Bankruptcy of the purchaser and enforceability of retention of title vis-à-vis its receivership

1. Bankruptcy of the purchaser and enforceability of retention of title vis-à-vis its receivership International Insolvency Law Conference Nottingham Law School 15 September 2010 Francesco Dialti, LL.M. (Finance) Avvocato, Milan

2. ECJ judgment C-292/08 (I) • Does an action by the seller against the purchaser, based on retention of title, fall within the scope of Regulation 44/2001 if (i) insolvency proceedings are opened against the purchaser and (ii) the relevant asset is in the Member State of the opening of the proceedings, at the time of the opening? Avv. Francesco Dialti

3. ECJ judgment C-292/08 (II) • Agreement for the sale of machines between a German company (seller) and a Dutch company (purchaser) • German company retains retention of title on the machines • Dutch company is declared subject to insolvency proceedings • Upon request of the German company, a German Court grants protective measures in respect of the machines • A Dutch judge declares the decree of the German Court enforceable • The receivership of the Dutch company appeals such decision Avv. Francesco Dialti

4. ECJ judgment C-292/08 (III) • Reference for ruling: if the asset is in the Member State of the opening of the proceedings, is the claim of the seller based on retention of title a claim which relates to bankruptcy or winding-up of the insolvent company, within the meaning of article 1(2)(b) of Regulation 44/2001? • Article 1(2)(b) of Regulation 44/2001 expressly excludes from the scope of such regulation “bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings” • Gourdain c. Nadler (Case 133/78): in order for decisions relating to bankruptcy and winding-up to be excluded from the scope of the Brussels Convention, they must (i) derive directly from the bankruptcy or winding-up and (ii) be closely connected with the proceedings • Based on such case law, the ECJ has stated that an action based on retention of title does not fall outside the scope of Regulation 44/2001. As a consequence, German Courts have jurisdiction in the case submitted to the ECJ. Avv. Francesco Dialti

5. Retention of title in Regulation 1346/200 • Article 7 Reservation of title 1. The opening of insolvency proceedings against the purchaser of an asset shall not affect the seller's rights based on a reservation of title where at the time of the opening of proceedings the asset is situated within the territory of a Member State other than the State of opening of proceedings. 2. The opening of insolvency proceedings against the seller of an asset, after delivery of the asset, shall not constitute grounds for rescinding or terminating the sale and shall not prevent the purchaser from acquiring title where at the time of the opening of proceedings the asset sold is situated within the territory of a Member State other than the State of the opening of proceedings. • Insolvency of the purchaser is regulated at paragraph 1. Clearly, such paragraph was not applicable to the case referred to the ECJ • Authors have underlined that article 7(1) is rather unclear. In particular, query which law would be applicable to retention of title in case of insolvency proceedings • The issue is even more complicated in the absence of a common regulation of retention of title at EU level Avv. Francesco Dialti

6. Aspects which are of relevance in case of retention of title • Contractual aspects, relating to the internal relationship between the parties to the sale agreement (e.g., seller’s right to terminate the sale if the price is not paid) • Aspects relating to the protection of third parties (sub-purchasers, creditors and receivership of the purchaser) The issue has become even more complex, due to the increasing development of international trade Avv. Francesco Dialti

7. Enforceability of retention of title vis-à-vis the receivership • Let’s assume that a German Court issues a ruling stating that the assets belong to the German seller. Would such ruling be enforceable vis-à-vis the receivership of the purchaser? • The issue was, apparently, not relevant in the case submitted to the ECJ • On the contrary, it would be very relevant, had the purchaser been an Italian company Avv. Francesco Dialti

8. Enforceability of retention of title vis-à-vis the receivership – Italy (I) • Some European countries (including Italy) provide limits to enforceability of retention of title. Such limits result in publicity formalities aiming at (i) avoiding collusions between the seller and the purchaser to the detriment of the purchaser’s creditors and receivership and (ii) protecting bona fide sub-purchaser of the assets. Avv. Francesco Dialti

9. Enforceability of retention of title vis-à-vis the receivership – Italy (II) Italian Civil Code (article 1524) - In order to be enforceable vis-à-vis third party creditors and the receivership of the purchaser, retention of title needs to be documented in writing with date certain at law (data certa, which is obtained, e.g., by way of notarisation) • In case of machines, retention of title also needs to be transcribed at the office of the clerk with the court in whose jurisdiction the machines are located, in order to be enforceable vis-à-vis third party sub-purchasers Italian legislation implementing Directive 2000/35 Retention of title, previously agreed upon in writing, is effective against third party creditors if: • retention of title is confirmed in the individual sale invoices relating to successive supplies of goods; • such invoices bear a date certain at law (data certa) prior to any enforcement by third parties; and • such invoices have been regularly recorded in the accounting entries Avv. Francesco Dialti

10. Italy: conflict of laws on retention of title (I) • No specific international private law provision on retention of title in the Italian legal system • Prevailing view of Authors • law applicable to the relationship between seller and purchaser: lex contractus • law applicable to enforceability of retention of title: lex rei sitae • in case of transfer of assets from one State to another:only thepublicity requirements provided for by the State of destination of the goods (importing State) should be met Avv. Francesco Dialti

11. Italy: conflict of laws on retention of title (II) • Case law • no recent case law • case law dated 1970s: Italian provisions on retention of title are (i) public policy rules or (ii) overriding mandatory provisions Rationale for that: • rules on enforceability aim at protecting third parties (creditors and receivership of the purchaser, bona fide sub-purchasers) • retention of title is an exception to the principle of free transferability of goods Avv. Francesco Dialti

12. Italy: conflict of laws on retention of title (III) • Based on view of Authors and case law: there are strong grounds to believe that an Italian receiver might oppose to a foreign judgment in favour of a seller based on retention of title if the requisites prescribed by article 1524 of the Italian Civil Code are not met, claiming that such judgment violates Italian public policy Avv. Francesco Dialti

13. Some practical advice when dealing with an Italian purchaser and foreign seller wants to retain title • The sale agreement should be provided with date certain at law (data certa) • In case of sale of machines: need to register title with the office of the clerk where the machine is located, in order to make title enforceable vis-à-vis sub-purchasers. To effect such registration, it is necessary that the sale agreement is notarised • In case of sale of registered movable goods (cars, ships, airplanes): need to register title with the relevant register • Based on old case law: strong doubts that “prolonged retention of title” clauses would be recognised under Italian law Avv. Francesco Dialti

14. Thank you Francesco Dialti, LL.M. (Finance) Avvocato, Milan francesco.dialti@hoganlovells.com Avv. Francesco Dialti