Summary

The retention of title, reclamation right, Eigentumsvorbehalt and purchase-money security interest are examples of ways in which Dutch, Belgian, German and US law construct a preferential status for supplier’s credit. They are positions, enhanced under property law, that both by law and legal precedents are granted to the supplier who has delivered goods on credit.

When introducing the concept of retention of title in het Dutch Civil Code, the Dutch legislator noted that a supplier must be able to protect himself against other creditors, in particular against an undisclosed right of pledge established earlier on behalf of a bank. According to the Dutch Supreme Court, this justified relationship is generally achieved, as evidenced by the ruling in the case of Dix q.q./ING. In my opinion, there is reason to question this assumption, considering the many situations in which the security right for supplier’s credit ceases under Dutch law. This happens, for example, in situations where the delivered goods are processed into new goods or resold to customers. In other judicial systems, such as German, Belgian and US law, this seems to be handled differently.

Based on this problem definition, I came up with the following two principal questions: How and to what extent do Dutch, German, Belgian and US law allow a preferential status for supplier’s credit, and how can the differences between these legal systems be explained? Does comparative law offer arguments and inspiration for a different interpretation or for further development or amendment of Dutch law with regard to the construction of the preferential status for supplier’s credit?

The analysis of Dutch, German, Belgian and US law, the UNCITRAL Model Law on Secured Transactions and the Draft Common Frame of Reference (DCFR) leads to the conclusion that there is international consensus regarding the conferral of a preferential status to the supplier who delivers goods to a buyer on credit. This is a generally accepted standard, which is described in Chapter 2. It is also apparent that legislators, draft- ers of law, plus the courts in the four judicial systems and the two model laws justify the conferral of this preferential status for supplier’s credit on the basis of similar arguments. These arguments fall into three categories. First, the conferral of a preferential status is considered necessary in order to facilitate the extension of credit by suppliers, as this has a positive effect on the trading and other commercial activities of enterprises and thus contributes to economic growth. Second, there is a close nexus between the supplied goods and the secured claim. Third, other creditors of the buyer are not disadvantaged by the preferential status since the supplier obtains security on goods that did not fall under the buyer’s possibility of recovery for new credits. They can ultimately even benefit from this, since they can lay claim on the goods involved.

Furthermore, as I show in Chapter 2, there is one notable difference in the way the preferential status works out. In all judicial systems and model laws examined, the preferential status for supplier’s credit continues of the goods become an accession or part of a new good, are commingled or resold, except in Dutch law. The Dutch judicial system thereby differs from the rest. This is remarkable for two reasons. First, the extension pertains to a surrogate of the delivered goods, while under Dutch law a preferential status does pertain to the delivered goods. Second, this preferential status regar- ding the delivered goods is considered justified under Dutch law on the basis of the same arguments that are presented in the other judicial systems and the model laws, to justify both the preferential status regarding the original goods and its extension to surrogates.

Next, in Chapters 3 to13 I provide insight into the ways in which Dutch, German, Belgian and US law construct the preferential status for supplier’s credit, and I explain the ways in which these correspond and differ. I also indicate when and how the comparison of applicable laws can serve as a source of inspiration for Dutch legislators or courts in the resolution of conflicts, discussions and filling up of gaps in current law. For my research I have selected eleven subjects, which are covered in as many separate chapters. Roughly described, these cover the creation phase, the enforcement phase and the consequences for the buyer’s commercial operations.

In Chapter 3 I examine the ways in which the four judicial systems construct a preferential status for supplier’s credit. This is achieved via two judicial concepts: the reclamation right and the preferential right. The supplier’s right to recover goods that have been delivered to the buyer when the purchase price for these goods has not been paid, is acknowledged under Dutch, Belgian and US law. This right reclamation right is constructed differently in these three judicial systems. Particularly notable are the differences in the time limit for exercising this right. The explanation for these differences can be found only in part in the differences in the varying definitions of the right of recovery.

Aside from the right of recovery, Belgian and US law also attach a preferential right to the supplier’s claim of the purchase price. Under Belgian law, the supplier has a preferential right of the unpaid seller.By means of this he can recover the proceeds of goods that he has delivered to the buyer, both during and outside of the bankruptcy of the buyer. Under US law, the supplier’s right of recovery of the purchase price is qualified in the Bankruptcy Code as an administrative expense priority. Hereby, the supplier has preference with regard to distributions from the bankrupt estate. This is a general preferential right. In German law these two judicial concepts are not mentioned, nor is any other judicial concept identified that would by operation of law grant a preferential position to a supplier who has provided credit.

Chapter4 examines the consensual preferential status for supplier’s credit. Under Dutch, German and Belgian law, a supplier can retain the title of the sold goods. Under Dutch and Belgian law a supplier can also retainarightofpledge when transferring goods. In US law the supplier cannot retain ownership of delivered goods. One of the effects of the functional approach of Article 9 UCC is that retention of title is regarded as a security interest regarding the goods delivered. To achieve a result that is comparable to the retention of title, the supplier must demand a purchase-money security interest. This is a security interest that has superpriority, meaning that the supplier is granted a primary security interest regarding the goods that he has delivered, regardless of whether a security interest was established earlier or in advance.

This chapter also sets out in what ways this consensual preferential status can be established or created. Two special situations are worth mentioning in this regard. First, retention of title does not require a pre- scribed form under Dutch law, unless the statutory regulation contained in Title 2B of Book 7 of the Dutch Civil Code is applicable. Second, under US law the supplier must attach and perfect the purchase-money security interest. For the purchase-money security interest on inventory to be established, the supplier must also send notifications to all creditors who have registered security rights to the same inventory of the buyer.

Chapter4 also covers other consensual secured rights: the right of pledge, the fiduciary transfer of title, and the security interest. Every creditor of the buyer can call for these secured rights, so that the supplier does not always obtain a first right of security to the goods that he has delivered. Important reasons for a supplier to opt for these security rights are the wider scope and the fact that this security right can be enforced on the surrogate of the goods delivered.

Chapter5 addresses the scope of the various judicial concepts that lead to the creation of a preferential status for supplier’s credit. This scope is relevant, for example, when the supplier loses his preferential status with regard to a part of the delivered goods as a result of accession, commingling, specification or resale.

The research that I have conducted shows that the judicial systems involved require a close nexus for the preferential position by operation of law. The supplier only obtains a preferential position with regard to the goods delivered as security for the related purchase price claim. This close nexus thus serves as an argument to justify the preferential status, but also to limit the scope of this preferential status.

It follows from Chapter 2 that the close nexus also constitutes an argument for the justification of the consensual preferential status for supplier’s credit.The four judicial systems differ, however, regarding the extent to which a close nexus is required. Under Dutch law, a broad retention of title can be created, as apparent from Article 3:92 of the Dutch Civil Code. By means of this broad retention of title, the law meant to compensate the supplier to some extent for the loss of security resulting from accession, commingling, specification or resale. In addition, with this extension to ancillary claims, the legislator meant to maintain the practice that existed under the old civil code.

Under German law a supplier can retain title for every type of claim against his buyer. The scope of this retention of title is limited by the doctrine of Übersicherung, the Kontoausgleich and the conferral of an Absonderungsrecht to the supplier whose retained title serves as security only for claims other than the purchase price. With these restrictions the close nexus between the performance by the supplier and the secured claim is restored economically. Under Belgian law the supplier can only retain title of the delivered goods to ensure payment of the purchase price of those goods. In US law there is a comparable limited scope for purchase-money security interest. For inventory the supplier can, however, acquire a cross-collateralization clause because, – according to the designers of Article 9 of the UCC – the supplier of these goods would otherwise run the risk that the purchase-money security interest expires.

Chapter6 explains that the preferential status for supplier’s credit is in principle not impaired by later acts of disposition under property law by the buyer pertaining to these goods on behalf of other creditors. This is a consequence of the priority rule: first-in-time, first-in-right. There are several exceptions to this rule, for example third party protection. Comparative law shows that protection of third parties and publicity are related to each other. If the supplier’s security interest is apparent for third parties (by public registration), then a subsequent party who is provided security cannot successfully appeal to third party protection. This is why, under Belgian and US law – contrary to Dutch and German law – a supplier has no reason to fear the loss of security if his security right has been entered in a public register.

In addition, under Dutch law the recourse facility of the tax authorities does not constitute a risk for the supplier’s preferential status. In that respect, Dutch law is an exception to the other judicial systems.

Chapter7 discusses the ways in which a supplier can exercise his security interests outside and during the bankruptcy of the buyer in each of the four judicial systems. Outside of bankruptcy, a distinction can be made between the exercise of retention of title by means of dissolution and revendication and the exercise of a security right such as the retained right of pledge and the purchase-money security interest by means of execution. Under German law, an exception to this distinction is made if the retention of title is only meant to serve as security for claims other than the purchase price, or if an extended retention of title is involved. The rules for exercising security interests must be adhered to by the supplier.

Duringthebankruptcy of the buyer, the trustee or the bankruptcy court in the judicial system involved is in charge, except in Dutch law. There, in principle, the supplier is in charge. In each of the four judicial systems, the supplier still retains his preferential status. An exception to this applies only under German law, i.e. if the retention of title is only intended to service as security for claims other than the purchase price or if an extended retention of title is involved. In such cases the supplier has an Absonderungsrecht instead of an Aussonderungsrecht. The supplier cannot revendicate the delivered goods but only has priority in the distribution of the proceeds of the goods following execution by the trustee. Before the distribution takes place, 9% of the proceeds must be paid to the trustee in his capacity as estate administrator. In that respect, German law differs fundamentally from Dutch and Belgian law, where the supplier always has a right of revendication based on retention of title and does not contribute towards the fee paid to the trustee.

Chapter8 deals with to the consequences of accession of movable goods for the preferential status for supplier’s credit. Under Dutch law these consequences are determined by the rules of accession. The preferential status is lost if an asset becomes an accessory of another asset.. Other than under German, US and Belgium law, there is no policy decision to protect the supplier.

As a result of this policy decision in German, Belgian and US law, the preferential status for supplier’s credit in case of accession of movable goods does not cease or, if it does, then only in exceptional cases. This policy decision is shaped in different ways. Under German law, accession is lim- ited to wesentliche Bestandteile. This concept should be interpreted in a restric- tive sense according to the German legislator and the Bundesgerichtshof. As a result, an asset will not readily be identified as an accession. Next tot that, the supplier will obtain a share in the joint ownership of the unified asset in principle. Under US law, the purchase-money security interest also continues in the asset that becomes an accession. An exception to this only applies if a security interest has been established in a good by notification on a certificate-of-title. This security interest on the whole asset has preference over a purchase-money security interest on an accession. Under Belgian law, the preferential status likewise does not in principle cease by accession. If multiple goods of the supplier are combined, the supplier becomes the fiduciary owner of the unified asset. If assets belonging to several owners are combined, the retention of title clause also continues in the asset if the assets can be split physically and economically. If that is not possible, then the preferential status is extended to the unified asset, on condition that the asset delivered under retention of title is the principal element of the unified asset. The preferential status for supplier’s credit only ceases if the delivered asset becomes a component of a principal asset.

The consequences of commingling of assets resulting in a mass or mixture for the preferential status for supplier’s credit are discussed in Chapter9. My conclusion is that, in each of the four judicial systems, commingling has in principle comparable consequences for the preferential status of the supplier. The preferential right to the original asset continues in the commingled goods. This continuation of the preferential status is based on a comparable rationale. Under German, Belgian and US law, it is considered appropriate to protect owners and holders of limited rights to the original goods against the loss of their rights due to commingling. From the Zalco ruling it can be concluded that the Supreme Court is of the same opinion in its interpretation of the rules of commingling under Dutch law.

Chapter10 addresses the doctrine of commingling resulting in the loss of the goods being identifiable. Under German, Belgian and US law, this type of commingling is regarded as a form of commingling. As a consequence, the preferential status for supplier’s credit continues in the commingled goods as described in chapter 9.

Dutch law is an exception in this regard, a this type of commingling is regarded as a separate doctrine. To what extent Dutch law takes an exceptional position is dependent on the approach taken: strict or flexible. In the strict approach the supplier loses his preferential status in all situations where his goods are commingled with goods of a third party. In that respect, Dutch law differs considerably from the other three judicial systems. In the flexible approach the individualisation requirement is applied less strictly. The supplier in that approach loses his preferential status solely if he cannot prove that his goods are located with the buyer and the extent of his share in the total. With this flexible approach the conse- quences of commingling for the preferential status of the supplier under Dutch law link up more closely with the other judicial systems. In addition, the flexible approach is supported by arguments that were also consid- ered by the legislators in the other three judicial systems in deciding not to let the preferential status for supplier’s credit lapse due to commingling. There are tentative indications that the Dutch legislators will not reject this flexible approach or may in fact even endorse it. Dutch law furthermore allows room for this flexible approach. In the literature various possibil- ities have been discussed whereby the result that is intended with the flexible approach can be integrated into current law.

The consequences of specification for the preferential status for supplier’s credit are examined in Chapter 11. Under Dutch law these consequences depend on the rules for assignment of title in situations of specification. This often leads to the buyer becoming owner of the new goods. The speficiation is then at the risk and expense of the new owner and has decisive influence over the method of production and the design of the product.

In Germany, Belgium and the US, the respective legislators and the courts have sought to protect suppliers against the loss of their preferential status as a result of specification. They have effected this by continuing the supplier’s preferential status to the new goods. Under German law, a supplier can, by means of a contractual agreement with the buyer (the Verarbeitungsklausel), arrange that the new goods are produced on his behalf and that he obtains full or partial ownership of the new object to secure his claim. Under Belgian and US law, the law establishes that the supplier obtains a security interest in the new goods. Belgian law does, however, allow an exception for situations where new goods are produced from goods of several owners. The preferential status is extended in such case to the new object if the supplier is the owner of the principalasset.

Chapter12 examines the consequences of resale of goods with regard to which the supplier has a preferential status. Under Belgian, US and German law, the preferential status for supplier’s credit extends to the claim from resale. This continuation is considered justified based on the close nexus that exists between the secured claim and the claim from resale that represents the value of the object that was delivered on a credit basis. Under Belgian and US law this continuation is effected by operation of law. These exceptions result from a balancing of interests that is to the detriment of the supplier. Under German law, a supplier can extend his preferential status by calling for an Eigentumsvorbehalt mit Vorausabtretungsklausel. Based on this, the buyer assigns his claim from resale to the supplier. The Bundesgerichtshof ruled that such security assignment is granted priority over any previously agreed all-encompassing security assignment on behalf of another credit provider.

Under Dutch law the preferential status of the supplier does not extend automatically to a claim from resale. Likewise, neither the law nor legal precedents grant priority to a security interest that the supplier might claim to surrogates of objects that he has delivered.

Chapter13 describes the ways in which a supplier can transfer his claim to a lender, who thereby takes the risk of payment default by the buyer and in fact finances the credit provided by the supplier to the buyer. In particular I examine whether the lender in such cases also acquires (or can acquire) the preferential status of the supplier.

In each of the four judicial systems the supplier can arrange the transfer of his claim to the lender by assigning his receivable of the purchase price. To ensure that the receivable and the related security right come into the same hands, the supplier must, under Dutch and German law, separately transfer the retained ownership of the goods. Ownership is not a dependent or ancillary right of the transferred claim and therefore does not transfer by operation of law. However, from a functional approach, it may be argued that retention of title clause is a security interest with a function that is comparable to a right of pledge and should thus have the same consequences. This rationale lies at the basis of Belgian security law, meaning that the retained title will by operation of law transfer in case of assignment of the receivable of the purchase price. Also under US law the preferential status transfers by operation of law along with the receivable. After all, the functional approach in Article 9 of the UCC means that the reserved title is ‘converted’ into a limited security interest.

Under Dutch and German law, on the other hand, a separate transfer of conditional right of ownership can be effected easily. A problematic aspect, however, is that the lender does not thereby obtain the power to exercise the retention of title. The lender cannot dissolve the purchase agreement. This problem also occurs under Belgian law, which is remarkable considering the functional approach. As to German law, it is assumed in recent literature that the right of dissolution can be transferred separately. In that way the lender can obtain the right to exercise the retention of title. This does not seem possible under Dutch and Belgian law since, according to current doctrine, the right of dissolution cannot be transferred independently. The parties involved can overcome this by means of a power of attorney. Inability to obtain the power of dissolution can be reason for the lender to opt not for assignment but for takeover of the contract. Under Dutch and German law it once again applies that retained ownership must be transferred separately.

In Chapter 14 I conclude that there is a dichotomy between the four judicial systems. On the one hand there is Dutch law, and on the other hand German, Belgium and US law. Dutch law shows an ambiguous picture, contrary to the other legal systems. Dutch law allows, on the one hand, an ample preferential status for supplier’s credit regarding the original goods, but, on the other hand, this preferential status is not continued in the case of accession commingling, specification and resale. The three other judicial systems grant a preferential status for supplier’s credit both to the original goods and continue the security interest in case of processing or resale of the supplied goods.

The exceptional position of Dutch law is remarkable in view of the conclusions in Chapter 2. The preferential status for supplier’s credit pertaining to the supplied goods is considered justified under Dutch law on the basis of the same arguments that are propounded to justify both the preferential status pertaining to the original goods and the continuation of this preferential status. The assumption of the Dutch legislator that the supplier has a preferential status and is thus protected against security interests of other credit suppliers of the buyer is thus only partially true.

The absence of the continuation of the preferential status in Dutch law does not appear to rest on a normative choice. The idea appears to exist in Dutch law that the preferential status for supplier’s credit expires as a result of accession, commingling, specification and resale, simply because this is a result of the legal system. The other judicial systems make clear, however, that the legislator and the court can choose differently, so that the preferential status does continue in these situations. Comparative law thereby presents an argument plus inspiration for the construction, amendment or reconsideration of Dutch law regarding the preferential status for supplier’s credit.

However, four methods that may lead to the continuation of the preferential status are examined for Dutch law. These methods are set out in chapter 14. Comparative law provides inspiration for the justification of these continuation and shows how this can be implemented by amending or reconsidering Dutch law.