Security by title transfer

What does the institute of se­curity by title transfer mean in practice? The commercial world has long been developing a method of taking security over assets by title transfer having the same commercial effect as security. Effectively, a borrower transfers title to an asset to a lender (or third party) by way of security and then the lender has an obligation to re-transfer the asset back to the borrower, if and once the underlying debt has been paid. Security by way of title transfer operates in a totally different manner from “traditional” security.

‘Traditional” security operates by giving priority to the secured lender in a ranking scenario, but title to the secured asset remains vested in the borrower’s hands. In security by way of title transfer, the borrower actually transfers title to an asset to a lender by way of security. Therefore, the lender acquires legal title to asset, but he owes fiduciary obligations to the borrower and is bound by law to act in a commercially reasonable manner. However, in contrast to the institute of pledge, possession may remain with the borrower himself. Consequently, the borrower may continue making use of such assets which may still serve as collateral for the lender. However, the lender is deemed at law to be the absolute owner of the property so transferred.

Nothing of course stops the parties from also agreeing that the movable thing in question be delivered to the lender. In such an event, notwithstanding the fact that the creditor is the absolute owner of property transferred, any exercise of ownership rights other than as may be provided for in the agreement between the parties (or at law) would be a breach of fiduciary duties for which the lender would be liable towards the borrower.

Although Roman law catered for security by way of title transfer through the institute known as fiducia cum creditore (cfr. institute of Fiducia cum amico which has no collateral aim), this institute was forgotten or forbidden through the ages since it was held that this collateral was too risky for the debtor, particularly because the value of the asset could be more than the secured indebtedness.

Now EU law and many civil law countries are adopting an old and prohibited Roman law institute and developing it to meet the needs of present day commerce. Under German law, for example, the concept of security by title transfer has become an established part of the German legal system through case-law. The need for a transfer by way of security also arose due to the cumbersome institute of pledge as laid down under German law, in particular the necessity of publicity as well as transfer of possession of the movable. The German courts had recognised the fiduciary transfer device as one which serves the business needs of both borrowers and lenders.

By way of a flavour, the new institute of security by title transfer as introduced in Malta’s Civil Code may broadly be described as follows:

It is a permissible form of collateral only in the case of movable things (not real estate), but applies to both tangible and intangible movables (such as debts and other rights);

The object of title transfer can include future debts (for instance, giving as collateral future anticipated cash flows);

Such security can be given by both the borrower or by a third party;

It can secure both present and future obligations whether to present or future creditors (unlike most security institutes which require more certainty as to the obligations being secured);

There must be an agreement in writing;

If there is an event of default, the creditor need not resort to court to enforce the security, but, on giving notice in writing to the borrower, he may either sell the movable thing or appropriate it in discharge of the secured obligation; and

Where the property transferred by way of security is in the possession of the debtor, a demand may be made to the Courts to support the creditor in taking possession of the property.

There is a school of thought which views the institute of security by title transfer with a degree of scepticism, particularly because the lender is deemed to be in a powerful position since he owns title to the collateral provided and may enforce without recourse to the Courts. This view looks at title transfer security as being in stark contrast to the historic tradition of civil law countries (like Malta) which are traditionally debtor-friendly jurisdic- tions. In rebuttal of this argument, it is submitted that legal thought has now evolved in its sophistication to distinguish between instances when the law should be creditor-friendly and when it should be debtor-friendly.

Clearly, the law should afford significantly more protection to the case where a lender advances credit to an individual consumer than when it does so to a sophisticated counter-party. In fact, the trend in legal systems has developed such as to liberalise many legal civil issues between parties in commercial matters and to adopt a debtor-friendly approach to the law only in the case of consumers, that is individuals, who are not acting in the course of their profession, business or trade.

In this regard, Philip R Wood’s Comparative Law of Security Interests and Title Finance (Sweet & Maxwell, 2007) is a must-read on what elements determine the sophistication of a legal system. The introduction of insolvency set-off in 2003 and the availability of Maltese law commercial trusts since 2004 have been part of the foundation over which all other Maltese financial laws rest upon. The facilitation of security by title transfer is another key aspect of Maltese financial law which has reconciled the interests of finance and the law.

The author is a partner at Ganado & Associates – Advocates and a visiting lecturer at the Faculty of Laws, University of Malta.