учебный год 2023 / Hamwijk, Public Filing with Regard to Non-possessory Security Rights in Tangible Assets as Contemplated by the DCFR. Of No Benefit to Unsecured (Trade) Creditors

4.4 Three Other Relevant Remarks

I would like to make three other remarks that are relevant for this subject. It has often been argued that although trade creditors do not themselves consult the register, their credit rating agencies or credit insurers do:

Credit reference agencies, in particular, may be seen as substitutes for unsecured creditors in the examination of a company charges register.40

The fact that trade creditors do not, in practice, take the trouble to consult the register does not mean that this interest does not exist, so the argument often runs. Referring back to my above reasoning, my comments on this can be brief: that trade creditors do not take the trouble to consult the register is simply explained by the fact that they can deduce very little from information about the availability of unencumbered assets (except that it forms part of the overall picture of a business). That this information can be obtained through credit rating agencies and credit insurance companies does not alter this.

Should we accept that information about whether and, if so, what goods are encumbered with security rights does not help trade creditors to improve their ‘proprietary’ position, a logic follow-up question would be whether the information could perhaps help them to avoid unnecessary attachment costs, by warning them about whether the goods on which the attaching party has set his sights are indeed available. In theory, this seems plausible: Why bother attaching encumbered assets, if there is no prospect of recovery? However, since attachment also serves the purpose of putting the debtor under pressure, the introduction of a public filing system will be of little avail. This function of attachment will be preserved, even when the goods are encumbered with a security right.

Finally, sometimes the question is raised whether not precisely non-contrac- tual unsecured creditors, such as victims of tort or unjust enrichment, would have an interest in public information, since they – unlike contractual creditors – have not chosen their own faith.41 Obviously, the answer is negative: Tort victims did not rely on anything to begin with. Unlike prospective pledgees or buyers, their actions were not based in any way on publicity.

40BRIDGE, p. 186. See also, e.g., C.W. MOONEY JR., ‘The Mystery and Myth of ‘‘Ostensible Ownership’’ and Article 9 Filing: A Critique of Proposals to Extend Filing Requirements for Leases’, 39.

Alabama Law Review 1988, p. 762 et seq.

41These are creditors whose claims are based on statute. Snijders seems to make use of this argument; see W. SNIJDERS, ‘Bezitloze Zekerheid op roerende zaken’, in Wetgevende Geschriften, Kluwer, Deventer 1995, p. 34. This contribution has been published earlier in Honderd Jaar Rechtsleven, Zwolle 1970, pp. 25–39.

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5.The Relative Importance for Unsecured Trade Creditors of Security Interests Being Public

Regardless how much all creditors, before entering into the commercial relationship, appear to be the same unsecured creditors, in reality they are not. The type of creditor is much more the decisive factor for the design of a commercial relationship than is sometimes recognized. For the reasons given in sections 3 and 4, it is not to be expected that unsecured creditors will act differently (‘more wisely’) if a public register is introduced.

In my view, sometimes attempts are made to ‘put right’ the position of unsecured trade creditors, who all too often (rightly or wrongly) are seen as pitiful, by seeking the solution in (providing more) publicity.42 Information is seen as the answer to a question that relates not to publicity but to policy: Why is it justified at all that there are security rights that give certain creditors priority over others? The assumption in this reasoning seems to be that the priority brought by a security right can be justified only if all the third parties against whom the security right has effect can know about it:43

Da die dinglichen Rechte als absolute Rechte gegenu¨ber jedermann wirken und von jedem Dritten zu respektieren sein, mu¨ssen sie auch fu¨r jedermann erkennbar sein.44

42This applies to publicity with regard to both the transfer of ownership and the creation of a pledge. See for Dutch law, e.g., Meijers on the non-possessory pledge in the Parliamentary History of the New Civil Code (Parlementaire Geschiedenis NBW) (Explanatory Notes by Meijers), p. 747: ( . . . ) the creditors of household debts rely ( . . . ) on external appearance. If someone goes bankrupt and it turns out that his household effects do not fall under the bankruptcy, these creditors will justifiably feel duped. This is why the draft not only assigns a restricted effect to the transfer of ownership constituto possessorio, but also aims to discourage a non-possessory pledge of goods which are not business goods (freely translated). As regards the introduction and design of the delivery constituto possessorio, Meijers argued that it should not only have no effect vis-`a-vis the entitled party, such as an existing secured party (see Art. 3:90, para. 2 Civil Code) but also vis-`a-vis all other creditors of the transferor. Meijers argued that the only exceptions should be if the creditors of the transferor could expect the latter not to be the owner of the tangibles, for example, because his business is not only to sell certain tangibles but also to have them in custody, or if a note has been made in the trade register (Handelsregister) stating that the custodian is the representative of the owner. The Explanatory Notes by Meijers also contained another exception to this rule: if the transferee of the tangible can designate other goods on which the creditors can take recourse. See Parliamentary History of the New Civil Code (Parlementaire Geschiedenis NBW) Book 3 (Explanatory Notes by Meijers), p. 382. Although this third exception was not included in the final text of the Civil Code, in my view, it is an indication of what was (or is) thought about the importance of publicity for general (trade) creditors.

43Otherwise, in the same line or thought, that as a normative matter, the benefits of a security interest should not be easily obtained. See, in this respect, Harris and Mooney who in discussing the Art. 9 UCC filing rules speak of ‘a hurdle that a secured party must clear in order to justify its entitlement to collateral at the expense of a debtor’s unsecured creditors’. S.L. HARRIS & C.W. MOONEY JR.,

Security Interests in Personal Property, Foundation Press, New York 2006, p. 160.

44S. ZHANG, ‘Das Publicita¨tsprinzip und der rechtsgescha¨fliche Mobilia¨rerwerb’, Diss. Berlijn 2004, Hu¨mboldt-Universita¨t, Berliner Wissenschafts-Verlag, Berlin 2004, p. 17.

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It is a pity that unsecured trade creditors, unlike pledgees and buyers, are not protected, while they did not know that certain goods were encumbered with a priority right: ‘Surely he then deserves publicity?’, so the argument goes.

A creditor’s right of recourse can turn out to be worthless as a result of the security rights created by the debtor in favour of other creditors. If publicity is linked to security rights, the consequence is that the other creditors of the debtor/pledgor can be aware of the fact that, because of the security rights that have been created, there are few if any unencumbered assets available for them. The consequences of security rights could, in a certain sense, become justified because the other creditors were able to find out about them before proceeding to grant credit.45

However, as explained above, publicity of security rights is of no relevance whatsoever to the average unsecured (trade) creditor. If creditors do not want to be disappointed in their expectation of being able to take recourse, they will have to stipulate a pledge or a retention of title, however wealthy or creditworthy the debtor may appear to be:

Perhaps that absence of notification to unsecured creditors should not concern us as much as the plight of the secured party because the former have freely chosen their inferior class.46

This also explains why in Dutch law unsecured (trade) creditors are not protected in their disappointed expectation of recourse. This is not for reasons of efficiency or similar considerations but is a logical consequence of their (selfchosen) unsecured status, which, in the event of bankruptcy, manifests itself in an appropriate ranking. If a creditor does, in fact, stipulate a security right and it later turns out – for example, because the debtor was not honest about this – that the tangible was already encumbered by a senior security right, then the legislator has to resolve an actual conflict of interests. This is because both the first creditor and the subsequent creditor think they have acquired a (first-ranking) proprietary (security) right. The resolution of such conflicts of interest has been laid down in third-party protection rules (cf. Articles 3:86 and 3:238 Dutch Civil Code). Because

45VAN DEN HEUVEL, p. 88 (freely translated). For the sake of completeness, I note that Van den Heuvel also takes a critical stance as regards this general principle (correctly in my view), by asking whether linking publicity to security rights sufficiently protects the interests of these creditors.

46See PHILIPS, p. 12. However, he continues: The equitable basis of according priority to the perfected secured party, however, depends not only upon the unsecured creditors’ lack of action, but also upon their ability to assess accurately the consequences of belonging to the class they have chosen. I agree with him on this nuance.

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the application of such rules always results in one party losing out, publicity about the question of who has a proprietary (security) right and who does not is always the better solution.47 After all, prevention of such conflicts is better than having to resolve them. Trade creditors are not involved in conflicts of this kind, so publicity is simply irrelevant to them.48

Even if trade creditors choose to take a security right or stipulate a retention of title, there will be no risk that the debtor is dishonest about the legal status of the tangibles, since suppliers can simply transfer their goods subject to retention of title or the retention of a right of pledge.49 Since the debtor does not actually grant these to its supplier(s), the debtor cannot be found guilty of deceiving these creditors.50

6.The True Interest of (All) Unsecured Creditors

6.1Alternative Ways of Compensating Unsecured Creditors

Unsecured (trade) creditors do not need a ‘signal’ that the pool of unencumbered assets is decreasing as such; they need a signal whether a bankruptcy is approaching and whether the pool of assets is decreasing in light of this. It is important for them to know when it is no longer wise to continue supplying goods on credit terms51 (without additional protective conditions). As will already have become clear, this risk of bankruptcy cannot be deduced from information about the (decrease in) quantity of unencumbered assets. If one really wants to help unsecured (trade) creditors, one should think of something else than providing publicity.52 The very existence of security rights (or separatist position or preferential position) could be

47Whether this publicity should be realized at any price, for example, by introducing a public register is quite a different question. Beekhoven van den Boezem and Goosmann argue that the introduction of a public register would add nothing for banks as creditors, because publicity is already available in the form of the (most recent) annual financial statements and management letter, which are audited by the accountant. See BEEKHOVEN VAN DEN BOEZEM & GOOSMANN, 2010a, p. 753 and BEEKHOVEN VAN DEN Boezem & GOOSMANN, 2010b, pp. 44 and 53. In my view, this is a misunderstanding: After all, the debtor can mislead the accountant as much as the bank. An accountant can, at most, confirm that a debtor has already pledged the goods to another bank, not that the goods have not been pledged again. Whether the risk of this is high enough to justify the costs of a public register is a question that exceeds the scope of this article.

48Cf. Baird on the American notice filing system: In short, the Code’s notice filing system addresses principally only one kind of ostensible ownership problem – the one arising from competition between secured creditors. BAIRD, p. 66.

49See Art. 3:81, para. 1 Dutch Civil Code.

50I will not discuss the relatively unusual case in which a supplier of goods stipulates a right of pledge on goods that have not come into existence yet, that is, future goods, due to accession or specification.

51Even if a trade creditor regularly does business with the debtor, the relationship with the debtor as regards each supply will only last as long as the payment term. ‘Continuing to supply’, therefore, amounts de facto to entering into a new commercial relationship each time.

52See, in this context, also Baird: If the legal system needs to be changed to give general creditors more protection, additional civil and criminal penalties for debtor misbehaviour seem more appropriate than requiring more information in the filing system. BAIRD, p. 61.

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re-examined,53 or unsecured creditors could be compensated in other ways, for example, by means of a 20% rule, as exists in the United Kingdom.54 This also applies to the perceived problem that banks often have a pledge over all of the debtor’s assets, which translates into the problem that in the event of bankruptcy there is nothing left for the unsecured creditors after distribution of assets.55 In this article, it is not my aim to argue in favour of one of these alternatives. My only objective is putting forward the argument that perceived dissatisfaction as regards the position of unsecured creditors cannot, in any event, be solved by introducing a public filing system.56

6.2 The Prevention of Fraud

There is, however, another problem that can be solved by adoption of a public filing system. This need for a ‘signal’ exists in a completely different context, namely where attempts are made to decrease the assets by means of fake proprietary transactions or manipulation of the precise moment in time at which proprietary transactions are said to have taken place.57 In case of such fraud, unsecured (both

53For Dutch law, see, e.g., L.J. VAN EEGHEN, ‘Het schemergebied vo´o´r faillissement. Een onderzoek naar de wenselijke verdeling van verhaalsrisico’s van de onderneming vo´o´r faillissement’, Diss. Tilburg, Boom Juridische Uitgevers, Den Haag 2006, p. 196; VAN DEN HEUVEL, and the discussion in VERSTIJLEN & VAN NIEUWSTADT, ‘Stelling: de separatistenpositie voor zekerheidsgerechtigden moet worden afgeschaft’, pro/contra, TvI 2005, 2, 14, p. 48.

54This is a complex rule that, in essence, entails that the unsecured creditors can receive a proportion of the proceeds from a floating charge. In theory, this proportion is 20%, but in practice, it often turns out lower or is even not paid at all, because (application of) the rule is subject to many exceptions. For more detailed information on this subject, see Art. 176A of the Insolvency Act 1986 (as revised by the Enterprise Act 2003) and the Insolvency Act 1986, Order 2003 SI 2003/2097.

55In Dutch law, precisely this interest was the underlying reason for the restriction imposed on the silent pledge of receivables. See Art. 3:239, para. 1 Civil Code and the Parliamentary History, pp. 751–752.

56Another question is whether creditors should be facilitated in withdrawing their supplies, or imposing extra conditions on them, in the twilight zone before bankruptcy, at least, if this is based on an unreliable signal (‘encumbrance of the goods with a security right’). See, in this sense, also H.-J. LWOWSKI, ‘‘‘Quiet’’ Creation of Security Interests or Filing’, in H. Eidenmu¨ller & E.-M Kieninger (eds), The Future of Secured Credit in Europe, special vol. 2 of European Company and Financial Law Review, De Gruyter Recht, Berlin/New York 2008, pp. 214–222.

57In Dutch law, it was Meijers who, on the introduction of the non-possessory pledge in 1929, drew attention to the problem of antedating or making false deeds (of pledge) to the detriment of general creditors. Meijers argued against the introduction of the fiduciary transfer, primarily because it was not sufficiently public. After looking more closely, it seems to me that he particularly objected to the fact that fiduciary transfers (without registration) opened up the possibility of malpractice in the form of making false deeds that could be enforced against creditors seeking attachment (general creditors). Meijers referred to an (outdated) survey of bailiffs in both urban and rural areas, which found that in over 50% of cases they were unsuccessful in their attempt to attach the goods of their debtors in payment difficulties; the latter said that their goods had been transferred by means of a delivery constituto possessorio as security, in consequence of which the goods were only in their

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trade and financial) creditors do not feel so much the adverse consequences of the bankruptcy itself – in a concursus the consequences of their unsecured position will naturally manifest themselves – but rather are harmed because the bankrupt estate is manipulated. In fact, it is only faked that the available assets are reduced, but the distinction with actual reduction of the available assets appears to be very thin if security rights can be created with little or no formal requirements. It is important for unsecured creditors, or for a bankruptcy trustee on their behalf, that such manipulations are prevented as far as possible. One could say that the introduction of a non-possessory security right takes away the ‘objectively determinable moment’ at which the tangible shifts from the transferor to the transferee and, thus, makes room for such manipulation: If the moment of handover depends purely on what the pledgor and pledgee agree in their contract, this is difficult to justify in relation to third parties because of the risk of fraud. This risk can be counteracted by requiring that the moment of creation of the security right is filed in a public register (‘signal’). However, this signal does not have to be public. After all, the point is to reveal transactions that have been manipulated. For this, it is necessary, but also sufficient, that the moment of the manipulated transaction can, in some way, be found, that is, determined with certainty. Objectivity regarding the moment at which already completed (and not necessarily disputed as to their validity) legal acts have taken place can be accomplished by making this moment verifiable:

In order to have a right that is enforceable against third parties and to determine the ranking with competing entitlements, it is sufficient that there is a fixed point in time that allows, without discussion, to establish the creation of a security right and to determine its rank in relation to competing entitlements. This can be achieved by different means such as filing, registration, notification or control.58

In Dutch law, this is achieved by requiring a non-possessory pledge in tangibles and claims to be created by a notarial deed or by a private deed that is registered with the tax authorities. The purpose of this is to ensure date certainty.

possession by virtue of a loan agreement. According to Meijers, these were all false deeds, and as a result, the entire legal system was undermined, in particular the position of unsecured creditors. MEIJERS, p. 184.

58E. DIRIX, ‘Effect of Security Rights vis-´a-vis Third Person’, in U. Drobnig, H.J. Snijders & E. Zippro (eds), Divergence of Property Law, an Obstacle to the Internal Market?, Sellier European Law Publishers, Munich 2004, pp. 85 and 93. Compare Harris and Mooney who argue that Art. 9 UCC’s priority rules based on the time of filing reduce evidentiary costs and disputes in connection with determination of security interest priorities, since the public office filing system memorializes the time of filing and constitutes a visible and (generally) reliable ‘scoreboard’. HARRIS & MOONEY, p. 160. It remains to be seen whether secured creditors should take responsibility themselves of claiming their ranking, as is the case in Dutch law, or whether this should be centrally organized by giving a bankruptcy trustee access to a filing system. Scholars tend to argue in favour of the latter option, since it would enable priority conflicts to be resolved more ‘easily’ or more ‘efficiently’.

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Manipulation of this kind, that is, the risk of fraud, should, in my view, be sharply distinguished from the transactions that are addressed (in the Netherlands) by the actio Pauliana – a remedy available to bankruptcy trustees to avoid detrimental transactions for the benefit of the general body of creditors. While the first case concerns manipulation of legal facts or legal moments, the actio Pauliana concerns violation of the pari passu rule by legal acts that are, in fact, known to have taken place prior to bankruptcy but that has prejudiced the general body of creditors.59

7.Conclusion

The assumption that unsecured (trade) creditors have an interest to know whether or not the debtor has unencumbered its assets, in my view, without merit for several reasons. First, this assumption takes insufficient account of the correlation between unsecured and secured creditors, in which not the age of the debt but the moment at which security is taken is relevant. In addition, legal information is ascribed a business-economic quality that it simply does not possess. Both notions appear to be fostered by an understanding of how banks provide credit and how suppliers behave, which is not consistent with reality. The result of this is that a public register concerning security rights on goods does not have the function of informing third parties in the general sense (‘the world at large’) about the existence of such rights. It can only help those who have stipulated a proprietary interest (with a certain ranking), such as pledgees, to make certain that they have actually acquired that interest or that ranking. In addition, a register (public or otherwise) can help make the proprietary transaction objectively determinable, which means that antedating is made impossible. This is important for all creditors who must be paid out of the bankrupt estate.

59In practice, the transactions that are contested by means of actio Pauliana are much more important than the risk of fraud. The main concern is hardly ever to pinpoint the moment at which a transaction took place; much more often, the issue is whether the transaction was still permitted at a particular moment.

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