Civil and common property law

share in the sale proceeds of the object in regard to which the security right is established unless the proceeds surpass the claim by the secured creditor.24

The theoretical, almost scholastic, distinctions I just made, do not imply that grey areas between, e.g., relative and absolute rights are absent. Dutch law, to give an example, accepts that under specific circumstances an exemption clause in a contract may bind third parties in both a positive and a negative way. In a positive way, by accepting that an employee may avail himself of an exemption clause in a contract made between his employer and a third party. The employee is not a party to this contract, but at the same time he is also not a complete stranger to it.25 In a negative way, by accepting that an exemption clause in a contract between A and B under specific circumstances may be invoked against third party C, to fence off a tort claim by this party.26 Another example of a grey area can be found in German law. Certain personal rights, such as the right of a buyer under a retention of title clause to become owner after full payment of the purchase price, are qualified as “Anwartschaftsrechte” (rights arising from expectations), which may be treated as quasi-absolute. They are, in comparison to absolute rights, considered to be a “wesensgleiches Minus”: essentially the same as an absolute right, but not completely the same. As such these expectation rights are not “absolute”, but are, nevertheless, treated as such in several respects.27

Deductive reasoning from canonical principles and rules has become so familiar to civil lawyers that they sometimes tend to forget some of the advantages of more flexible property law in pre-codification days. Because of the more rigid dogmatic approach, in civil law systems legal practitioners are forced to be creative within the given canons of the law, which, of course, limits their problem solving capabilities. In the common law tradition this more flexible approach can still be found. Here, as a result of the continued existence of concepts stemming from the feudal system, combined with the acceptance of the dual system of “law and equity”, a less absolutist and more relative approach towards the acceptance of “rights against the world” has prevailed. That approach is more aimed at adapting the law to what is perceived as the economic and social day-to-day reality and it is seen as facilitating the search for more flexible, practice-oriented solutions. The possibility to separate ownership and management is a striking example. In common law systems such a separation can be reached in a very effective way through the mechanism of the trust. Both the trustee and the beneficiary have property rights. The trustee’s (common law) property rights are given to him for the purposes of management. The beneficiary’s

24For Dutch law see ASSER-MIJNSSEN-DE HAAN, Goederenrecht, Tjeenk Willink, Deventer, 2001, pp 19 et seq.

25I refer to Art. 6:257 C.C.

26Cf. W.L. VALK, 1998, Burgerlijk Wetboek, Tekst & Commentaar, Kluwer, Deventer, 1998, Art. 6:250 C.C., comment 3 (with references to case law).

27M. WOLF, Sachenrecht, Beck, München, 2001, pp 300 et seq.

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property rights are of a different (equitable) nature and are meant to give him special (strengthened) protection against the trustee and against certain third parties. In civil law systems other, far more complicated, solutions have toe found, because the civil law does not accept – as a matter of principle – fragmented ownership.

It seems that civil law and common law, given the differing routes they have taken since the French Revolution, have developed into completely separate states of mind. Separate to such a degree that, first of all, it seems highly problematic for a civil lawyer to understand the common law or vice versa and, secondly, that any attempt to learn from one another is futile. Both points, I submit, are incorrect. By simply looking at continental business practice it should become clear that common law concepts as the trust, franchising, factoring and leasing have become familiar concepts, although sometimes they had to be transformed before they could be fitted into civil law concepts. As a result of this process of transformation the original common law concepts, of course, were changed. Under a civil law trust arrangement, to give but one example, the beneficiary cannot have any property entitlements. It will be attempted, however, to give her adequate protection through other means, such as tort law or perhaps a public law control mechanism (supervision by a financial authority). As a result, although common and civil law differ in regard to the legal technique they use, comparable results can be reached. It all shows that understanding of one another’s way of legal thinking is certainly possible and also fruitful.

To develop a broader understanding and enable a more in-depth examination of civil property law by common lawyers and common property law by civil lawyers it is absolutely necessary to look at the whole fabric of property law and its history. The famous English Romalpa case is a good example to show how otherwise, if this approach is not taken, a misunderstanding may arise here easily. In that case the English Court of Appeal accepted that a retention of title clause might not only have consequences at common law, but also in equity. The retention of title clause was part of a set of general conditions, to which Dutch law (under the old Civil Code) applied. The conditions had been translated into English, but in such a way that Roskill, L.J. remarked that the translation was “perhaps not very well expressed” and that “it cannot be said that the English translation is happy”.28 Under the old Dutch Civil Code retention of title frequently was combined with a transfer of ownership for security purposes in cases where the goods delivered under such a clause were used in the manufacturing process. As a result of this use, ownership would pass to the buyer, who acquired “original ownership”.29 Subsequently, the buyer transferred ownership to the seller until full payment of the purchase price. The seller was then called the “zekerheidseigenaar” (“security owner”) or “fiduciaire eigenaar”, translated into unhappy English as “fiduciary owner”. The latter words, given that no expert

28Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd, [1976] 2 All ER 552, at 558 (e) and (g).

29This rule still applies under the new Civil Code.

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advice was presented to the court on Dutch law, led the Court of Appeal to think in terms of English law, i.e. the law of equity. It was then decided that the seller had certain equitable rights, as such non-existent under Dutch law.

The above example shows that a comparative property lawyer must proceed with great care, perhaps even more care than a comparative lawyer must generally. However, the need to be careful does not imply that comparative analysis in this area of the law should not be ventured. To illustrate how comparative legal analysis might be fruitful also in the area of property law, I will take as an example a common law security instrument in which continental commercial lawyers take a growing interest: the floating charge. Could this general security be introduced in a civil law setting?

5An example of attempted harmonisation of security interests within a regional integrated market: The floating charge in the United Kingdom

5.1The floating charge in England

In English law the Court of Appeal in Chancery introduced the floating charge in a decision which is only two and a half pages long. It is the In Re Panama, New Zealand, and Australian Royal Mail Company case, decided in 1870.30 The company had issued a mortgage debenture in which they charged their undertaking for a loan made to private investors. The company had fifteen steam vessels as well as sailing and coal ships. It also had further assets and it had income from a subsidy receivable for the Panama service and from local mail service in New Zealand as well as between New Zealand and Australia. The company went into liquidation and the question arose if the private investors had priority to the general creditors in the form of a charge upon the proceeds of sale, which resulted from the winding up. The official liquidator argued that only the income of the company was charged, not the property. He argued: “The construction contended for by the Respondents would lead to an absurdity, for if all the property of the company were charged, it would include unpaid calls, and ships and coals which had been purchased after the date of the debenture, and even the money itself which was advanced by the debenture holders (…).”31

The court of appeals disagreed. Sir G.M. Giffard, L.J. decided that the word “undertaking” which was charged meant all the company’s present and future property and that the company could go on in the ordinary course of carrying on their business as long as the terms of payment regarding interest and principal were met. He then said this: “But the moment the company comes to be wound up, and the property has to be realized, that moment the rights of these parties (the debenture holders, JvE), beyond all question attach. My opinion is, that even if the company had not stopped the debenture holders might have filed to realize their scurity. I hold that

30Law Rep., 5 Ch., 318 (1870).

31Loc. cit. p 320

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under these debentures they have a charge upon all the property of the company, past and future, by the term “undertaking,” and that they stand in a position superior to that of the general creditors, who can touch nothing until they are paid”.32

Already from this, very brief, decision the main characteristics of how the floating charge functions can be deduced. It is a general charge, governed by equity, upon the whole of a company’s property – movables, immovables and claims, present and future – which does not attach, but “floats” with the property until it attaches (“crystallises”) upon non-payment of the debenture. If property is sold in the ordinary course of business, the new owner will not be burdened by the charge. If property is bought, it will fall immediately under the charge. In this way the company can continue doing business, while at the same time the charge holder (usually a bank) has a certain control over the property. A floating charge, to be effective in case of insolvency, has to be registered.33 Although the characteristics of a floating charge are clear, the nature of the charge is not. There is much debate as to whether the charge before crystallisation is a “real” right or not.34

5.2The floating charge in Scotland

The floating charge became such a generally accepted instrument of security in England that it was considered to be in the interests of economic integration within the United Kingdom (a “common market” avant la lettre of the European Community) that it should also be introduced into Scottish law. This had to be done by special statute, as the floating charge is equitable in nature, a concept unknown to the legal system of Scotland, which is a mixture of common law and Roman law.35

32Loc. cit. pp 322/323. See also R.R. PENNINGTON, ‘The Genesis of the Floating Charge’, 23 The Modern Law Review, pp 630 et seq. (1960).

33See for proposed changes in the English system of registration and an attempt to reform the law more generally: Law Commission for England and Wales, Consultation Paper 164 (July, 2002), entitled “Registration of Security Interests: Company Charges and Property other than Land”, to be found at <http://www.lawcom.gov.uk/>.

34Cf. P.A.U. ALI, The Law of Secured Finance, Oxford University Press, Oxford, 2002, pp 119 et seq. See also S.C. STYLES, ‘The Two Types of Floating Charge: The English and the Scots’, 4 Scottish Law & Practice Quarterly (1999), pp 235 et seq., pp 237 et seq., arguing that under English law only the effects of a floating charge are clear, not its legal nature. Cf. also K.J. NASER, ‘The Juridical Basis of the Floating Charge’, 15 The Company Lawyer, pp 10 et seq. (1994).

35This was done by the Companies (Floating Charges) (Scotland) Act 1961 and subsequent legislation, especially the Companies Act 1985, sections 462 et seq. For more information and for proposed changes in the system of registration see Scottish Law Commission, Discussion Paper No. 121 (October, 2002), entitled ‘Discussion Paper on Registration of Rights in Security by Companies’, to be found at: <http://www.scotlawcom.gov.uk/> and Discussion Paper No. 114 on the Sharp v.Thomson case (July, 2001), to be found on the same web site. See also the report on ‘Business Finance and Security over Moveable Property’, written for the Scottish Executive by J. Hamilton, A. Coulson, S. Wortley and D. Ingram (2002), to be found at: <http://www.scot- land.gov.uk/cru/kd01/purple/bfas-00.asp>.

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The special statute that introduced the floating charge into Scottish law was met with fierce opposition. In a comment published in 1984 Gretton spoke about the Scottish floating charge as “a problem of generic incompatibility” with the corpus of Scottish law. In his view the floating charge existed in a “conceptual vacuum” and he even went so far as to say that the terminology adopted by the act was “unhelpful and at times even perverse”.36 This certainly is harsh criticism coming from an eminent expert in this field. The antagonism towards the floating charge became even greater after the decision of the House of Lords in Sharp v. Thomson.37 A company had sold a flat it owned to a buyer who had paid the purchase price and taken possession. However, the buyer had not – after all the legal documents had been prepared – registered the deed of transfer. Before registration the floating charge, which the company had given over all its assets, crystallised. The question then arose, if the flat now fell under the floating charge or whether the buyer could still register the deed of transfer and become owner. The House of Lords ruled that, in the circumstances of the case and in the light of the statutory text, the crystallisation did not affect this particular property. If the buyer would not be protected in this case that would lead to an inequitable result, particularly because the price had already been paid. Therefore, the property could no longer fall under the floating charge. As a result the concept of equitable ownership was introduced into a legal system, which does not know the distinction between common law and equity.38 In reaction the Scottish Law Commission published a paper in which it recommended to abolish the rule in Sharp v. Thomson. Recently, the Court of Session (Extra Division, Inner House) decided

Burnett’s Trustee v. Grainger, in which it distinguished Sharp v. Thomson. It is unclear, yet,what the impact of that decision will be.39

The Scottish experience, particularly in the light of Sharp v. Thomson and Burnett’s Trustee v. Grainger, is a clear warning that we need to know far more about the English legal background of the floating charge before introduction in a civil law setting could (and should) be considered. A functional analysis will be an insufficient basis. Having said this, I certainly want to avoid the impression that I feel that the floating charge could never be introduced into, e.g., Dutch law. If this type of charge is generally seen and accepted as a desirable security interest, this is an important practical argument for its incorporation into the civil law. It should, however, only be

36G.L. GRETTON, ‘Floating Charges: The Scottish Experience’, The Journal of Business Law 1984, pp 255 et seq., p 256 and p 257. See also G.L. GRETTON, ‘Floating Charges in Scots law: the saga continues’, The Journal of Business Law 1995, pp 212 et seq. and R. RENNIE, ‘The Tragedy of the Floating Charge in Scots Law’, 3 Scottish Law & Practice Quarterly, pp 169 et seq. (1998).

37To be found (under Sharp and Others v. Woolwich Building Society) at: <http://www.parlia- ment.the-stationery-office.co.uk/pa/ld199697/ldjudgmt/jd970227/sharp01.htm>.

38See R. GOODE, ‘Commercial Law and the Scottish Parliament’, 4 Scottish Law & Practice Quarterly, pp 81 et seq. (1999) esp. pp 88 et seq.

39The case can be found at: <http://www.scotcourts.gov.uk/opinions/XA169_00.html>.

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done after a thorough legal historical-comparative study and an extensive analysis of the requirements, which in a modern legal system security interests have to fulfil. An economic and functional analysis of property law should therefore, in my view, always be accompanied by a legal-historical comparative examination. Let me end by making some concluding remarks on the possibility to introduce the floating charge in a civil law setting.

6Final remarks

Why is it that particularly large financial insitutions seem so much in favour of floating charges? The answer to this question can be found, if the floating charge is held against the light of the key elements and core principles of modern insolvency law (and hence debtor/creditor regimes). These elements and principles were recently stated in an UNCITRAL report40 and in an article written by experts from the European Bank for Reconstruction and Development (EBRD).41 The key elements are transparency, accountability and management of financial crises. The core principles are: (1) reduction of the risk of giving credit, (2) securing credit should be simple and non-possessory, (3) the creditor’s claim must have priority and be satisfied out of the charged assets, (4) prompt enforcement of the security at market value, (5) effectiveness in insolvency, (6) secured transactions should involve low costs, (7) security should be available over all types of assets, secure all types of debts and between all types of persons, (8) publicity, (9) clear and precise priority rules and (10) freedom of contract as far as possible. Given the limits of this contribution, I cannot discuss all these elements, but can only make some general remarks.

In essence, the floating charge is a general non-possessory security interest resting upon the movables, immovables and claims, both present and future, belonging to a company. From a functional viewpoint the floating charge can be compared with the transfer of ownership for security purposes as developed in case law under present German law and under the old Dutch Civil Code. Especially, if one takes into consideration that under old Dutch law this type of ownership functioned as a non-possessory pledge on present and future property. As such it was a complement to the right of hypothec, which could, if the code was taken literally, only rest on present immovables. Under the old Dutch Civil Code it could be said that the transfer of ownership for security purposes created a, to use pre-codified continental terminology, “dominium minus plenum”. The same can be said with respect to

40See document A/CN.9/469, the report of the working group on insolvency law on the work of its twenty-second session (Vienna, 6-17 December 1999) and document A/CN.9/WG.V/Wp 61, draft Legislative Guide on Insolvency Law, Note by the Secretariat (New York, 13-17 May, 2002), to be found at: <http://www.uncitral.org/english/workinggroups/wg_il/wp-61e.pdf>.

41J. SIMPSON & J. MENZE, Ten years of secured transactions reform, Law in transition (a publication of the EBRD), autumn 2000, special issue about secured transactions, to be found via the following URL: <http://www.ebrd.org/pubs/find/index.htm>.

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present German law. If one looks at the relationship between creditor and debtor from an economic point of view each claims his own share from the bundle of ownership rights. The creditor/transferee has the dominium (minus plenem) utile and the debtor/transferor has the (remaining) dominium (minus plenum) directum.42 In modern continental civil law terminology this distinction no longer is made, as ownership cannot be fragmented. It should further be realised that in modern continental civil law a close connection exists between the unitary concept of ownership and the numerus clausus of absolute rights. If ownership can be fragmented, the numerus clausus doctrine looses much of its relevance, because, when its substance is analysed, any new form of ownership will come very close to a new limited real right. It is exactly this result that the numerus clausus doctrine wants to prevent. Therefore, it can be no surprise that in the Netherlands the Supreme Court ruled that the statutory provisions on hypothecs and pledges regarding a forced sale of the secured object applied when the creditor/security owner wanted to enforce his claim and sell the property. He had a duty to account for the proceeds of sale; the debtor/former owner was entitled to the net proceeds, if any.43 In Germany the Supreme Court ruled that in a situation of bankruptcy the security ownership (“Sicherungseigentum”) of the creditor did not result in “Aussonderung”, but “Absonderung” from the insolvent estate. In other words: the creditor is not entitled to a split off, resulting in the acceptance of the creditor’s full ownership, but a separation, resulting in a right to the proceeds of sale. The ratio for security ownership is, according to the German Supreme Court in a decision from 1979, the following: “Sinn und Zweck der Sicherungsübereignung ist es, dem Sicherungsnehmer für den Fall der Nichterfüllung seiner Forderungen die Befriedigung aus dem Sicherangsgut zu gewährleisten, den übereigneten Gegenstand regelmässig aber zunächst dem Sicherungsgeber zur Nützung zu belassen, um ihm die Forthführung seines Betriebes zu ermöglichen.” Remarkably enough, ownership for security purposes thus creates a “Treuhand” relationship, which in essence is a fragmented type of ownership.44 If the resemblance between the floating charge and the transfer of ownership for security purposes is, indeed, so close, it will, for this reason alone, be very difficult to introduce this concept into Dutch law, given the fiducia ban.45 One of the purposes of this ban is to prevent any fragmentation of ownership.

42Nève, Eigendomsvoorbehoud, pp 29 et seq.

43See for a further analysis of the law under the old Civil Code: Asser-Mijnssen Zakenrecht III, Tjeenk Willink, Zwolle, 1986, pp 149 et seq.

44Cf. Nève, Eingendomsvoorbehoud, pp 44 et seq. (the quote from the BGH decision of 24 October 1979 can be found on pp 44 et seq.) and J.H.M. VAN ERP, ‘De Kwaliteitsrekening als “Treuhand”figuur’, in E. Dirix and R.D. Vriesendorp, Inzake Kwaliteit. De kwaliteitsof Derdenrekening naar Belgish en Nederlands Recht, Kluwer, Deventer, 1998, pp 211 et seq.

45Art. 3:84(3) Netherlands C.C.

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Further, it should be taken into consideration that from a historical perspective the floating charge can be compared with the continental sitpulated “hypothèques générales” (general mortgages) which could rest on both immovables and movables.46 This type of mortgage was no longer allowed under the old Civil Code, nor is it allowed under the new Civil Code. One of the underlying (historical) reason, no doubt, is the fear that debtors otherwise might overburden themselves with security interests.

If the floating charge would, nevertheless, be introduced into Dutch law it will certainly be necessary to create a registration system in the light of the enormous reach and impact of this type of charge. The risk that a debtor looks creditworthier than he in fact is (the so-called “false wealth” risk) is overwhelming.47 This risk must be avoided in the interest of other creditors. But not only for that reason should a floating charge be registered. A registration system and, I should add, a clear set of priority rules should also be established to compensate for the loss of transparency in the light of the principle of specificity. Furthermore, a distinction should be made as to who can create a floating charge (only companies or also business undertakings generally, small and private enterprises?) and for whose benefit: (only banks, or also parent companies, other business undertakings?). In my view, consumers should most certainly not be allowed to create a floating charge to prevent the risk of overburdening, considering their non-existent bargaining power in relation to, specifically, banks.

In this article I cannot answer the question whether there is a clear and proven need for the introduction of the floating charge. However, the legal-historical background of civil code provisions disallowing stipulated general mortgages and, in the Netherlands, the fiducia ban should be taken as a warning that introduction should be done in a balanced way. The Scottish (civil law) experience with the English floating charge furthermore shows that introduction of such a general security interest from a different legal tradition also can create problems of internal coherence. Such problems should not be underestimated. Still, international standards can help finding the required balance.

46See J.H.M. VAN ERP, A comparative Analysis of Mortgage Law: Searching for Principles, loc. cit., p 80. Nève, Eigendomsvoorbehoud, pp 26 et seq.

47Cf. the famrous American case Benedict v. Ratner 268 U.S. 353, 45 S.Ct.566 (Brandeis, J., delivering the opinion of the court). See Ph.R. Wood, Title Finance, Deritvatives, Securitisations, Setoff and Netting, Sweet & Maxwell, London, 1995, pp 19 et seq.

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