the same purpose). The unitary approach means that acquisition finance devices - in particular, title retention devices - are included within the general definition of security rights11. The lively debate on this issue during the preparatory work, however, has prompted the elaboration of an alternative text, applying a so-called non-uniform approach to acquisition finance devices. In practice, one of the versions of the latter option - called alternative A - enables countries to pursue the aim of functional equivalence by retaining their own settled terminology and legal concepts relating to retention of title agreements12. A further option, alternative B, taking stock of the opposition from the representatives of some European countries, treats assets under acquisition security devices as third-party-owned13.

Irrespective of the model followed by each state, however, the most important message of the draft UNCITRAL Legislative Guide on this point is that states should not simply rely on traditional classifications. They should clearly spell out the policy decisions underlying their choices and the economic results of these decisions. Moreover, all devices pursuing the same function of enabling acquisition of assets on credit by the debtor should be treated alike, whatever their structure or form.

The Cape Town Convention provides a list of interests in mobile goods to which it applies, separately mentioning security rights, the rights of the seller under a title retention clause, and rights of a lessor under a finance lease agreement. The English-language version of the title itself, moreover, does not...

To continue reading