Overview of security rights in commercial transactions

1. Overview of security rights in commercial transactions Dr. Jürgen Brandstätter Alliott German Circle Meeting Zurich, 21./22.09.2017

2. Security rights A security right is a partial right that can exist on an object. Its function is to assign the economic value of an object to a person other than the owner of the object. This separates the value of the object from the full legal right to the object.

3. Security rights in Austria • Retention of title • Security transfer • Bill of exchange • Assignment for security • Assumption of debt • Collateral promise • Possessory lien • Legal lien of the forwarder/stock keeper/commission agent • Bill of lading • Earnest fee and penalty fee • Current account • Letter of credit • Bank guarantee • Comfort of letter • Guarantee of the Oesterreichische Kontrollbank AG

4. Legal basis I § 1343 ABGB: The legal ways of securing a liability and to fortify a right by which the claim holder is granted a new right, are: the obligation of a third party for the debtor and the pledge. So there are obligatory (debt-law) and in rem (property law) security interests.

5. Legal basis II § 447 ABGB: The lien is the right in rem, which is granted to the creditor, to obtain settlement out of an object, if the liability is not fulfilled at the defined time. The object on which the creditor is entitled to this right is called a pledge. Attention: For movable, physical things, the dead pledge principle applies. (Exception: transfer by sign or labelling allowed for very large machines or warehouses) A register deposit for movable things exists in Austria only for ships. On immovable property, the pledge is made by registration of a mortgage in the land register.

6. Legal basis III § 1346 ABGB: (1) Anyone who obligates himself to satisfy the creditor in the event that the first debtor fails to fulfil the obligation shall become a guarantor, and the agreement between him and the creditor shall be called a surety agreement. Here, the first debtor still remains the principal debtor, and the guarantor is only added as a second debtor. (2) The validity of the guarantee contract requires that the guarantor's letter of commitment is submitted in writing. Attention: written form also applies to commercial (corporate) guarantee statements. Written form means: Handwritten signature Exempted only credit institutions (§ 1 Abs 6 BWG)

7. Legal basis IV § 368 UGB:(1) If a pledge by the pledgee and the pledger is an enterprise-related business, then the period of one month specified in § 466b (1) ABGB such period shall be replaced by one week. (2) This provision shall apply respectively to the statutory lien of the commission agent, the forwarder, the warehouse keeper and the haulier, to the lien of the freight forwarder and the haulier, even if the freight forwarding or freight contract is an enterprise-related business only on their side. § 466b. (1 The pledgee has to threaten the pledger with the sale of the object after the due date of the secured claim, as far as this is not impractical. He has to indicate the amount of the outstanding claim. The sale may take place only one month after its menace or, if it was impractical, after the due date. If there is another lien on the object, the creditor must also threaten the sale to the other pledgee. To the latter the redemption of the demand (§ 462) shall be allowed. (2) The sale shall be effected by public auction by an authorized agent. (3) The time and place of the auction shall be made public under the general name of the pledge. The pledger and third parties who have rights to the pledge are thereof to be informed. (4) Objects with a stock exchange or market price may also be sold by the pledgee at free-hand. Securities that have a stock exchange or market price, as well as savings certificates may only be sold free-hand at their price or value.

8. Legal basis V § 369 UGB:(1) An entrepreneur shall have a right of retention, because of debts due, on the debtor's movable property and securities which he obtains as a result of business-related transactions. This right of retention is applicable on movable property and securities that he has in his rightful possession, in particular by means of a bill of lading or a warehouse note. The right of retention is also justified if ownership of the object has been transferred from the debtor to the creditor or has been transferred from a third party to the creditor for the debtor, but has to be returned to the debtor. (2) The right of retention does not apply to a third party with rights in rem. (3) The right of retention shall be excluded if the retention of the object conflicts with the instruction given by the debtor before or at the time of transfer or with the obligation assumed by the creditor to proceed in a certain manner with the object. (4) The debtor may avert the exercise of the right of retention by providing security. A guarantee by guarantor is excluded.

9. Legal basis VI § 371 UGB:(1) By virtue of the right of retention, the creditor is entitled to satisfy his claim out of the retained item. The creditor has the precedence of satisfaction out of the object over a new lien that was constituteded after his. (2) The satisfaction shall take place in accordance with the rules applicable to the lien. The period of one month specified in § 466b (1) ABGB is replaced by a one-week period. (3) If the satisfaction does not take place by execution, it is only permissible after the creditor has obtained an enforceable title for his right to satisfaction against the owner or, if the object belongs to him, against the debtor; in the latter case, the provisions of the ABGB concerning the satisfaction of the debtor apply. In the absence of an enforceable title, the sale of the object is not legal.

10. Security rights of the debtor § 813 ABGB: The heir or probate curator may request, to determine the debt level, that all creditors are required to declare their claims within a reasonable period. This edict has to contain the note that until the expiry of the period the satisfaction of the creditors has to pause. § 814 ABGB: The court order means that the creditors who have not filed their claims in due time have no further claims against the estate if it has been exhausted by satisfying the registered claims. This does not apply if the claim is secured by a lien. § 815 ABGB:If the heir does not file such a request or if he satisfies only some creditors without respecting the rights of others, and therefore some creditors remain dissatisfied resulting from the over-indebtedness of the estate, the heir will, with all his property, be liable to the creditors, for the amount, that they would have gotten by a proper request.

11. Retention of title I In Austrian law, the reservation of title is not expressly regulated in the law, but became introduced under customary law. • Enables the safe sale of goods on credit • Retention buyer acquires with transfer not yet property, but a right of entitlement • His property is conditional

12. Retention of title II Problems may arise in case of a resale by the buyer, as the second purchaser can acquire property by bona fides (§ 367 ABGB). There are essentially the following forms of permissible and effective retention of title: • Downstream retention of title • Extended retention of title • Forwarded retention of title

13. Retention of title III In the case of a Downstream retention of title, the reserved buyer sells an object that he himself has purchased under retention of title to a third party and agrees with him on a retention of title. The reserved buyer therefore pretends to be the owner of the object sold to the second buyer. If there is no permission of the reserved seller for the resale, the third party can acquire the expectant right only by bona fides. In this case, two retention of title and two expectant rights arise. If the second purchaser pays the purchase price, he acquires ownership.

14. Retention of title IV In the case of an extended retention of title, the conditional buyer is permitted to resell the reserved object to a third party. The third party acquires derivative property. In the case of an extended reservation of title, the reservation seller usually requests the assignment the claim of the reserved buyer against the third party in advance in order to secure his purchase price claim. The secured assigned claim is then a substitute security. The validity of this security assignment requires publicity by notification to the third party or a note in the accounting records.

15. Retention of title V In the case of a forwarded retention of title, the reserved buyer sells his entitlement to a third party. The third party may acquire the expectant right derivative. The reserved buyer becomes owner only when the reserved seller has been satisfied. In the case of an extended retention of title, reserved seller and reserved buyer agree that the reserved property should secure claims other than the purchase price claim. Such an agreement is a covert, unpublished and therefore ineffective security transfer. See below 

16. Security transfer According to Austrian law, the security agreement is a valid title of ownership transfer. However, the security transfer may not be used to circumvent the laws to obtain ownership and pledge. It is therefore only valid if the publicity requirements established for the lien are complied with.

17. Bill of exchange I The bill of exchange is regulated in the 1955 bill of exchange law. The bill of exchange is a security issued in accordance with certain formalities in which a person undertakes to pay a specified amount of money to the bill holder at a specified time and place. The transfer of the bill happens mostly for reasons of payment. The bill thus securitizes an independent claim.

18. Bill of exchange II The two essential functions of the bill of exchange are: • Payment function  the original debt expires upon redemption of the bill of exchange • Credit function  the effective payment of the bill debtor is postponed by the duration stated on of the bill of exchange The bill of exchange is a "born order paper". It can only be transferred by means of endorsement.

19. Bill of exchange III The special feature of the bill of exchange is that the owner can "work" with the bill of exchange. He can do this by • Selling it to the bank • Selling it to other creditors as a means of payment • redeem it at the bank when due Today the bill of exchange plays a minor role.

20. Assignement of security It is a special form of assignment in which the assignee acquires a claim with the contractual obligation to collect it only if the debtor is in default of payment. In the case of the assignment, an agreement is required between the cedent and the assignee. The cedent guarantees the assignee the correctness and collectability of the claim.

21. Debt assumtion Existing debtor and new debtor conclude a debt assumption agreement. This is regulated in §§ 1405, 1406 para 1, 1407 ABGB. It is agreed that the new debtor takes the place of the existing debtor. Unlike the change of the creditor, however, the change of the debtor always requires the consent of the creditor. Thus, even without agreement with the debtor, a third party can assume the debt of the creditor by signing a contract.

22. Collateral promise The collateral promise is regulated in § 1406 para 2 ABGB. The acceding debtor is not placed instead of, but besides the existing debtor and thus joins the debt. The creditor acquires another debtor, thereby obtaining increased security and may decide from which debtor he demands the debt. The consent of the creditor to join the debt is not required.

23. Right of retention § 369 UGB An entrepreneur has, under certain conditions, a right of retention in the movable property and securities of the debtor for the due claim which he is entitled to against a entrepreneur. In doing so, the objects must have come into the creditor's possession with the will of the debtor and on the basis of business-related transactions. The debtor must be able to dispose about the object through a bill of lading or a warehouse note.

24. Right of retention § 369 UGB Settlement rights: The creditor is authorized by virtue of the right of retention to satisfy himself out of the retained object for his claim. The sale may proceed one week after the debtor has been threatened with the sale, by public auction or, in the case of objects with a market price, also by private, free-hand sale.

25. Legal lien of the forwarder/warehouse keeper/commission agent • forwarder / warehouse keeper / commission agent have a legal lien on the goods concerning the freight / storage costs / commission, as long as they have the items in their possession and can dispose of it in particular by means of a bill of lading or a warehouse note. • The landlord has a legal lien on the items brought into the rental property (§ 1101 ABGB). • The lawyer has statutory liens on his client's cash (§ 19 RAO) and on the claim for compensation of his party (§ 19a RAO).

26. Bill of lading The most important shipping document for overseas shipping is the bill of lading. It documents the ocean freight contract concluded between the consignor and the consignee. The importance of this paper stems from the fact that around two thirds of world trade is handled seaways. The bill of lading in particular justifies the assumption that the consignor has taken over the goods as described in §§ 643 No. 8, 660 UGB.

27. Earnest fee and Penalty fee The old civil-legal appearances of the Earnest fee and Penalty fee also have security function. § 908 ABGB: What is given in the conclusion of a contract, except in the case of a special agreement, can only be seen as a sign of conclusion or as a guarantee for executing the contract and is called Earnest fee. If the contract is not fulfilled because of a party's fault; Thus, the innocent party may keep the Earnest fee received by the other party, or reclaim twice the amount it has given. But if the innocent party is not satisfied with it, it can requests on fulfilment; or, if this is no longer possible, demand compensation. § 909 ABGB: If, upon the conclusion of a contract, an amount is determined which one or the other party must pay in the event that he wishes to withdraw from the contract before fulfilment; the contract is closed under a Penalty fee. In this case either the contract has to be fulfilled or the Penalty fee has to be paid. If only a part of the contract is fulfilled; or the other party has provided parts for fulfilling the contract, there cannot be a abdication even by paying the Penalty fee. Attention: special provision for consumer transactions (§ 30a para 4 KSchG).

28. Current account I § 355 UGB:(1) If someone agrees with an entrepreneur with whom he is in a business relation, that mutual claims and benefits, arising from this business relation, shall be invoiced together in regular intervals by offsetting and determining the surplus for one or the other part , it is called current account. Unless otherwise agreed, the legal effects regulated in the following provisions shall apply. (2) The billing period is one year. (3) At the end of the accounting period, the mutual claims and benefits and interest are offset. §§ 1415 and 1416 ABGB are to be applied. (4) Each party shall have a claim against the other party for the clearance of the accounts. If a financial statement has been established, the person who is entitled to a surplus may also rely on it to justify his claim. The objection of the other party, in which the creditor is enrichened without justification, remains untouched. The person to whom a surplus is due when clearing the account may demand interest on the surplus from the day of the conclusion of the transaction, even if interest is included in the invoice. (5) In case of doubt, the current account may also be terminated during the term of a billing period, with the effect that the person who is entitled to a surplus after the calculation can claim its payment. (6) Applying for a balance of accounts which has been established in using terms of general contractual conditions or forms that violate a law or are against bonos mores is considered equal to a self-reliance on such a condition within the meaning of § 28 (1) last sentence KSchG.

29. Current account II The function of security of the current account is that each party can obtain satisfaction for its claims by extinguishing its debts. Other disposals of overdrafts are ineffective. Only if a assignment has already been made prior to the conclusion of the current account agreement and the debtor has also become aware of this, does this assignment take precedence over the current account agreement.

30. Letter of credit • A letter of credit is the obligation of a bank, on behalf of the importer or client, to pay the exporter or the beneficiary a certain amount immediately or at a specified later date upon presentation of certain documents. • Import credits are used when an importer wants to make sure that he only has to pay for the delivery if it has been proven on the basis of documents that conform to the conditions in the letter of credit that the delivery has been made. • Export credits are used if there is still no relationship of trust with the other contracting party. Upon receipt of an export letter of credit, the exporter has the security that payment by the bank issuing the letter of credit will be effected if the exporter submits documents in conformity with the conditions in the letter of credit in due time.

31. Bank guarantee § 880a ABGB "If someone has promised another person a performance by a third party, this shall be deemed a promise of his effort towards the third party; but if he is guaranteeing the success, he is liable for full satisfaction if the performance of the third party fails. " - 880a ABGB Bank guarantee is the independent obligation of a credit institution towards a specified beneficiary (guarantee holder) to be responsible for the failure of an agreed performance of its customer (warrantor). In this case, the transfer of a specified amount of money to the beneficiary is prompted by his written request, regardless of the legal fate of the underlying transaction. The beneficiary should have the assurance of having immediate liquidity made available to cover any potential or actual loss.

32. Comfort letter The OGH sees the letter of comfort "as an instrument of securing credit for a large number of declarations of different legal character, given by a person different from the borrower, but regularly closely related to him, the patron, and whose content is ranged from non-binding declarations all the way to a guarantee contract ". [OGH, Judgment of 11 July 1985, 7 Ob 572/85] There are "hard" and "soft" letters of comfort.

33. Guarantee of the Oesterreichische Kontrollbank AG The Oesterreichische Kontrollbank AG (OeKB) is a specialized institution owned by commercial banks headquartered in Austria. Its central services strengthen the location of Austria and support the economy in global competition. The Export Financing Promotion Law (AFFG) The export financing procedure is subject to the provisions of the Export Financing Promotion Law. The Federal Minister of Finance is authorized by the AFFG to assume liability in the form of guarantees in favor of creditors for OeKB's credit operations in connection with export financing. Guarantee of the Republic of Austria according to AFFG Under the terms of the Export Financing Promotion Law, the Federal Minister of Finance is authorized to grant guarantees for OeKB's loan operations on behalf of the Republic of Austria. Guaranteeable financing instruments are bonds and loans as well as money market instruments, such as Commercial Papers. www.oekb.at

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