A full and efficient legal security right
The Pledge Act of 11 July 2013 has substantially improved the legislation surrounding retention of title (reservation of ownership). It has been generalised, and the system was developed using a functional approach, so that retention of title is now regarded as a full security right.
The legislator adopted a semi-functional approach, since no publication is required in the pledge register. In other words, in Belgium, retention of title has gained a certain maturity.
1. Retention of title – What is that?
A retention of title clause is a contractual clause, in which the seller of a good stipulates that ownership of the item only passes to the buyer once he has fulfilled his contractual obligations, or, in other words, once he has paid the full purchase price.
So this clause creates an exception to the principle that, in the event of a transfer agreement, the right of property passes to the transferee at the point of consensus ad idem, and thus irrespective of payment of the agreed price.
2. Retention of title – Previously and now
Prior to the Pledge Act of 11 July 2013, retention of title in Belgian law was only legally regulated in a very fragmented manner, namely only in the context of the Bankruptcy Act. The Bankruptcy Act (Section 101) recognises the enforceability of the retention of title clause on movable goods in Belgium in the event of bankruptcy of the debtor, and only subject to certain strict conditions, namely:
(i) Retention of title is only enforceable in the event of bankruptcy of the debtor (no other cases of concurrence);
(ii) A document must be drawn up, at latest at the time of delivery, with the explicit or implicit approval of the buyer;
(iii) The goods must still be located in natura on the debtor’s premises, and not have become moveable through incorporation, or have been mixed with another movable good. The subject of the reclamation therefore still had to be definable and identifiable. The latter was not always evident as the item could have been used, or fundamentally transformed by processing. Added to this, there was the further problem of fungible goods: if these had been mixed with other goods of the same nature, recovery was ruled out;
(iv) The legal claim for reclamation had to be instituted before the drawing-up of the first statement of verification of debt claims. In practice, this meant that this kind of legal claim had to be instituted by summons ca. forty days after the date of bankruptcy. The object had to belong to the person asserting the right of reclamation; he bears the burden of proof of his right of property, because the trustee of the bankruptcy benefits from the presumption of ownership, based on Section 2279 of the Civil Code (“possession amounts to title”).
A limited interpretation of Section 101 of the Bankruptcy Act still applies; indeed, to date, the provisions of the Pledge Act of 11 July 2013 have not come into force. The security function of retention of title was not allowed to be extended to include security of debt claims other than those for the payment of the price of the sold goods.
3. The Pledge Act – Added value for retention of title?
The added value of the Pledge Act of 11 July 2013 is, in any case, that henceforth, general and broader legislation is foreseen for retention of title. Thus, amongst others, it foresees the scrapping of Section 101 of the Bankruptcy Act and the incorporation of the general principles of retention of title into the Civil Code.
The generalisation of the new legislation lies mainly in the fact that the legislation no longer only applies to retention of title in the context of purchase/sale agreements, but also to retention of title within other “derivative” agreements such as exchange agreements, contribution agreements and combined purchase/service agreements.
Disputes concerning retention of title, such as, for example, regarding service agreements which also include the supply of goods, will be a thing of the past.
Also, the fact that the new legislation applies not just in the event of bankruptcy (in the case of full enforceability in respect of any third party), but in any situation of concurrence and seizure, is proof of its more general application. This is a result of the incorporation of the general principles of retention of title into the Civil Code.
4. Retention of title – Subject to conditions?
4.1 A document required?
Enforceability in respect of third parties requires a delivery document, but entails no publication rule or constitutive requirement for granting the security right.
The document, (e.g. a price quote, order form, order confirmation, delivery note, etc.), need not be signed by the buyer or by the seller.
The seller must prove that the document was actually drawn up and was drawn up punctually. He bears the burden of proof, but can apply all legal means for this purpose.
However, if the buyer is a consumer in the sense of Section 2,3° of the Act of 6 April 2010 regarding market practices and consumer protection, the document must prove the buyer’s consent. This special protection of the consumer acts as a kind of correction, and is a recurring theme throughout the Pledge Act of 11 July 2013.
For the rest, there are not too many formal prescriptions. We refer to the statements made above during the discussion of Section 101 of the Bankruptcy Act, under (ii) and (iv).
4.2 The Pledge Register
Although retention of title is now equated with a real security right in movable property (such as the pledge), it is not subject to any form of publication, due to practical reasons (namely not encumbering SMEs with new formalities).
The registration of retention of title in the pledge register, which is to be introduced in the future, is not compulsory, but is, of course, possible and in our view, advisable. Indeed, registration provides protection against movables becoming immovables (cf. infra).
In our view, the legislator has missed an opportunity here, which he can still take, as the law has not yet entered into force. It would have been better to make pledge registration compulsory. It is possible that frequency of practice may play a role in this. For instance, professional sellers active in various sectors (amongst others the automobile sector) are apparently planning to commence systematic registration.
5. The Pledge Act – A broadening of retention of title
The broadening of the new legislation means that retention of title is applicable and remains enforceable in cases in which the enforceability of retention of title was not previously accepted, namely if the transferred goods are no longer to be found in natura on the debtor’s premises. So, from now on, the general provisions relating to processing, mixing and resale apply. These are aimed at linking financial and legal security.
Under Section 101 of the Bankruptcy Act, in the event of concurrence, the unpaid seller, on the basis of the Speciality Principle, was unable to invoke any security law claims using retention of title based on the new item formed by processing (or mixing: cf. infra). The goods were required to be still specifiable (identifiable), or recognisable. The item was permitted to have undergone some processing or to have been incorporated into a different movable item, but not consumed or fundamentally reformed.
5.1 Retention of title in case of processing and mixing of sold goods
Due to the Pledge Act of 11 July 2013, the in natura requirement (or at least its previous interpretation) was abandoned. From now on, unless agreed otherwise in the contract, retention of title shall also relate to the new item produced by processing.
Under Section 101 of the Bankruptcy Act, it was also difficult to apply retention of title in the event of mixing of sold goods with goods of the same type.
Mixing can only occur in fungible goods. Fungible goods are replaceable items and in first instance form a kind of pile. If this pile cannot be identified as belonging to an owner, or distinguished from that of other owners, due to other fungible goods coming into contact with the original pile, this is known as mixing. If, however, the goods can be specified or identified as the creditor’s goods, (e.g. by trademark, serial, or production numbers – possibly open to discussion), (if the seller holds retention of title), recovery can take place. The creditor bears the burden of proof in this, and may use all legal means to this end. However, in most cases recovery was not possible.
An alternative that was developed in practice was collective recovery, whereby the mixed goods pass into the joint ownership of the persons, (who may include buyers and sellers), whose goods were mixed.
The legislator has now introduced this developed practice as a rule. However, the unpaid seller does bear the burden of proving that his property is still present, and in what proportion. If several unpaid sellers invoke retention of title, they are to exercise their recovery right in proportion to their share. The latter also occurs when the goods present are insufficient to pay all of the unpaid sellers with retention of title. The above means that recovery is still possible if a seller (X) has supplied under retention of title goods, which are mixed with goods of the same kind at the buyer’s premises, and the buyer is declared bankrupt. If paid and unpaid goods are present, priority is granted to the unpaid seller. The same occurs if there are several sellers (X and Y) of the same kind of goods.
5.2 Retention of title and real subrogation
The real subrogation of retention of title was a subject of discussion in previous legal doctrine.
If the goods sold under retention of title are converted into a debt claim (e.g. in the event of resale), in future, the right of the seller/owner will be based on this debt claim (e.g. the debt claim to the purchase price).
In principle, under property law, the buyer has no authority to resell the goods, except if this is implicit (from the nature of the goods) or explicitly stipulated.
In the event of unauthorised resale, the seller under retention of title has a right to follow the property, reserving application of Section 2279 of the Civil Code. Previous discussion relating to real subrogation (“Real subrogation shall not apply”) now ceases. From now on, retention of title includes all debt claims which replace the encumbered goods, including debt claims arising from their transfer, and those for compensation due to destruction, damage or loss of value of the encumbered item. However, this is conditional upon the traceability (individual nature) of the debt claim.
5.3 Retention of title and incorporation
The fact that, under Section 101 of the Bankruptcy Act, retention of title is not immune to incorporation, (i.e. that movable goods are de facto attached to an immovable good, such as, for example, machines which are attached to the floor of an industrial building), means that Section 20, 5° of the Mortgage Act (priority of the unpaid seller) was able to continue to play his role. After all, if the movable goods which have been bought become immovable, a conflict can arise with the mortgage creditor. Retention of title was lost upon the conversion of movables into immovables by incorporation. For that conflict, the seller could simply protect himself by invoking his priority as an unpaid seller, provided that the goods were capital goods. This protected the seller from the custodian of mortgages, even if the mortgage registration was from an earlier date. This exception to the priority rule was explained by the idea that lending for the acquisition of capital goods enjoys special protection.
Unlike Section 101 of the Bankruptcy Act, the Pledge Act of 11 July 2013 now states that for goods sold which have become immovable due to incorporation, (NB this is not true in the case of fixtures), retention of title is now safe, provided that it is registered in the pledge register. Some qualification is required regarding the order of priority of claim, also mindful of the super priority, which is allocated to the seller under retention of title for protection of the investment loan (as opposed to the finance loan). If registration in the pledge register occurs prior to the incorporation, the retention of title retains its priority, even over priorities and mortgages registered earlier (due to super priority – cf. infra). The seller then gains priority over the mortgage creditor. If registration occurs after incorporation, any conflict with the mortgage right must be deliberated in accordance with the anteriority principle.
6. Retention of title – Super priority?
As already mentioned above, from now on, retention of title enjoys super priority, in the sense expressly stipulated in the Pledge Act of 11 July 2013 that “a possessory lien that is based on a retention right for a debt claim for the preservation of an item has precedence over all other pledge holders. Reserving paragraph 1, the unpaid seller who has reserved ownership, the privileged seller and the priority of the sub-contractor take precedence over the pledge holders of these goods.” The basis for this, is that without a strong right of priority, the seller is not inclined to supply goods before he has been paid. Thus, priority is given to the goods loan (instead of the financial loan).
In light of the above, the question arises, whether a combination of retention of title and the priority of the unpaid seller is conceivable. In conceptual terms, they do conflict, however, in our view, a combination of the two is possible in practice. As we have already stated above, the same protection can be acquired through registration of the retention of title in the pledge register.
7. Retention of title – Ban on enrichment
According to the Pledge Act of 11 July 2013, the effect of retention of title is limited by the enrichment ban (which is the same as the ban on enrichment under Section 105 of the Bankruptcy Act). Under retention of title, the seller is logically only the owner up to payment of the highest amount of the buyer’s outstanding debt under the retention of title.
If the value of the reclaimed item exceeds the amount of the debt claim, the seller is “obliged to pay the balance to the buyer”. In this case, the seller may indeed claim the off-setting of the uncovered sums.
8. Conclusion
The legislation governing retention of title is now much better elaborated. Retention of title has become more generalised, and the system has been developed using a functional approach, so retention of title is now regarded as a full-blown security right.
The legislator did use a semi-functional approach, as there is no requirement for publication in the pledge register (this is purely optional).
In other words, in Belgium, retention of title has acquired a certain maturity, which is good for trade and the economy, and can lead to greater efficiency.
Suppliers should, albeit in theory, be able to recuperate more of their debt claims in the event of concurrent claims from their clients.
