What is more important than the timing as such is the fact that when the instruments appeared in England, assignment of debt was not yet generally possible other than by way of novation. The conclusion of part I of this book was that the fact that novation was the most robust technique available to transfer obligations when securities first appeared caused England to shape securities around the law of novation and to rely predominantly on registered securities.

In German and Austrian law, on the other hand, assignment was generally possible when securities first appeared. There was, therefore no need to apply the law of novation to facilitate transfers of securities. The rules on assignment, however, had significant disadvantages, which had to be overcome by German and Austrian legal doctrine. The shortcomings of the law of assignment, and the theories put forward in order to overcome them, will be analysed in the following sections.

9.2 Shortcomings of the law of assignment

The conclusion of section 9.1 was that, when securities first appeared in Germany and Austria, they were classified as intangibles and that their transfers were considered to be governed by the law of assignment.

The assignment of debt was, at the time, possible under the German ALR as well as the Austrian ABGB. Debt and equity securities could therefore be placed on the market by issuers with a view to being transferred by taking advantage of the general law of assignment contained in the civil codes of the time. There was no need in German and Austrian law for the issuer to consent to a transfer.26 This may explain why German and Austrian law never relied on the law of novation to analyse securities or their transfers, and why registered securities never took root in German or Austrian law.

The fact that German and Austrian law originally classified securities as intangibles and considered their transfers to be governed by the law

26It is also worth noting in this context that in German law at an earlier stage obligations were considered to constitute personal debt that could not be transferred without the debtor’s consent. In particular, Roman law – but also, it seems, the German common law – took this position (Heinrich von Poschinger, Die Lehre von der Befugniß zur Ausstellung von Inhaber-Papieren, Mu¨ nchen: Lindauer, 1870 12). Practice developed techniques making the transfer of obligations possible. Interestingly, some sources report that one of the techniques used was novation (Arthur Engelmann, Das Preußische Privatrecht in Anknu¨pfung an das gemeine Recht, Breslau: Koebner, 1883 203). The transfer would be effected by means of extinguishing the obligation towards the transferee and creating a new, but identical, obligation with the transferor.

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of assignment had the advantage of providing a legal basis permitting their transferability, but the analysis also had disadvantages. The first of these consisted in the fact that under German common law it was impossible to have a contractual relationship with an unidentified creditor.27 German common law would enforce a contract only if the obligee was identified. If securities are issued to the bearer, this rule is, on the face of it, infringed. The issuer of a bearer instruments does not undertake to perform an obligation towards an identified individual: the obligation is to be performed in favour of the person who presents the certificate to the issuer at the time when the obligation becomes due.

The ABGB takes the same position: a debt note is valid only if it contains the name of the creditor (ABGB, s. 1001). Debt notes issued to the bearer, of course, do not refer to the creditor’s name.

This rule did not cause problems when securities first appeared because they were originally issued in the name of the respective investors. The issuer would also make out a certificate. The certificate was considered to be a document evidencing the entitlement of the holder, whose name was stated in the certificate. The rights issued were transferred without the involvement of the issuer, the assignment being carried out by way of a written note on the certificate.

Over time, however, the requirement for there to be evidence of each transfer was considered to be too burdensome. Market practice gradually shifted towards replacing name certificates with bearer certificates. At the request of investors, issuers also began to issue certificates to the bearer,28 a practice difficult to square with the existing law.

Another problematic issue was that the law of assignment subjects the buyers to adverse claims arising out of unauthorised transfers. If an investor buys debt from a seller who was not entitled to sell the debt, she does not acquire title to the debt. The law of assignment does not protect the bona fide purchaser against adverse claims. Market participants would either have to enquire into the material entitlement of the seller – or, alternatively and more likely – would price the risk of unauthorised transfers into every transfer. The latter would reduce the price that could be achieved on the secondary market – and, in turn, also the price for which securities could be first issued.

27Friedrich Carl von Savingy, Das Obligationenrecht als Theil des heutigen ro¨mischen Rechts, vol. II (Berlin: Bei Veit und Comp, 1853) 94; Poschinger, Beitrag zur Geschichte 34.

28Go¨ nner, Von Staatsschulden, p. 182.