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THERECOGNITIONANDTREATMENTOFTITLERETENTIONINTHELEGALSYSTEMSOFTHEUNITEDKINGDOM,VIETNAMANDRELATEDJURISDICTIONS:A

COMPARATIVESTUDY

HienTrinh

PresentedforthedegreeofDoctorofPhilosophy

LancasterUniversity

2018

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DECLARATION

I,HienTrinh,doherebydeclarethatthissubmissionismyownwork.Ihavenot

submitted it in substantially the same form towards the award of any other

degreeorqualification.Ithasnotbeenwrittenorcomposedbyanyotherperson

andallsourceshavebeenappropriatelyreferenced.

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ACKNOWLEDGEMENT

I have benefited from the assistance and endorsement of numerous people for over the

last four years for the completion of this thesis.

First and foremost, I wish to thank my supervisors, Professor David Milman and

Mr. Angus MacCulloch who have generously offered academic and professional

advice. Notably, this thesis would not have been possible at the very beginning

without the support, encouragement and patience of Professor David Milman. He not

only provides helpful and valuable comments and instructions for my research but

also accepts my status of "away" student. His role is vital and decisive, and I am

honoured to be his student.

I am grateful to the Lancaster University for providing me with the facilities for

carrying out this research. Special thanks to the Vietnamese Ministry of Education.

They granted me the full scholarship to pursue the Ph.D. study in England for three

years.

I would like to take the opportunity to express my deepest gratitude to my mother

who does not hesitate to take care of my family. Without her unconditional support,

this thesis could not be done. Finally, I would like to dedicate this thesis to my father,

who is always proud of me, and to my children with a hope that it could be an

inspiration in their life.

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ABSTRACT

Titleretentionfunctionallyservesasasecuritydeviceforensuringthepayment

ofthepurchasepriceinasalescontract,butnotalljurisdictionsrecognizeitasa

securityinterest.Theresearchaimstocomparetherecognitionandtreatmentof

title retention in Vietnam, England, France, the United States and Australia. It

examines the issues arising in Vietnam concerning the existing law of title

retentionandtheprospectofareformthatpossiblyinvolvestheimportationof

the Article 9 model. The research is conducted using the doctrinal and

comparativeanalysismethodswiththeaidofacriticaloutlookandadiscussion

onthelegaltransplant.

It is found that English law insists on the formalism approach that does not

accept title retention to the original goods as a security interest. It raises the

unexpectedimpactontheSaleofGoodsActaftertheFGWilson(Engineering)Ltd

v John Holt & Co (Liverpool) Ltd1and PST Energy 7 Shipping LLC v OW Bunker

MaltaLtd2rulings. Vietnamese law adopts theFrench law approach that treats

title retention as a security interest, but it is merely a seller-based security

interest that excludes the participation of other. Article 9 of the American

UniformCommercialCodeandtheAustralianPersonPropertySecuritiesActare

an appealing and increasingly-accepted model of the law on secured

transactions.Itintroducestheconceptofpurchase-moneysecurityinterestthat

includes the title retention arrangement. The functionalism, unitary approach

andthenoticefilingsystemundertheArticle9offeracomprehensivetreatment

of a purchase-money security interest as the exception of the general security

interest.

ThefindingssuggestthateventhoughArticle9iscurrentlyagoodmodelinthis

area,theimportofthismodelmayencountersomeresistancefromtheangleof

legalcultureandlegalpractice.FromtheVietnameseperspective,itispossibleto

build the law of purchase-money security interest running parallel with other

devices in the scheme of a Civil Code before considering adopting a unitary

functionalismlawofsecuredtransactions.

1 2013]EWCACiv1232,[2014]1WLR2365 2 [2016]UKSC23;[2016]AC1034

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CONTENTS

DECLARATION..............................................................................................................................2

ACKNOWLEDGEMENT................................................................................................................3

ABSTRACT......................................................................................................................................4

CONTENTS.....................................................................................................................................5

LISTOFABBREVIATIONS...........................................................................................................7

CHAPTER1 INTRODUCTION................................................................................................81.1 THEISSUE...................................................................................................................................................81.2 RESEARCHQUESTION...........................................................................................................................121.3 RESEARCHMETHOD..............................................................................................................................121.4 CONTRIBUTIONTOKNOWLEDGE.......................................................................................................191.5 STRUCTUREOFTHESIS.........................................................................................................................20

CHAPTER2 HOWISRETENTIONOFTITLETREATEDINENGLISHLAW?.............222.1 OVERVIEW...............................................................................................................................................222.2 VALIDITYUNDERTHESALEOFGOODSACT1979.......................................................................232.2.1 Simpleretentionoftitle:Aquasi–securityinterestunderformalism..........232.2.2 “Retainingbeneficialandequitableownership”:Beyondtheproblemofwording.............................................................................................................................................................292.2.3 Titleretention:Aboomerangreturningtothesaleofgoodslaw......................332.2.3.1 Buyersinpossessionandauthoritytosell....................................................................................332.2.3.2 Bunkerscase:Howtitleretentionconvertsasaleintoanon-saletransaction...............40

2.3 CONSTRUCTIONOFFIDUCIARYRELATIONSHIP..............................................................................432.3.1 Romalpamodel............................................................................................................................442.3.2 NegationofRomalpaprinciple............................................................................................502.3.3 Constructionofcharges...........................................................................................................542.3.3.1 Chargeissue..............................................................................................................................................542.3.3.2 Priorityissue............................................................................................................................................61

2.4 CONCLUDINGREMARKS........................................................................................................................66

CHAPTER3 PURCHASE-MONEYSECURITYINTERESTS:ARTICLE9MODEL........693.1 OVERVIEW...............................................................................................................................................693.2 CONCEPTOFPURCHASEMONEYSECURITYINTEREST..................................................................703.2.1 Securityinterest:FunctionalismandunitaryapproachinArticle9................703.2.1.1 Functionalism..........................................................................................................................................703.2.1.2 Unitaryapproach....................................................................................................................................77

3.2.2 Conditionalsale:Statutorysecuredtransactionunderfunctionalism...........783.2.3 Purchase-moneysecurityinterest.....................................................................................81

3.3 ESTABLISHMENTOFPURCHASE-MONEYSECURITYINTEREST...................................................853.3.1 Attachment.....................................................................................................................................853.3.2 Perfection:Filingafinancingstatement.........................................................................91

3.4 PURCHASE-MONEYSECURITYINTERESTPRIORITY.......................................................................96

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3.4.1 Overview..........................................................................................................................................963.4.2 Purchase-moneysecuredcreditorvs.unsecuredcreditors.................................983.4.3 Purchase-moneysecuredcreditorsvs.purchasers..................................................993.4.3.1 Buyersofgoodsinordinarycourseofbusiness.......................................................................1003.4.3.2 Authoritytomakedisposition........................................................................................................1033.4.3.3 Buyersreceivedelivery.....................................................................................................................104

3.4.4 Purchase-moneysecuredcreditorsvs.othersecuredcreditors.....................1053.4.4.1 “First-in-time,first-in-right”rule...................................................................................................1053.4.4.2 Priorityruleofpurchase-moneysecurityinterest..................................................................108

3.5 CONCLUDINGREMARKS.....................................................................................................................121

CHAPTER4 RETENTIONOFTITLEINTHEAUSTRALIANPERSONALPROPERTYSECURITIESACT2009...........................................................................................................1244.1 OVERVIEW............................................................................................................................................1244.2 CONCEPTOFPURCHASE-MONEYSECURITYINTEREST..............................................................1264.2.1 Securityinterests:Functionalapproach......................................................................1264.2.2 Purchase-moneysecurityinterest..................................................................................132

4.3 ESTABLISHMENTOFPURCHASE-MONEYSECURITYINTEREST................................................1364.3.1 Attachment..................................................................................................................................1364.3.2 Perfection.....................................................................................................................................138

4.4 PURCHASE-MONEYSECURITYINTERESTPRIORITY....................................................................1464.4.1 Purchase-moneysecuredcreditorvs.unsecuredcreditor................................1464.4.2 Purchase-moneysecuredcreditorvs.buyers...........................................................1484.4.2.1 Unperfectedsecurityinterest.........................................................................................................1494.4.2.2 Authoritytosell....................................................................................................................................1504.4.2.3 Buyerinordinarycourseofbusiness...........................................................................................152

4.4.3 Purchase-moneysecuredcreditorvs.othersecuredcreditors.......................1574.4.3.1 Defaultpriorityrule............................................................................................................................1574.4.3.2 Priorityruleofpurchase-moneysecurityinterest..................................................................158

4.5 CONCLUDINGREMARK.......................................................................................................................171

CHAPTER5 RETENTIONOFTITLEINVIETNAMESELAW:ALIMBOSTATUS.....1745.1 OVERVIEWOFVIETNAMESELAWONSECUREDTRANSACTIONS............................................1745.2 RETENTIONOFTITLEASASECURITYINTEREST.........................................................................1765.2.1 TitleretentioninFrenchlaw.............................................................................................1775.2.2 TitleretentioninVietnameselaw...................................................................................183

5.3 TITLERETENTIONTREATMENTFROMTHEPERSPECTIVEOFLEGALTRANSPLANT:THECASEOFVIETNAM...............................................................................................................................................1875.3.1 ImportoftheFrenchapproach.........................................................................................1895.3.2 TransplantingPMSIconceptintotheschemeofCivilCode...............................194

5.4 CONCLUDINGREMARK.......................................................................................................................201

CHAPTER6 CONCLUSION.................................................................................................2036.1 TREATMENTOFTITLERETENTIONINVIETNAMANDCOMPAREDJURISDICTIONS:ENGLAND,THEUNITEDSTATE,AUSTRALIAANDFRANCE.......................................................................2036.2 WHATSHOULDTHELAWOFTITLERETENTIONINVIETNAMLOOKLIKEWHENTITLERETENTIONISACCEPTEDASASECURITYINTEREST?.................................................................................211

BIBLIOGRAPHY.......................................................................................................................220

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LISTOFABBREVIATIONS

PMSI Purchase-moneysecurityinterestPPSA AustralianPersonalPropertySecuritiesAct2009PPSR AustralianPersonalPropertySecuritiesRegulationsSGA1979 SaleofGoodsAct1979UCC AmericanUniformCommercialCodeUSA TheUnitedStatesofAmerica

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CHAPTER1 INTRODUCTION

1.1 Theissue

Itisnotunusualinthecontextofbusinesstransactionsthatsellerssupplygoods

tobuyerson creditorship thegoodsprior topaymentand then theybear the

riskofnon–paymentbythebuyer.Retentionoftitleisamodelthatisfrequently

copied inorder to inducebuyers tomake fullpayment inexchange for the full

ownership. This clause reads in the simple form that the seller retains the

propertyinthegoodsuntilthefullpaymentofthepurchasepriceismadebythe

buyer.

Therequirement forpassingofpropertydiverges,and it ismostlydivided into

twoprinciples,namelyofconsentandofdelivery.Theformerrequirestitletobe

passedwhen a sale contract is concluded.Meanwhile, the latter rule provides

thatpassingofpropertyoccursatthetimethegoodsaredeliveredtoabuyer.A

commonfeatureofthetwoprinciplesisthatthepassingoftitleinthegoodsdoes

not depend on full payment of the purchase price. Despite the default rule as

aforementioned,manynationallawsrespecttheprincipleofpartyautonomythat

allows parties to tailor the transportation of title. Sellers insist on retentionof

titlebecausetheyaimatescaping fromthedefaultruleof title transferandthe

requirement of registration. Until the buyer makes full payment, the seller

remainstheownerofthegoodstopreventthemfromjoiningthebuyer’sassets

tobedistributedtoothercreditorsincaseofinsolvency.However,whathappens

inpracticedoesnotmeet theexpectationof title-retainingsellers.Retentionof

titleofteninvolvespersonalproperty,particularlyconsumer,workablegoodsor

stocks-in-trade. Thus, possession, both physical and documentary, can place

possessingbuyers inagoodpositiontomakethegoodsathandmanufactured,

mixed,fixedorresold.Intheeventofbuyers'insolvency,sellersfindthemselves

in dispute with other creditors in an effort to rank them above even secured

creditors. Therefore, many varieties of retention of title clause are drafted to

anticipatedifficultiesfacedbynon-possessingsellers1.

1SeeDaviesI,EffectiveRetentionofTitle(FourmatPublishing1991)atpp.32-3

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(1) A simple retention of title clause provides that the seller will retain the

ownership in goods until the buyer has paid the purchase price2. This clause

doesnotsufficientlyallowsellerstotraceintotheproceedsofsub-sale.(2)Anall

monies(orcurrentaccount)clauseprovidesthesellerapossibilitytoretainthe

title to the goods until they have recovered all outstanding debts arising from

past,presentandfuturetransactionswiththebuyer3.(3)Aproceedsofsale(or

“tracing”or“prolonged”)clausewillentitlethesellertoanyproceedsgenerating

fromasub-sale toa thirdparty4.Thisclause frequentlyauthorizesthebuyerto

sell the goods and even the manufactured goods incorporating the goods

supplied toa thirdparty in thenormal courseofherbusinessuponconditions

thatthebuyer’srightsagainstathirdpartywillpasstotheseller,ortheproceeds

willbeheld in trust for the seller. (4)Amanufacturing (oraggregation) clause

providesthatifthegoodsathandaremixedormanufacturedwithothergoods,

thesellerwillretainthetitle in thewholeof thenewlymanufacturedgoods5.A

title retention clause may be drafted to cover both the proceeds and newly

manufacturedproductsandconcurrentlyencompassingalldebtsofthebuyerto

theseller.

Asaleoncreditisundoubtedlyanimportantfinancingdevice.Abuyercanobtain

credit from a seller and retention of title is consequently a method to secure

payment.Titleretentionhasthe functionofasecuritydeviceaimedat the first

prioritytothegoodssupplied,theirproceedsornewproducts.Thedemandfor

free flow of commerce has raised a significant question how a title retention

clauseiscapableofprotectinganunpaidsellerwithoutrestrainingabuyerfrom

doingtheordinarycourseofbusiness.

Theultimategoaloffinancingistobenefitbothcreditorsanddebtors,thatisto

say, debtors have access to secured debts to operate their business while

creditorsgainprofit throughtheircapital.However, titleretentionbynature is

not qualified to create a security interest. It makes no sense that the seller

ensures the performance of the buyer's obligation by his asset instead of2SeeParrisJ,EffectiveRetentionofTitleClauses(Collins1986)atpp.44-63ibid,atpp.47-84ibid,atpp.49-525ibid,atpp.52-3

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following the asset of the buyer or someone else. However, the buyer cannot

charge what has not yet belonged to her. Retention of title is a contractual

arrangementregardingthepassingofproperty,butithasanimpactuponthird

partiesbyitsfunction.Itresultsinthediversityoftitleretentiontreatments.

English law treats title retention as the seller’s absolute proprietary right that

allows the recoveryof thegoodswhenabuyer fails topay thepurchaseprice.

Romalpa 6 is a striking case in this field since it recognized title retention

extending to the proceeds of sub-sale by introducing fiduciary concepts into

commerciallaw. However,courtshavedistinguishedtheircases fromRomalpa

todismissthevalidityoftheproceedsclausebytheargumentthatthisclauseis

equivalent to a void registrable charge. Similarly, English courts do not

acknowledge the first priority of title retention regarding newlymanufactured

products and their proceeds. In recent days, title retention has an expected

impactonthesaleofgoodslawundertheBunkers’rulingtotheextentthatthe

saleofconsumableorworkablegoodssubjecttotitleretentionisnotacontract

ofsalewithinthescopeoftheSaleofGoodsAct1979.

Article9of the AmericanUniformCommercialCodebrings title retention intothescopeofsecuredtransactionsinpersonalpropertyunderfunctionalism.Itis

considered as “the most innovated part of the Uniform Commercial Code”7. A

security interest isdefinedas “aninterestinpersonalpropertyorfixtureswhich

secures payment or performance of an obligation”8. Security interests comprise

anydevicethathasafunctiontosecureperformanceofobligation,regardlessof

theformoftransaction,thetypeofcollateralorthestatusofthedebtor/secured

party9.Allsecurity interestssubject to theArticle9receivethesametreatment

regarding attachment, perfection,priority, default and enforcement. Under this

Article9,titleretentionorconditionalsalescanberecognizedandregisteredasa

6AluminiumIndustrieVaassenB.V.vRomalpaAluminiumLtd.[1976]1WLR676,atpp.690,693,6947WarrenWDandWaltSD,SecuredTransactionsinPersonalProperty(8thedn,FoundationPress2011),atp.98U.C.C§1-201(35)9NguyenX-TandNguyenBT,TransplantingSecuredTransactionsLaw:TrappedintheCivilCodeforEmergingEconomyCountries (2014) (Legal StudiesResearchPaperNo. 2014-39, RobertH.McKinneySchoolofLaw,IndianaUniversity),atpp.8-9

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purchase-money security interest. The concept of purchase-money security

interestsisbroadenoughtocoverallkindsoftitleretentionclauseexceptforthe

allmoniesone.Title-retainingsellersbytimelyperfectingtheirsecurityinterest

maygainthefirstinlineofpriorityastheyhaveexpected.

Article9oftheAmericanUniformCommercialCodeisnoticeabletosetamodel

that is transplanted in many jurisdictions. The Australian Personal Property

SecuritiesAct(PPSA)broughtintoforcein2009hasputanendtotheadvantage

oftheRomalpaclausethatwasutilizedwiththeexpectationtocreateadeviceto

securepaymentwithoutregistration.ThePPSAisagoodlessonoftransplanting

Article9intothedomesticlawofsecuredtransactionsinpersonalproperty.

In Vietnam, sale and purchase transactions are mostly regulated by simple

usagesandpractices,andthecontractofsaleisnotoftenreviewedbyalawyer.

Thetransferofthegoodsisconsideredtobethetransferofproperty,especially

withregardtopersonalpropertythatisnotrequiredacertificateoftitle.Sellers

hesitate to control or administer the goods delivered to the buyer, bearing in

mind that it is not easy to identify particular items. To some extent, personal

property is not the valuable and popular collateral comparable with real

property.Therefore, titleretentionhasnotattractedattention inVietnamupto

now.Thetitleretentionclauseisinsertedinacontractofsalebutfewdisputesin

this area are brought to court. Practitioners and academics have long viewed

retentionof title asa contractual arrangement rather thanconcentratingon its

functionasasecuredtransaction.Onlythosewhohaveresearchedforeignlaws

perceivethefunctionoftitleretention,andCivilCodedraftersareamongthem.

In2015,arevisedCivilCodewasenacted,andretentionoftitleiscategorizedas

asecuredtransaction.ItadoptstheFrenchapproachthattreatstitleretentionas

asecurityinterestanddoesnotmentiontheconceptofpurchase-moneysecurity

interestrecommendedinArticle9.

Briefly, title retention is increasingly receiving great attention in many

jurisdictions.Article9undoubtedlyhasagreat influenceon the lawofsecured

transactionsinpersonalpropertythattreattitleretentionasapurchase-money

securityinterestunderthefunctionalismapproach.Manycommonlawcountries

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have adopted the Article 9 model. The influence of this model is likely to be

expanded since the UNCITRAL issued the Legislative Guide on Secured

Transactionsin2009thatreflectsthe“toneandspirit”oftheAmericanmodel10.

It leads to the tendency of legal transplant of the Article 9 in general and the

conceptofpurchase-moneysecurityinterestinparticular.

1.2 Researchquestion

ThisresearchhasasanobjectivetoexploretheVietnameselawoftitleretention

andthe integrationof titleretentionasasecurity interest intotheschemeofa

civil code under a comparative approach. Many jurisdictions with differential

treatment of title retention will be brought in to this comparative research

includingEngland,France,theUnitedStatesandAustralia.Theresearchwillalso

aimatinvestigatingtheissueoflegaltransplantation,sincetheArticle9ofthe

American Uniform Commercial Code has increasingly been a model for many

jurisdictionstoreformthelawofsecuredtransactionsinpersonalproperty.

Therefore, the overall research question(s)will be:How is retention of title

recognizedandtreatedasasecurity interest inVietnam,England,France,

AustraliaandtheUnitedStates?Whataretheissuesthatwouldarise if it

wereadoptedonawidespreadbasisinVietnam?

1.3 Researchmethod

This is a comparative study of title retention; thus, the authorwill employ the

doctrinalandcomparativeanalysiswiththeaidofacriticalapproach.Adoctrinal

researchapproachisdefinedasone“whichprovidesasystematicexpositionofthe

rules governing a particular legal category, analyses the relationship between

rules, explains areas of difficulty and, perhaps, predicts future development”11. In

brief,adoctrinalresearchanswersthequestionwhatthelawisinacertainarea

by collecting, analyzing and synthesizing relevant case law and legislation12.10McCormackG,‘AmericanPrivateLawWritLarge?TheUNCITRALSecuredTransactionsGuide’(2011)60International&ComparativeLawQuarterly597,atp.59811DefinitionbyPearceCommitteecitedinHutchingsonT,‘DoctrinalResearch’inWatkinsDandBurtonM(eds),Researchmethodsinlaw(Routledge2013),atp.1012Dobinson I and John F, ‘Quantitative Legal Research’ in McConville M and Chui WH (eds),Researchmethodsforlaw(EdinburghUniversityPress2007),atpp.18-9

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Academics conductadoctrinal research fornotonlyproblem–solvingbutalso

uncoveringthestatusofthelawinquestionasbeingcoherentandconsistentor

not.Atthislevel,secondarysourceslikescholarlycommentariesandwritingare

studied to give in–depth discussion. A doctrinal analysis cannot be considered

merely as the legal research that aims at finding the law for particular cases.

Doctrinalresearchersarerequiredtoreflectonthelawtogainnewinsights13.

Thedoctrinalmethod iscriticized for isolatingrulesof lawfromthecontextor

from the purpose that they are going to serve. The social, political, economic,

moralandthelikefactorsarenotconsideredastheunderpinningorexaminedto

evaluatetheeffectoflaw14.Despitethesaidcriticism,adoctrinalanalysisisstilla

principal anddominantmethod in law in thesense that,nomatterwhatother

legalresearchmethodsareadopted,aresearchermustanswerthequestionwhat

law is at first glance15. Bearing in mind this debate, the present author will

conductadoctrinalanalysisasthecoremethodofthisstudytoexplorethelawof

titleretentioninvariousjurisdictionswithinthescopeoftheresearch.

Comparative analysis is the second method of research in this study.

Comparative lawcanbedefinedsimplyas “thecomparisonofthedifferentlegal

systemoftheworld”16,butdenotesmorethanamethodofstudyorresearch17.It

hasthesubstantivefeaturetoberegardedasanacademicdiscipline,wherelaw

isexaminedinanewperspective18.Oneormoresystemsoraparticularareaof

one or more systems are studied in relationship with others to gain new

13Pendleton M, ‘Non-empirical Discovery in Legal Scholarship - Choosing, Researching andWritingaTraditionalScholarlyArticle’inMcConvilleMandChuiWH(eds),ResearchMethodsforLaw(EdinburghUniversityPress2007),atpp.162-314HutchingsonT,‘DoctrinalResearch’inWatkinsDandBurtonM(eds),Researchmethodsinlaw(Routledge2013),atp.1615Ibid,atpp.17,2816Zweigert K, Introduction to Comparative Law (Kötz H ed, 3rd rev. ed. edn, Clarendon Press;OxfordUniversityPress1998),atp.217WatsonA,LegalTransplants:AnApproachtoComparativeLaw(2ndedn,UniversityofGeorgiaPress 1993), at pp. 1–2; Legrand P, ‘Comparative Legal Studies and Commitment to Theory’(1995)58TheModernLawReview262,atp.26418WatsonA,LegalTransplants:AnApproachtoComparativeLaw(2ndedn,UniversityofGeorgiaPress1993),atp.9;LegrandP, ‘ComparativeLegalStudiesandCommitmenttoTheory’(1995)58TheModernLawReview262,atpp.264-5,

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knowledge19.Acomparativestudyoflaw,therefore,providesitsownoutlookfor

the subject-matter in question as opposed to other outlooks such as feminist

legalstudy,sociallegalstudyoreconomicanalysisoflaw.

Asa researchmethod in law, the crucialquestion ishow to compare. Itwould

makesensetoputthehomelawononesideandotherforeignlawsintheother

side. It is not difficult to identify a study as the macro-comparison or micro-

comparison.Theformeristhecomparisonofdifferentlegalsystemsasawhole

tolearnaboutthelegalstyle,culture,thinking,andprocedure,whereasthelatter

dealswithaparticularareaof law20. It is suggested that themicro-comparison

starts with the presumption of similarity to seek best solutions, namely the

harmonization in a specific area of law; in contrast, the macro-comparison

involves the presumption of difference that identifies the legal mentality of

comparedlegalsystems21.Thefunctionalmethodofcomparisonwhichlooksfor

varioussolutionstothesameproblem22couldbeagoodstartwheretheresearch

question is dealingwith a specific legal issue. Thismethod runs in linewith a

doctrinalanalysisinthesensethatbothofthemisolateasetofrulesfromtheir

context or purposes to study. However, the consequence of functional

comparison does not always result in harmonization of law. Although starting

with the presumption that the law in a specific area in different jurisdictions

serve the same function, comparatists have inspiration from witnessing the

difference insolutionsat theoutset toproceedonacomparativeresearch.The

functionalmethodrevealsmanysolutionsforthesameproblemandthequestion

of harmonization can only be satisfactorily answered through in-depth19 Frankenberg G, ‘Critical Comparisons: Re-thinking Comparative Law’ (1985) 26 HavardInternational Law Journal 411, at pp. 413-4; Watson A, Legal Transplants: An Approach toComparativeLaw(2ndedn,UniversityofGeorgiaPress1993),atp.920Zweigert K, Introduction to Comparative Law (Kötz H ed, 3rd rev. ed. edn, Clarendon Press;OxfordUniversityPress1998),atp.2,atpp.4-5;SamuelG,AnIntroductiontoComparativeLawTheoryandMethod(HartPublishing2014),atp.5021See more discussion on two approaches in Samuel G, An Introduction to Comparative LawTheory andMethod (Hart Publishing 2014), at pp. 53-7. Zweigert K, in his leading text book,IntroductiontoComparativeLaw,proposethepresumptionofsimilarity(ZweigertK,supra,atp.40).Legrandarguesthatcomparatistsshouldacknowledgedifferencethatemphasizesonsocio-historicalorsocio-culturalcontextunderpinningjudicialdecisionsandlegislation(SeeLegrandP,‘ComparativeLegalStudiesandCommitmenttoTheory’(1995)58TheModernLawReview262,atpp.239-240)22Seen.16,atpp.34-40

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discussion. Accordingly, the difference in solutions should be explained in the

lightoftheircontext.

Acomparativeresearchapproachoffersthechancetoexploreaconcreteareaof

law in different contexts that expose deficiencies, contradictions or competing

visions23. A critical approach is suggested to fix theweakness of the functional

method24.Acriticalapproachalsohelpstoavoidhegemonicthinkingandcultural

biases. A comparative researcher may be an expert in her home law but a

stranger to the foreign law. Therefore, her viewpoint on foreign laws cannot

depart fromher legal and cultural education; in otherwords, foreign laws are

looked from the certain bias of the comparatist25. Instead of pretending to be

neutral or objective, comparatists should keep a distance from their home

jurisdictionstocritiquetheirownrulesmindfuloftheforeignlaw.Comparative

lawshouldnotlookatlawasasetofrulesisolatedfromtheirsurroundingsbut

ratheracomponentofsocialpractices,accordingly,foreignlawwouldbeviewed

with respect and appreciation for its legal culture as the underlying cognitive

framework26.

Legalcultureisdefinedas“aspecificwayinwhichvalues,practicesandconcepts

are integrated into the operation of legal institutions and the interpretation of

legaltexts”27.Thequestionisraisedwhethercomparativelawmustinvolveother

researchlikesocialoreconomicresearchtoseeallfactorshavinginfluenceson

the set of rules of each jurisdiction in question. Hoecke recommends the

paradigmoflegalcultureusedasatoolforcomparativelawthatiscomposedof

sixelements:(1)conceptoflaw,(2)theoryoflegalsources,(3)methodologyof

23Frankenberg G, ‘Critical Comparisons: Re - thinking Comparative Law’ (1985) 26 HavardInternationalLawJournal411,atp.44824SeemorediscussioninFrankenbergG,supra,atpp.445-825LegrandP,‘ComparativeLegalStudiesandCommitmenttoTheory’(1995)58TheModernLawReview262,atpp.266-7.SeemorediscussiononnewapproachtocomparativelawthatlawisconsideredascultureinVanHoeckeMandWarringtonM,‘LegalCultures,LegalParadigmsandLegal Doctrine: Towards a New Model for Comparative Law’ (1998) 47 International andComparativeLawQuarterly495,atpp.491-513 26Seemore discussion on how civilians research the common law in LegrandP, ‘ComparativeLegalStudiesandCommitmenttoTheory’(1995)58TheModernLawReview262,atpp.237-827BellG,‘EnglishLawandFrenchLaw-NotSoDifferent?’(1995)C.L.P.69citedinVanHoeckeMandWarringtonM, ‘LegalCultures,LegalParadigmsandLegalDoctrine:TowardsaNewModelforComparativeLaw’(1998)47InternationalandComparativeLawQuarterly495

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law,(4)theoryofargumentation,(5)theoryoflegitimationoflaw,and(6)basic

ideology. Element (6) is the most important one that decides the level of

comparisonasthedeepestwhereasotherelementsareatintermediatelevel,and

thecomparisonoflegalruleandconceptsisofsurface.Thisnewperspectiveof

comparativelawisvaluableparticularlywithregardtothescopeofthisresearch

wheretheVietnameselawoftitleretentioniscomparedwiththelawinthisarea

in selectedwestern jurisdictions. AlthoughVietnamese lawhas been rooted in

theAsianlegalsystemanddeeplybeeninfluencedbythesocialistlegalsystemin

the modern time, it borrows rules, concepts and even techniques from many

westernjurisdictionsincludingFranceandtheUSAtobuilditslegalframework

of themarketeconomy in the contextof globalization, economic transitionand

integration. However, it does not mean that Vietnamese law is approaching

closer to the international or widely-recognized standards, or the set of rules

imported can survive identically in the Vietnamese legal and economic

environment. A deep comparisonmay reveal both similarities and differences

withregardtolegaltransplant.

ThecaseofVietnamillustratesaphenomenonthatcomparatistsmaynotice,the

processoflegaltransplants,thatistosay,“themovingofaruleorasystemoflaw

from one country to another”28. Watson in his classic work proves that the

considerablesourceoflegalchangeinmostjurisdictionsislegaltransplants,and

transplanting is not only common but also socially easy29. His argument is

challengedwhetherthe legal transplanteffectivelyoccurs.Legrandasserts that

therulecomprisespropositionalstatementandinvestedmeaning,theformerof

which iswhatWatsonmentions inhisworkandthe latterofwhich ischanged

through interpretation affected by the host jurisdiction’s language and other

cultural elements including socio-legal culture30. In other words, a rule once

transplanted is not the original rule, thus legal transplant does not happen in

reality.BothWatsonandLegrandgo tooppositeextremes.Borrowingamodel

28WatsonA,LegalTransplants:AnApproachtoComparativeLaw(2ndedn,UniversityofGeorgiaPress1993),atp.2129ibid,atpp.94-530LegrandP, ‘TheImpossibilityof 'LegalTransplants'’(1997)4MaastrichtJournalofEuropeanandComparativeLaw111,atpp.116-7,120-1

17

fromforeignlawisbroadlyagreedasasourceoflegalreform,andlawisrarely

original.Legrandevenacceptsthatborrowingisthepracticeoflawreformersfor

convenience31.Transplantcouldbeseenasametaphorforthelegalphenomenon

indiscussion.Theterm“transplant”isattackedbecauseithasmisledusthataset

oflegalrulesasanorganisremovedandimplantedintoanotherlegalsystem–a

neworganismand,afterall,remainsidentical.Manytermshavebeensuggested

tohaveamoreappropriatemeaningsuchaslegaltranspositionorlegalirritant.

Örücü advocates the term “transposition” as being used inmusic to emphasize

that imported legal rules will be adjusted to suit new conditions 32 . Legal

transplant is not simply the moving of a legal system or legal rules across

nationalboundaries,rathertheprocessinvolvingtheadaptiontothesocio-legal

cultureanddemandofthehostcountry.Teubnergoesfurtherbyusingtheterm

“irritant”toinsistthatlegalborrowingwillstimulatetherecipienttohaveactive

responses.Transformedrulesirritatethelegalcultureofthehostcountry,thatis

tosay,therecipientlegalculturewillalsoundergosignificantchange,butstillbe

different from the original jurisdiction one33. Despite the terminology debate,

legal transplant becomes a generic word, at least, to describe what Watson

mentions:“themovingofaruleorasystemoflawfromonecountrytoanother”.

Studying law from comparative perspective is not only an attempt to seek for

similarities or differences, but from the viewpoint of legal transplant,

comparatistsshouldanswerthefollowingquestions:

- Howisthetransplantedsetofruleschangedtosuitthelegalsystemand

legalcultureofthehostcountry?

- Istheroleofthetransplantedsetofruleschangedinthisprocess?

- Inturn,dothelegalsystemandlegalcultureundergoanychangetosuit

thetransplantedsetofrules?

Today, the trend of economic transition, integration and globalization has

promotedthelegalharmonizationinwhichlegaltransplantplaysavitalrole.As

31ibid,atp.12132ÖrücüE,‘LawasTransposition’(2002)51InternationalandComparativeLawQuarterly205,atp.20733TeubnerG, ‘Legal Irritants:GoodFaith inBritishLaworHowUnifyingLawEndsUp inNewDivergencies’(1998)61ModernLawReview11,atp.20

18

aresult,manycountries,transplantingandtransplanted,mayhavesimilarsetof

rules for common legal problems. However, the meaning and the role of

transplantedrulesmayundergosignificantchangetocreatenewinterpretation

thatTeubnercallsit“newdissonancesfromharmonization”34.

With regard to the present research, Article 9 of the American Uniform

Commercial Code is a model for the law of secured transactions in personal

property sincemany common law jurisdictions have reformed the law after it,

includingCanada,NewZealandandAustralia.Asuccessfultransplantwherethe

setofruleshasreconciledanddevelopedinahostjurisdictionmaygiveagood

lessonforanycountrythatisplanningtoreceiveamodel.Thisstudyisobviously

a micro-comparative research that focuses on retention of title. The research

question is formulated in functional terms to reflect functionalism - a

fundamental method of comparative law. However, comparison will be done

criticallyand inperspectiveof legal transplant togainadeepunderstandingof

titleretentionlawincomparedjurisdictions.

Vietnamisahome jurisdictiontobecomparedwithother foreign jurisdictions,

namely England, the United States, Australia and France. The scope of foreign

laws is broad partly due to the diversity of legal solutions in this area. The

context of Vietnam is also taken into account since this country having the

economic transition and international integration is in the process of

reconstructingthelegalframeworkforprivatelawingeneralandforcommercial

activities in particular. Although Vietnam has a foundation of a civil law legal

family, it is willing to learn from the common law. Among common law

jurisdictions, theUnitedStates lawhasbeen researched foryears.Vietnamcan

learngoodlessonsfromabroadscopeofcomparison.Thesignificantinfluenceof

theAmericanUniformCommercialCodeArticle9inthecommonlawworldisan

indisputable fact, but English law still keeps a distance from this impact, thus

makingacomparisonbetweenthetwojurisdictionsisworthy.Australiathathas

receivedtheArticle9modelwouldbeagoodexampleoflegaltransplant.France,

acivillawjurisdictionisalsoconsideredbecauseVietnamadoptstheFrenchlaw

34ibid,p.20

19

oftitleretention.BothVietnamandFrancedonotimporttheAmericanscheme

intotheirmassivecivilcodes.

1.4 Contributiontoknowledge

The research is intended to contribute significantly to current literature and

knowledge relating to retention of title in a comparative perspective inwhich

Vietnam is the home country. The comparative study emphasizing on home

jurisdictionandothercomparedjurisdictionsisconductedwithoutlimitationto

functional method that merely answers the question whether jurisdictions in

discuss has similar results for the same legal problems regardless of different

solutions.Thepresentauthorarguesthatsomeaspectsoflegalculturetosome

extent plays a vital role in differentiating treatment of title retention in each

compared jurisdictionalthough theymayshare certain similaritieswith regard

to the legal consequences. In otherwords, legal ruleswill be analyzed in their

contexttolookintodifferencesamongjurisdictions.

The research contributes to the scholarshipof title retentionbyofferinganew

standpoint from the angle of legal transplant. Legal transplant has been long

regarded as the pragmatic device to renovate the particular set of rulesor the

legal system.Article9hasbeenamodel for the lawof secured transactions in

personalpropertyincludingthetreatmentoftitleretentionoraconditionalsale

as a purchase-money security interest.However, the reception of theArticle 9

modelhasmanylevels.Theauthorarguesthatalthoughtheunitaryapproachof

the Article 9 is a great achievement to the extent that it provides a

comprehensivesetofrules,itdoesnotmakethelawofsecuredtransactionless

complicated, at least regarding purchase-money security interests. The

perfection and priority rules still depend on the classification of collaterals or

secured assets into inventory, capital equipment, farm products, serial-

numbered property and consumergoods. The set of rules for purchase-money

securityinterestsisrelativelyindependentofthewholeschemeoftheArticle9,

thus,it isnotessential to import the fullArticle9,but it ispossible toconsider

theideaofpurchase-moneysecurityinterestsonly.

20

TheresearchalsohassoughttomakethecontributionparticularlytoVietnamese

lawwithregardstotitleretentionandthelegaltransplantexperience.Although

titleretentionasasecurityinterestandapurchase-moneysecurityinterestare

not familiarconcepts toboth legalpractitionersandacademics inVietnam, it is

vital to import them into Vietnamese law to meet the requirement of

international trade and business that Vietnamese companies have increasingly

taken part in. The author will look into manymainstream legal concepts and

theories that affect the process of making law in Vietnam in the case of title

retention.

1.5 Structureofthesis

ThethesishassixchaptersincludingChapter1onintroductionandChapter6

on conclusion. Chapter 2 discusses the recognition and treatment of title

retention in England. This chapter analyzes the orthodox approach to security

intereststhatdeniesthetreatmentofsimpletitleretentionasasecurityinterest.

Meanwhile,titleretentionintheproceedsandnewproductscanbeheldtobea

chargethatisinpracticevoidduetolackofregistration.Thesaidapproachalso

determinesthepriorityrulesregardingallkindsof titleretention.Thischapter

also discusses unexpected outcomeof title retention on the saleof goods laws

thatsurprisinglyurgesthelegalreformoftitleretentionlaw.Chapter3explores

therulesofpurchase-moneysecurityinterestsintheframeworkoftheArticle9

of the American Uniform Commercial Code under formalism, the unitary

approachandthenoticefilingsystem.Chapter4examineshowAustraliamoves

fromtheorthodoxapproachinheritedfromEnglishlawtotherenovatedscheme

ofArticle9.Chapter 5 explores the statusof title retention inVietnamese law

wherethelawoftitleretentionhasbeentransplantedfromtheFrenchapproach.

TheFrenchlawwillbediscussedwithregardtoitstreatmentoftitleretentionas

a security interest. Themain arguments lie in this chapter that addresses the

issueof the legal transplantwith regard to theVietnamese current lawof title

retentionandthepossibilityofreceivingArticle9.Theauthorconsiderswhether

the Article 9model as a whole is essential element to reform the law of title

retentionbyimportingtheconceptofpurchase-moneysecurityinterest,orsuch

21

recognition can stand separately and independently from the scheme of the

Article9model.

22

CHAPTER2 HOW IS RETENTION OF TITLE TREATEDINENGLISHLAW?

2.1 Overview

RetentionoftitleinEnglishlawislikelytodevelopintothreestagesinwhichthe

Romalpacase1isapparentlyamilestone.AfterRomalpa,thereisaboominguseof

title retention clause in the contract of sale. Prior toRomalpa, therewere few

reported cases on title retention, although the concept of separation of

ownershipfrompossessionwasnotunfamiliar.McEntirevCrossleyBrothersLtd2

isnoteworthy forhighlightingthepossibilityofaconditionalsale.Eventhough

the concernedagreementdidnot containa title retentionclause, the condition

forthepassingofpropertyhadthesimilareffect.Itwasheldthatthepurchaser

couldnotcreateachargeonthemachinesuppliedbecausethepropertyhadnot

passed;thatistosay,thesupplierstillretainedthetitleoftheconcernedgoods.

AlthoughitiswidelyknownthatmodernIrishlawisrootedinEnglishlaw,title

retention surprisingly seemed to be recognized in Ireland before Romalpa.

McEntire v Crossley Brothers Ltd in 1895, which approved the supplier’s title

retentiontothegoods inaconditionalsale, isindeedanIrishcasegoingtothe

House of Lords. Another Irish case, Re Interview3, dealing with the proceeds

clausewasreportedoneyearearlierthanRomalpa4.

Title retentionwasupheld inEnglish law for thevery first time inRomalpa5in

1975.Due to title retention and implied authority to sub–sell, the buyer owed

fiduciary duties to the seller that resulted in the latter’s tracing right to the

proceedsofsub–sale.Thejudgmentisastonishingtotheextentthatthetracing

1AluminiumIndustrieVaassenB.V.vRomalpaAluminiumLtd.[1976]1WLR6762[1895]AC4573[1975]IR3824Infact,thejudgmentdateofRomalpainthecourtoffirstinstance(theQueen’sBenchDivision)was11February1975,almostonemonthearlierthanReInterview intheIrishHighCourt in7March1975.Romalpa thenwenttotheCourtofAppealandthejudgmentdatewas16January1976.5DaviesI,EffectiveRetentionofTitle(FourmatPublishing1991),atp.11

23

rightarisesnotunderanunauthorizedbutalsoauthorized sale6.However, the

criticalpointisthattheunpaidsellerisnotinthepositionofunsecuredcreditors,

butherproprietaryclaimovertheasset that issupposedtobethepropertyof

thebuyerisinvisibletotherestoftheworld.SinceRomalpa,thetitleretention

clausehasbeendraftedelaboratelyandcomplicatedlytocoverallderivativesof

the original goods, namely their proceeds and products or to extend to all

indebtedness owed to the seller. A Romalpa clause becomes an alternative

generictermtoatitleretentionclause.Thenumberoftitleretentioncasesfrom

Romalpa to early 1990s has established the case law in this field. The great

varietyofRomalpaclausesandconcerneddisputedissuesmaketherelevantlaw

“amaze if not aminefield” – as in a frequently cited remark of Staughton J in

Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd 7 . After the

establishmentofcaselawintitleretention,newissuesstillarise,revealingthat

not only the status of title retention but also the conflicts between a title-

retaining seller and a bona fide sub-purchaser are problematic8. Recent years

have shown unexpected influences of title retention treatment on the sale of

goodslawthaturgethequestionofareconceptualizationoftitleretention.

2.2 ValidityundertheSaleofGoodsAct1979

2.2.1 Simpleretentionoftitle:Aquasi–securityinterestunderformalism

Thevalidityof theretentionof title in thesimple formisstraightforwardsince

thetransferofproperty isbasedonthearrangementof theparties.TheSaleof

GoodsAct1979section17(1)setsuparule:

“Wherethereisacontractforthesaleofspecificorascertainedgoodstheproperty

inthemistransferredtothebuyeratsuchtimeasthepartiestothecontractintend

ittobetransferred.”

6GoodeRM,ProprietaryRightsandInsolvencyinSalesTransactions(Sweet&Maxwell1985),atp.847[1984]1WLR4858MilmanD,‘Prioritydisputesoncorporateinsolvency:thecurrentstateofplay’(2008)233CompanyLawNewsletter1,atp.4

24

Further, the Sale of Goods Act 1979 section 19(1) explicitly stipulates the

reservationoftherightofdisposalthatprobablycoversretentionoftitle9:

“Where there is a contract for the sale of specific goods or where goods are

subsequently appropriated to the contract, the seller may, by the terms of the

contractorappropriation, reserve the rightofdisposalof thegoodsuntil certain

conditionsarefulfilled[.]”

Parties to a contract of sale are unequivocally at their discretion permitted to

tailor when and how the property in the goods is passed10. Title retention

legitimately imposes conditions for the transfer of property. Even when the

passingofriskisagreedtobeatthetimethedeliveryismade,titleretentionis

still valid. The transfer of risk accompanied by the transfer of property is a

defaultrulethatcanbecontractedout11.

Basically,whenthebuyer is in insolvency,by invokingtitleretention, theseller

can claim to repossess the goods that are at least identifiable in the former’s

possessionandnotfullypaid.Theclaimislikelytobeallowed,exceptforspecial

situations involving the wording of a retention of title clause that will be

discussed in the subsequent part12. At present, receivers, administrators or

liquidators are likely to respect any title retention claim on the unpaid goods

strictlyandreturnthemtotheunpaidseller13,otherwisepaythepurchaseprice

tokeeptheon-goingbusiness.Nevertheless,inBlueMonkeyGamingLtdvDavid

Hudson,GrahamBushby,SimonBower, theburdenofproofisonthesellerwhois

9McCormackG,ReservationofTitle(Sweet&Maxwell1995)atp.1610Borden(UK)LtdvScottishTimberProductsLtd[1981]Ch.25atp.30,ReAndrabell[1984]BCLC522atp.526,HendyLennox(IndustrialEngines)LtdvGrahamePuttickLtd[1984]1WLR485atp.492,CloughMillLtdvMartin[1985]1WLR111atpp.121-211SaleofGoodsAct1979section2012“equitable and beneficial ownership shall remainwith” the seller. See In Re BondWorth Ltd.[1980]Ch22813Compaq Computer Ltd v Abercorn Group Ltd & Ors [1991] BCC 484 at p. 488, ReWeldtechEquipmentLtd[1991]BCC16atp.17

25

assertinga retentionof title claim, and sheshould identify the stock subject to

herclaimclearly14.

However, the seller’s entitlement to repossess the goods unpaid as an owner

retaining title is challengeable. The fact that the buyer has possession of the

goods itself couldbeamisrepresentationofwho is theownerof thegoods. In

many cases, it is expressly or impliedly in the contract that the buyer has

discretionary power to resell the goods to sub–purchasers or use them in the

course of processing or manufacture to make new products 15 . Buyers of

inventory such as rawmaterials or stock in trade are usually not expected to

keep the purchased goods in their original status or refrain from reselling.

Buyers of capital equipment are expected to exploit the utility of the goods in

their daily operation right after taking delivery. Thus, notwithstanding the

retention of title clause, the buyer is given rights to treat the goods as if they

were her property16. It goes without saying that the property in the goods

nominallyremainswiththeseller,anditisactivatedonlyintheeventofdefault

of payment, particularly in the buyer’s insolvency. In this sense, title retention

operates as a security device17 . The seller’s ranking position against other

creditors in thegoodsmaybe remarkablyaffectedby thedeterminationof the

seller’s interests in thegoodsunpaidunder title retention, that is, theabsolute

ownershiporalesserproprietaryinterestarisingbywayofsecurity.Itmaylead

toa significant legal consequence sincea security interest isbasicallyenforced

against third parties only when it has been registered. Registration of a title

142014WL4355075.Seemorediscussionin StephensE,‘Clarificationforadministratorsdealingwith ROT claims:BlueGamingMonkey vHudsonand others’ - (2014) 5 Corporate Rescue andInsolvency207,atp.20715Aluminium Industrie Vaassen B.V. v Romalpa Aluminium Ltd. [1976] 1 WLR 676 at p. 679,Borden(UK)LtdvScottishTimberProductsLtd [1981]Ch.25atp.32,CloughMillLtdvMartin[1985]1WLR111atp.113,RePeachdartLtd [1984]Ch131atp.138,EPfeifferWeinkellerei-WeineinkaufGmbH&CovArbuthnotFactorsLtd[1988]1WLR150atpp.154–5,Tatung(UK)LtdvGalexTelesureLtd (1989)5BCC325atp.328, ReWeldtechEquipmentLtd[1991]BCC16atpp.16–7,CompaqComputerLtdvAbercornGroupLtd&Ors [1991]BCC484atp.491 16BradgateJR,‘ReservationofTitleTenYearsOn’[1988]ConveyancerandPropertyLawyer434atp.438 17DaviesI,seen.5atp.8;McCormackG,seen.9atpp.2–3;WorthingtonS,ProprietaryInterestsinCommercialTransactions(NewYork:ClarendonPress1996)atp.11

26

retentionclausemakesitlessattractivetosellerswhoseeksecurityforpayment

ofthepurchaseprice.

Thedebateonsimpletitleretentionasaregistrablechargehasbeenimpractical

sinceHendyLennoxand CloughMillestablishedtherule.Undertheretentionoftitle clause, an unpaid seller has an ownership interest rather than a security

interestontheunusedandidentifiablegoodsinthebuyer’spossessionuntiland

unless the purchase price is paid in full. The characteristic at the heart of a

securityinterest18isfoundnottoexistintitleretention.Itisdirectlyfiguredout

thatabuyercannotgrantasecurityinterestonasellerinthegoodsthathavenot

become her property yet19. The full ownership of the goods remainswith the

sellersubjecttocontractualterms,particularlyofthepassingoftitle20.

TheHendyLennoxand CloughMillcasesstrictlyfollowformalism,whichisoneofthekeystonesofEnglish lawonsecured transactions.The formof transactions

dependingonpartyautonomywilldeterminewhetheratransactionisasaleora

charge.Therefore,despiteitswidely-recognizedsecurityfunction,titleretention

isacontractualarrangementtopassthepropertyinthegoodsintheschemeofa

sale contract, rather thananagreementwhere thebuyer confersa chargeora

mortgageonthegoodssubjecttoherownproperty.Ontheotherhand,itcannot

besaidthat theEnglishlawonsecuredtransactions isa“formoversubstance”

one. The extended title retention clause, which covers the proceeds of sale or

products incorporated the original goods, is found to be a disguised charge

irrespectiveofanarrangementwithinasalecontractscheme21.Thecrucialpoint

is, of course, the sharp distinction between ownership and lesser proprietary

interests under English common law. Extended title retention does not have a

strong legal foundationlikesection17and19(1)of theSaleofGoodsAct1979

whichbothsupportasimpletitleretentionclause.

18A security interesthas fivecharacteristics.SeeGoode RM, Goode on Legal Problems of Credit and Security (Fourth edition. edn, 2009),atp.11 19CloughMillLtdvMartin[1985]1WLR111,atpp.119C-E,122B-C,123B-D,125B-D.20HendyLennox,seen.7,atp.492C-E21Seediscussionindetailinsub-section2.3.3.1

27

The functional approach that realizes the simple retention of title clause as a

securityinterestwasnotadoptedinCloughMillduetotheargumentthatitwas

not the buyer conferring but the seller retaining an interest in the property22.

However, in Re Bond Worth Ltd., a case suggested a functional approach to

security transactions, it has prompted a fundamental right of a debtor in a

security transaction, namely the equitable right to redeem the property that a

buyer subject to retention of title may have23. It enables a debtor to redeem

interestsinthepropertyconferredonacreditortosecuretheformer’sobligation

whenever this obligation is discharged. It seems that generally a seller has

proprietary interest in thegoodsby retaining titlepending the fullpaymentof

purchase price. This argument is challenged by a critical question under the

formalismperspective:whohasownershipofthegoods? If it issatisfiedthat it

shouldbetheseller,thebuyerdoesnotarguablyredeemaninterestbutrather

than gaining a new interest as a result of full payment, that is, the title to the

goodspreviouslyretainedbytheseller24.Thepresentauthorisnotsatisfiedwith

thenotionofnewinterestinthiscontextbecauseitislikelytoignoreabundleof

immense rights that the buyer has over the goods currently remaining in her

possession. The buyer indeed has proprietary interests in the goods, among

whichispossessoryinterest25.Subjecttoanagreement,impliedorexplicitly,the

goodsareputintotheflowofcommerceormanufacturingoperationwithoutany

restraintfromtheseller.Suchinterestprobablyconstitutestoagreatextentthe

propertyinthegoodsthatthebuyerexpectstogainfromacontractofsale.Itis

argued that the buyer’s dominion over the goods is not equivalent to the

property to the goods because she gains such discretionary power with the

consent of the sellerwho is currently retaining title to the goods26. It is not a

proprietary but contractual interest against the seller respecting the use and

22CloughMill,seen.19,atp.119C-E23[1980]Ch228,atp.24824WorthingtonS,ProprietaryInterests inCommercialTransactions (NewYork:ClarendonPress1996),atp.1825Goode RM, Goode on Legal Problems of Credit and Security (Fourth edition. edn, 2009),atp.4;GoughWJ,CompanyCharges(2nded.edn,Butterworths1996),atp.549 26CloughMill,seen.19,atpp.116G-H,124E-G.Forfurtherdiscussion,seeWorthingtonS,seen.24,atpp.12–6

28

disposition of the goods27. This argument is questionable. Like the absolute

ownership,other lesserproprietary interestscanbeacquiredbyanagreement

andhaveeffectagainsttherestoftheworldwithregardtothesubjectmatterof

theinterestathand.

The buyer’s dominionover thegoods subject to retention of title, even though

lackingfullownershipcertainlymanifestsonitsfaceanabsoluteproprietarytitle

totheeyesofthirdparties.Thefunctionalapproachdoesnotlimittothesecurity

function, but it also addresses the problem of ownership and possession

separation. In thecontextof titleretention,underthetheoryofnewvalue, it is

persuasive that title retentiondoesnothasanegative impacton theeconomic

positionofpreviouslysecuredparties28.Inotherwords,thetitle-retainingseller

doesnotclaimanythingfromtheexistingpoolofassetssubjecttotheinterestof

previously secured parties other than the goods supplied. However, she has a

secret bite against subsequent buyers, secured parties and other creditors.

Unlikeasecurityinterest,itisawholebitethatdoesnotleaveanysurplusvalue

ifanytothebuyer/debtor,preferentialandunsecuredcreditors.However, it is

notlikelythatthevalueofthegoodsincreasesatthetimeofrepossession29.Itis

demonstratedthatthepositionoftitle-retainingsellerisnotasattractiveasitis

supposed to be. The rapid depreciation of capital equipment and the short

businesslifeofinventoryareunsatisfactorytothetitle-retainingseller30,andthe

extendedtitleretentionclausetotheproceedsofsaleornewproductsdoesnot

improveherpositionasdiscussedsubsequentlyelsewhereinthischapter.From

the standpoint of secured parties, preferential and unsecured creditors, title

retentiondoesnotpractically imposea serious threat31.Thewidespreaduseof

title retention clause may alert existing would-be creditors of all kinds and

buyers without the requirement of registration32. Therefore, the problematic

27GoughWJ,CompanyCharges(2nded.edn,Butterworths1996),atp.549 28 GulliferL,‘RetentionofTitleClauses:AQuestionofBalance’inBurrowsASandPeelE(eds),ContractTerms(OxfordUniversityPress2007),atpp.287-929 GulliferL,‘"Sales"onRetentionofTitleTerms:IstheEnglishLawAnalysisBroken?’(2017)Apr(133)LawQuarterlyReview244,atp.247 30 BridgeMGandothers,‘Formalism,Functionalism,andUnderstandingtheLawofSecuredTransactions’(1999)44McGillLawJournal567,atpp.638-640 31ibid,atp.640 32GulliferL,seen.29,atp.247

29

separation of ownership and possession arising out of title retention is not

sufficienttoinitiatereconceptualizationthereof.

Thesimpleretentionoftitleclausehasafirmlegalgroundtobevalidwithouta

requirement of registration as a charge. The buyer has not yet acquired the

ownershipof thegoodssubjectmatterofacontractofsale,despite its function

providing security for the obligation of payment. In this sense, the simple

retentionoftitleclauseisjustaquasi-securityinterest.

2.2.2 “Retainingbeneficialandequitableownership”:Beyondtheproblemofwording

ReBondWorthisanattractivecaseduetotheadoptionofafunctionalapproach

andgettingcloser to theconceptofpurchase-moneysecurityinterest.Whereas

simpletitleretentionenablesthesellertoseekthevalidityonthegroundofthe

SaleofGoodsAct197933,thewordingoftheconcernedclause,namely“equitable

andbeneficialownershipshallremain…”,didnotadvance the seller in this case.

Slade J started his argument by finding the existence of a charge as a legal

consequenceofthesaidretentionoftitleclause34.

“Inmyjudgment,anycontractwhich,bywayofsecurityforthepaymentofadebt,

confers an interest in property defeasible or destructible upon payment of such

debt,orappropriatessuchpropertyforthedischargeofthedebt,mustnecessarily

beregardedascreatingamortgageorcharge,asthecasemaybe.Theexistenceof

theequityofredemptionisquiteinconsistentwiththeexistenceofabaretrustee-

beneficiaryrelationship.”

Theaffirmativeanswerthenledhimtothequestionhowthechargewascreated,

that is, by “remain” with the seller or “grant” by the buyer35. Although his

functionalapproachhasnotbeenwelcomedinrespectofthesimpleretentionof

title clause36, Slade J did not deviate from orthodox reasoning respecting the

passingofownership.Hisfindingwasstronglybasedontheassumptionthatthe

33Seesection2.2.1ofthisthesis34ReBondWorth,seen.23,atpp.248-25035ReBondWorth,seen.23,atpp.250-636Seesection2.2.1ofthisthesis

30

legaltitleofthegoodshadtransferredtothebuyer.Hearguedthatretentionof

equitableandbeneficialownershipimpliedatransferoflegaltitlethathadtaken

place at the moment of delivery of the goods37 . He probably negated the

reservationofequitableandbeneficialownershipandadoptedagrantandgrant

–backmechanism.

The operation of a grant and grant – back mechanism inReBondWorth was

describedas“theentirepropertyintheAcrilan[thegoods]passestoBondWorth

[the buyer] followed by a security, eo instanti, given back by Bond Worth [the

buyer]tothevendor,Monsanto”38.Itmeansthebuyeratacertainmomenthadfull

ownershipofthegoods,thusitcouldgrantachargeonthegoodsintheseller’s

favour.Thisfindingreliedonthedoctrineofscintillaemporisestablishedbythe

decisioninChurchofEnglandBuildingSocietyv.Piskor39andfollowedbyCapital

Finance Co. Ltd. v. Stokes40. The latter is the case Slade J referred to in the

concerned argument. However, the grant and grant – back mechanism was

challenged by an argument of the respondent relying onReConnollyBros. Ltd

(No. 2)41. Accordingly, the buyer only gained equity of redemption when it

acquired the goods42. The challenge has been raised again after the House of

Lords’decision inAbbeyNationalBuildingSocietyv.Cann43.Theabolishmentof

scintillaemporisdoctrinebyAbbeyhasplacedtheReBondWorthjudgmentinan

unsteady position. Re Connolly and Abbey are analogical to the extent that a

buyer obtained a credit to finance the purchase of a property and secured the

payment by a charge or mortgage on that property prior to obtaining the

property at hand. The former case found that the buyer had never acquired

absoluteownershipofthepropertyotherthantheequityofredemptionsubject

to the financier’s charge44.The latterheld that the transactionof acquiring the

propertyandgrantingthechargewasoneindivisibletransactionthatthebuyer

37ReBondWorth,seen.23,atp.24538ReBondWorth,seen.23,atp.25639[1954]Ch.55340[1969]1Ch.26141[1912]2Ch.2542ReBondWorth,seen.23,atp.25243[1991]1A.C.56(HL)44ReConnolly,seen.41,atp.31

31

neveracquiredanythingbut theequityofredemption45.ReConnollyandAbbey,

alsoPiskorandCapitalFinancearecasesdealtwithrealproperty,theprinciples,

particularlyofthefirsttwocasescanbetransplantedtogiveasecuredpartyin

personalpropertyashelter46.

Generally, inacontextof titleretention, thebuyerwillnotobtainthegoodson

credit unless she agrees with the title retention clause47 . Under the “one

indivisibletransaction”principleintheAbbeycase,itseemsthatthebuyerinRe

Bond Worth acquired only the equity of redemption48. On the other hand, in

Stroud Architectural Services Ltd v John Laing Construction Ltd49 following Re

Bond Worth, it was held that the retention of “equitable and beneficial

ownership”, whichwas similar to the corresponding clause inReBondWorth,

createdachargegrantedbythebuyerto theseller.Thecourtathandreadthe

grant and grant – back mechanism in Re Bond Worth as occurring

simultaneously50.Inthissense,Abbeydidnotdefeat,otherwisestrengthenedthe

grantandgrant–backanalysis51.

The two opposite perspectives on the decisions inReBondWorthand Stroud

Architectural though uniquely demonstrate a critical question: Did the buyer

obtainafulltitletothepropertyatanytime?Theaffirmativeanswershouldlead

toaregistrablechargeinfavourofthesellersubordinatetoanypreviouscharge

on after-acquired property. If conversely, the equity of redemption other than

thefulltitleisonlysufficienttocreateachargethattakesprioritysubsequentto

thechargeconferredupontheseller.AlthoughAbbeyansweredthequestionof

priority while the two title retention cases mentioned above dealt with the

45Abbey,seen.43,atpp.92–346 de LacyJ,‘ThePurchaseMoneySecurityInterest:ACompanyChargeConundrum?’(1991)Lloyd'sMaritimeandCommercialLawQuarterly531,atp.533 47McCormackG,‘ChargesandPriorities-theDeathoftheScintillaTemporisDoctrine’(1991)12CompanyLawyer11atp.13 48MorediscussionontheimpactofAbbeyonthedecisioninReBondWorthLtd.inthesenseofreconsiderationofthelatter,canbefoundinDaviesI,seen.5atpp.117-120;GregoryR,‘RomalpaClausesasUnregisteredCharges-AFundamentalShift?’(1990)106LawQuarterlyReview550; McCormack G, see n. 47, at p. 13; Hicks A, ‘Retention of Title - Latest Developments’ [1992]JournalofBusinessLaw398,atpp.405-749[1994]BCC1850ibid,atp.2351WorthingtonS,seen.24,atp.22

32

natureoftheseller’sinterestinthegoodsdeliveredtothebuyersubjecttotitle

retention52,thereasoningofLordOliverinAbbeyhascaughtmyattentiontothe

issueofinwhatmannerthechargeiscreated53.Hisreasoningsuggeststhatitis

notthesequenceofinterestsinvolvedtodeterminewhetherasecurityinterestis

createdtobeinlinewiththeorthodoxlegaltheory.Inotherwords,itisnotlikely

toberequisitethatadebtormusthavealegalestateinadvancetograntacharge

on it. It is acceptable that the acquiringof a legal estateandgrantinga charge

should be bound together. The argument is very close to the concept of a

purchase-moneysecurityinterest,thatisthetightrelationshipbetweenthefund

supplied and the acquisition of the estate. Indeed, Re Connolly and Abbey are

consideredtobringtheconceptofpurchase-moneysecurityinterestintoEnglish

law54.

Itisarguablethatthenegationofscintillatemporisdoctrineandadoptionof“one

indivisibletransaction”principleaimatresolvingthequestionofpriority.Aftera

single transaction, technically and in theory, the debtor/buyer is left with the

equityof redemption thatmay restrain thepropertyathand fromattaching to

otherinterestsrankingsuperiororequallytothechargeinthecreditor/seller’s

favour.ReConnollyandAbbeydonot indicate theunderlyingpolicyof the first

prioritygrantingtothefinanceradvancingmoneytoacquirethenewproperty.

Priorchargeescannotrelyonherpriorchargetogainwindfallbenefitbecause

the property was not acquired by her advance or the debtor’s money. This

argumentisattheheartoftheconceptofpurchase-moneysecurityinterestand

justifiesthefirstpriorityofpurchase-moneyfinancers,neverthelessthedoctrine

of“onesingletransaction”contributeanotherconsiderablejustification.

ItshouldbeemphasizedtheparallelbetweenthefinancingscenarioinAbbeyas

Lord Oliver discussed and the scenario of title retention. A sale on credit is

agreedupona titleretentionarrangement,and it isobviouslyacreditenabling

thebuyertoacquirethegoods.Itraisesthequestionwhytitleretentioncanor

52de Lacy J, ‘Retention of Title, Company Charges and the Scintilla Temporis Doctrine’ (1994)ConveyancerandPropertyLawyer242,atp.24553Abbey,seen.43,atp.9254deLacy J inhis footnotesaid thatAbbey introduced theconceptofpurchasemoneysecurityinterestintoEnglishlawforthefirsttime.SeedeLacyJ,seen.52,atp.247

33

cannot fall within this concept of security interest. It deserves an elaborate

clarification,andtheacceptancewouldbea landmarkfor thetreatmentof title

retention.

2.2.3 Titleretention:Aboomerangreturningtothesaleofgoodslaw

Simple title retention has a firm legal ground of the SGA 1979 to be effective

againstthebuyer’sliquidators,administratorsandcreditorsinthesamegoods.

Inrecentyears,titleretention,inturn,hasunexpectedimpactsontheSGA1979.

2.2.3.1 Buyersinpossessionandauthoritytosell

Undertitleretention,asellerreleasesthepossessionof thegoodstothebuyer

butdoesnottransferthepropertyinthegoodstothelatterpendingfullpayment

ofthepurchaseprice.Whenthebuyermakesadispositionofthegoodstoabona

fidedisponee,thesellerhasfoundherinadisputewithathirdparty.Sheasserts

a claim against the third party for repossession of the goods, or the purchase

priceasdamagesbyconversion.Meanwhile,abuyerinpossession,eventhough

doesnothavefullownership,maytransferagoodtitletothedisponeeunderthe

SGA 1979 section 25(1). It is a scenario of conflicting titles involving two

innocentparties,atitle-retainingsellerandabonafidethird-partypurchaser.

Basically,property lawhasstronglyadopted thenemodatquodnonhabetrule,

thatistosay,noonecantransferwhatshedoesnothave.Thisruleisreplicated

inthefirstpartoftheSGA1979section21(1)andtheFactorsAct1889section9:

“…wheregoodsaresoldbyapersonwhoisnottheirowner,andwhodoesnotsell

themundertheauthorityorwiththeconsentoftheowner,thebuyeracquiresno

bettertitletothegoodsthanthesellerhad,…”55.

Theapplicationofthosesectionsincludesasituationwhereabuyer/sub–seller,

possessing the goods but not yet obtaining the absolute title to them,makes a

dispositionthereof56.Theclaimofgoodtitleby thedisponeemustsatisfy three

55SGA1979section21(1)56BattersbyGandPrestonAD. , ‘TheConceptof “Property",”Title”and “Owner”Usedin theSaleofGoodsAct1893’(1972)35ModernLawReview268atp.282

34

requirements: (1) the buyer/sub–seller having bought or agreed to buy the

goods must possess the said goods with the consent of the seller; (2) the

buyer/sub–seller must deliver or transfer the goods under any sale or

disposition thereof to any person receiving the goods in good faith, without

notice of any right of the original seller in respect of the goods; and (3) if the

abovementionedrequirementsaresatisfied,thedeliveryortransferwillhavethe

sameeffectasifthebuyer/sub–sellermakingitwasamercantileagentinrespect

of the goods with the consent of the owner57. The last requirement is usually

interpretedasthedeliverymadebythebuyer/sub–sellerintheordinarycourse

ofbusiness58.Theeffectofthesub–saletransactionhasareferencetotheFactors

Act1889section2(1)thatallowsagoodtitleconferredonabonafidepurchaser

withoutnotice.

Adetaileddiscussiononevery condition isbeyond theambitof the thesis,but

somedisputedconditionsmayshedlightonthepositionoftheseller,thebuyer

and other relevant participants in the context of title retention. A simple

retentionoftitleclauseisagooddevicetoprotectanunpaidsellersolongasthe

goodsare inpossessionof thebuyer,but the former isnot inanadvantageous

positiontocontrolthegoods.Atitle-retainingsellerisexposedtoriskwhenan

innocent thirdparty relies on these exceptions to thenemodat rule.However,

section25(1)of theSGA1979, togetherwithsection9of theFactorsAct1889

reflectaneedtoensuretheflowofcommerce.Apurchaseringoodfaithbuying

from the seller selling in the ordinary course of business does not necessarily

investigatethetitletothegoodsconcerned.Thisruleallowsthetransferofgood

titleeventhoughthetransferorhasalessertitle.

57ArchiventSales&DevelopmentsLtdvStrathclydeRC1985SLT154atp.156.Therequirementscan be split into many conditions, namely “Bought or agreed to buy”, Possession of buyer”,“Consentofseller”,“Deliverortransfer”,“Sale,pledgeorotherdisposition”,“Effectofdeliveryortransfer”and“Goodfaithandnotice”,seeBridgeMGandBenjaminJP,Benjamin'sSaleofGoods(8thed./[gen.ed.:M.Bridge].edn,London:Sweet&Maxwell2010),atpp.382-39358BridgeMGandBenjaminJP,Benjamin'sSaleofGoods(8thed./[gen.ed.:M.Bridge].London:Sweet&Maxwell 2010),at pp. 390 – 391,ArchiventSales&DevelopmentsLtdvStrathclydeRC1985 SLT 154 at p. 157, Forsythe International (UK) Ltd v Silver Shipping Co Ltd (The Saetta)[1994]1WLR1334,atp.1351

35

Thefreeflowofcommercepolicyunderlyingsection25(1)oftheSGA1979may

productively support a third-party buyer having a title conflict with a title-

retainingseller.However,ReHighwayFoodsInternationalLtd(InAdministrative

Receivership)59, in which all the transactions were subject to title retention,

possiblyandunexpectedlyexposesan innocentdisponee to theriskof losinga

goodtitlerelyingonsection25(1). Oneoftheconditionsforthesub-purchaser

tohaveagoodtitleundersection25(1)isthatthedeliveryofthegoodstoathird

party “under any sale, pledge, or other disposition”. Therefore, a transaction

between a buyer/sub-seller and a sub-purchaser must be a sale, not an

agreement to sell. However, according to section 9 of the Factors Act 1889, it

could be made “under any agreement for sale, pledge or other disposition”. A

contractofsalebearingatitleretentionclauseisnomorethananagreementfor

sale, thus, does not satisfy the requirement of section 25(1). The Re Highway

Foodscourtheldthatsection9oftheFactorsAct1889coveringanagreementfor

saledidnotsufficetoconferagoodtitleonasub–purchaseruntilshemakesthe

fullpaymentbyreferringtosection2of thesameAct60. It isnoticeablethatRe

Highway Foods is the case in favour of both the original seller and the sub-

purchaser, who set aside a middleman to directly deal with each other. The

questioniswhetherthetitlepassedtothesub-purchaserundersection25(1)of

the SGA 1979 or section 9 of the Factors Act 1889 to prevent the seller from

repossessingthegoodsandthensellingdirectlytothesub-purchaser61.

BeyondthecontextofReHighwayFoods,iftherulingathandiswidelyfollowed,

the extensive use of title retention in sale transactions is leading to a scenario

jeopardizing the position of an innocent disponee in a title conflict62. Until the

sub-purchaserpaysinfull,itentitlestheoriginalsellertorepossessthegoodsor

seek damages for conversion, evenwhen the goods concerned is no longer in

59[1995]BCC271,atp.27660ReHighwayFoods,seen.59,atp.27661SeeagoodcasebriefingofReHighwayFoodsinThomasS,‘TheRoleofAuthorizationinTitleConflictsInvolvingRetentionofTitleClauses:SomeAmericanLessons’(2014)43CommonLawWorldReview29,atp.3262Thomas S, ‘The Role of Authorization in Title Conflicts Involving Retention of Title Clauses:SomeAmericanLessons’(2014)43CommonLawWorldReview29,atp.34.

36

possessionofthebuyer,andthesub-purchaserisingoodfaithdealingwiththe

buyer/sub-sellerinthelatter’sordinarycourseofbusiness.

TheHighwayFoods decision is correct, but it reveals that the English common

law of title retention is not satisfactory in the context of title conflicts. The

treatment of title retention has an unexpected influence on the application of

section25(1)oftheSGA1979,whichissupposedtoprotectinnocentthirdparty

dealingwithasellerintheordinarycourseofbusiness.

It is suggested that the shortcoming could be improved if English law had a

strong, clear rule providing for the role of authority to sell to solve the title

conflictsofthatkind.TherespondentsinReHighwayFoodsdidnotcontendthe

authority to sell, thus it is unfortunate that the issuewas not discussed in the

judgment.Nonetheless,iftheauthoritytosellhadbeenassertedsuccessfullyto

transferagoodtitletoasub-purchaserasdiscussedbelow,titleretentionclause

in the sub–sale contract is irrelevant to resolve the title conflict between the

seller and the sub–purchaser63. The sale by a buyer in possession stipulated in

theSGA1979section25(1)andtheauthoritytoselldemonstratetwodifferent

resolutions for titledisputeswithregardtoretentionof title, to theextent that

thisclauseisincorporatedineverytransactionofthechain.Itcannotbesaidthat

English law is inconsistent in this issue because the two resolutions have

different postures. The SGA 1979 section 25(1) has its application in case the

buyerinpossessiondoesnothaveauthoritytoselltoeffectthesub–sale“asvalid

as if he were expressly authorized by the owner of the goods”64. However, the

defendantmayrelyonbothtobeprotectedagainst theconversionclaimof the

seller65.

Whenrelianceuponthenemodat rule fails, thedisponeemaycontendthat the

buyer inpossession isauthorizedbytheseller tosell thegoods, thusconfersa

goodtitleonthedisponee.Authoritytosellattheoutsetseemsinconsistentwith63ThomasS,ibid,atpp.42,4664FactorsAct1889section2(1)65Thedefendant/sub–purchaserinFairfaxGerrardHoldingsLtdvCapitalBankPlc[2007]EWCACiv1226reliedonthebuyer’sauthoritytosellandsection25(1)oftheSGA1979.Itsucceededonthefirstpropositionbutfailedthesecondbecauseitcouldnotprovethat itwasapurchaseringoodfaith.

37

titleretentionthatcontemplates thetitle to thegoodstoremainwiththeseller

when the possession is transferred to the buyer pending full payment. Both

parties in commercearenot likely toblock thegoods frombusinessoperation,

particularlywhentheyareinventory.Otherwise,itdoesnotbenefitanyofthem

sincethebuyercannotexploittheeconomicvalueofthepurchase,atleastuntil

the full payment is made, to generate money for payment of the goods. The

retentionoftitleclauseisbroadlyacceptednottoaimatrestrictingthesub–sale,

and in fact, usually accompanied by express or implied authority to resell66.

RoskillLJremarkedinRomalpa, if itwereholdthattherewasnoimplicationof

thepowertosell,itwouldimpedethebusinesspurposeofthetransaction67.The

argument seemspersuasive from the business perspective, but an authority to

sellcannotautomaticallybeaninherentpartofasimpleretentionoftitleclause.

Furthermore,theauthoritytosellisnotincompatiblewiththeretentionoftitle

clause if theproceedsofsub–salearetakingtheplaceof thegoods,or thetitle

remainswiththeoriginalsellerirrespectiveofthesub-sale,orboth.Withoutan

expressedauthoritytosell,aquestioniswhethertheimplicationofauthorityto

sellcanbereadfromtheretentionoftitleclauseitself.Itisalsodoubtfulwhether

anauthoritytosell,expressedorimplied,withoutstipulatingthepassingoftitle,

isequivalenttoatransferofacleartitletothesub-purchaser.Inthisrespect,it

shouldbeacommonunderstandingofbothpartiesbeforethecourt68.

Alternatively,thecommercialdemandshouldbeinferredfromthefacts.InFour

PointGarageLtdvCarter,theimplicationofauthoritytosellwasfoundbecause

thetransactionisbetweentwocommercialgarages,althoughtherewasasimple

retention of title clause and from the knowledge of the seller, the buyer was

engagingonlyinleasingandhiring,notretailing69.InFairfaxGerrardHoldingsLtd

v Capital Bank Plc70, an implication of authority to sell was established by the

combination of a finance agreement and trust receipts. The finance agreement

havingatermoftitleretentionrequiredthebuyertoassignthedebtarisingfrom

66AtiyahPS,Atiyah'sSaleofGoods(AdamsJandMacqueenHLeds,12thed./P.S.Atiyah,JohnN.Adams;withsectionsonScotslawbyHectorMacQueen.edn,London:Longman2010),atp.47167Romalpa,atp.68968Romalpa,seen.1,atpp.689,691,69369[1985]3AllER12,atp.16 70[2007]EWCACiv1226;[2008]1AllE.RS(Comm)632

38

thesale tocustomersto theseller,whereas,underthetrustreceipts, thebuyer

committedtokeepingtheproceedsofsub–saleontrustfortheseller.Despitethe

argumentontheinconsistencyofthetwodocumentstreatingtheproceeds,both

were held to carry an implied authority to sell, and more importantly, pass a

goodtitletocustomers71.Itisarguedthatnothinginthefinanceagreementand

trust receipts in Fairfax contained an authority to transfer a good title to

customers, and nothing could prevent an arrangement from stipulating an

authority to sell subject to the original seller’s title retention pending the full

payment72.Thisargumentseemscorrectbecauseanauthoritytosellitselfshould

bereadinlinewithtitleretention,thatis,theproceedsofsub–saleshouldtake

theplaceofthegoods,orthetitleremainswiththeoriginalsellerirrespectiveof

the sub-sale, or both. Furthermore, the sub-purchaser, who fails to rely on

purchasingfromabuyerinpossessionundersection25(1),shouldkeepinmind

tochecknotonlytheauthoritytosellbutalsothescopethereof.Italsounderlies

apolicyquestionwhodeserves tobeprotected.Thisargument is criticized for

standingintheshoesoffinancierssettingupcontroloverachainoftransactions,

and,inFairfax,thesellerwouldhavehadawindfallfrompoorcontracting,thatis

not setting up the scope of authority if the judgment had been given in its

favour73.

It is worth briefly discussing the Article 9 of the United States Uniform

Commercial Code with regard to the conflict between a secured party and a

buyerofthecollateral,eventhoughitisnotentirelyequivalenttoEnglishlawin

the sense that title-retaining seller is not treated as a secured party. Title

retentionunderArticle9 is limited toa security interest in thegoods supplied

and may grant the secured party the first position if she fulfils the statutory

requirementsofperfection.Thepurchaser canhavea clear titleof thesecurity

interestwhen she is a buyer in the ordinary course of business,which indeed

requiresthesaletothepurchaserhasbeentakenplace74.Titleretentionhaving

the effect of reserving a security interest is no longer a condition to transfer71ibid,atpp.905-672 LoiKCF,‘RetentionofTitleandImpliedAuthoritytoPassTitletoSub-Buyers’[2008]Lloyd'sMaritimeandCommercialLawQuarterly427,atp.43173ThomasS,seen.62,atp.3774UCC§9-320(a).Seemorediscussioninsub-section3.4.3ofthisthesis

39

property in thegoods to the purchaser. Thus, title retention in the transaction

with a sub-purchaser cannot prevent the sub-purchaser in good faith dealing

with the seller in ordinary course of business to have a clear and free title.

Beyond the requirement of buyer in the ordinary course of business, Article 9

also stipulates that a secured creditor can follow the collateral in the hand of

thirdpartiesunlesssheauthorizesadisposition“freeofthesecurityinterest”75.

TheformerArticle9didnotincludethephrase“freeofthesecurityinterest”that

needed clarification in the PEB Commentary76and possibly raised a series of

concerned disputes brought to court77 . Entitlement to the proceeds under

statutoryprovisionsorunderanagreementdoesnotmanifestatransferofgood

titletoasub-purchaserdespitethefactthatitisagoodevidenceofauthorityto

sell78.TheauthoritytosellprovisioninArticle9doesnoteffectivelysolvethelike

- Re Highway Foods dispute in a sense to “protect” the sub-purchaser.

Furthermore, it does not helpmuch the Fairfax decision, if Article 9 model is

introducedintoEnglishlaw,tohaveasolidjustificatorygroundassuggested79if

theauthoritytosellifanyinthetwoabove-mentionedcasesisnotaccompanied

by the condition “free of the security interest”. Importantly, to protect a sub-

purchaser buying subject to title retention, title retention should not be

interpretedasanarrangementto transfer the title to thegoodssupplied,buta

securityinterestasrecommendedinArticle9.

The treatment of title retention within the ambit of a sale transaction under

Englishlawinthecontextoftitleconflictsleadstwoundesirableoutcomes.First,

Englishlawshouldclarifywhetheranauthoritytosellitself,expressorimplied

canconferagoodtitletosub-purchasers.Secondly,titleretentionmayspoilthe

lawofbuyerinpossession,namelysection25(1)oftheSGA1979andsection9

of theFA1889,which isaimingatpromotinga free flowofcommerce,when it

increasinglybecomesawidespreadphenomenoninthesaletransaction.

75UCC§9-315(a).Seemorediscussioninsub-section3.4.3ofthisthesis76PEBCommentaryNo.3Section9-306(2)and9-402(7)77See more discussion with regard to express and unconditional; conditional; and impliedauthorizationinThomasS,seen.62,atpp.47-5978Seedetailedargumentinsub-section3.4.3ofthisthesis79ThomasS,seen.62,atp.43

40

2.2.3.2 Bunkers case: How title retention converts a sale into a non-saletransaction

Whenthebuyerfailstopayinfull,thesellerhastherighttosueforthepriceof

goods.Titleretentionequipstheselleranalternativetofollowingthegoodsthat

promotesherfromthepositionofunsecuredcreditorsparticularlyinthebuyer’s

insolvency.However,repossessionofthegoodsisnotpreferableorpractical,for

instanceswithregardtotheworkingorconsumablegoodsthatnolongerexistat

the time of dispute as in PST Energy 7 Shipping LLC v OW Bunker Malta Ltd

(Bunkers)80orthegoodsresoldoverseaas inFGWilson(Engineering)LtdvJohn

Holt&Co(Liverpool)Ltd(Caterpillar)81. Ithasbeenwitnessedthat thenatureof

titleretentiontransactionhasbeennolongerproblematic,buttheeffectof this

clauseonsaletransactionshascausedalotofofconcernsanddebatesinrecent

years.

InCaterpillar,itwaspossiblythefirsttimethesellerisexposedtothenegative

sideoftitleretentionclause.Itwasheldthatundertheconcernedtitleretention

arrangement,thebuyerhadsoldthegoodsastheseller’sagentbeforepayingin

full.Thus,thepropertyhadnotpassedtothebuyeratanytime.Thesellercould

not claim for the price according to section 49(1) of the SGA 1979. The

Caterpillarcaseiscriticizedseverelyfortheagencyconstructionthatisarguedto

beatoddswithbusiness commonsense82.Theproblemof agency construction

wouldbediscussedinthenextsub-sectionofthisthesis.Theothercriticismison

thecourt’sviewthatsection49 is theonlysituationgivingrise toanaction for

theprice83.TheunexpectedconsequenceofCaterpillar istheexclusionofaction

for the price and the limitation of actions against a buyer for non-payment to

repossessionofthegoodsorfollowingtheproceedsofsaleifthetitleretention

clause is a proceeds clause when the property is not passed. The point that

section49exclusivelyprovidesforsituationsgivingrisetoanactionfortheprice

80[2016]UKSC23;[2016]AC103481[2013]EWCACiv1232,[2014]1WLR2365 82GulliferL,‘TheInterpretationofRetentionofTitleClauses:SomeDifficulties’(2014)4LloydsMaritimeandCommercialLawQuarterly564,atpp.567-572 83Caterpillar,seen.81,at[41].SeediscussionindetailinGulliferL,ibid,atpp.575-9

41

is, fortunately, overruled inBunkers84. TheBunkersruling has drawn attention

notonly to the insolvency ofone of theworld largest suppliers in the bunker-

supplymarketbutalsotoitscontroversialdecisionrespectivetoasupposed-to-

be commonnotion of a sale contract.Bunkers involved a chain of transactions

where bunkers were sold down, the seller-buyer transaction and one of the

supplier-supplier transactions of which had a title retention clause. The end-

buyer/ship-owner, was concerned about paying twice, once to the immediate

sellerandoncetoasupplierinthechainundertitleretentionormaritimelien85.

The end-buyer sought to apply section 49(1) to avoid the immediate seller’s

action for the price. The Supreme Court upheld the previous decisions

consideringtheconcernedcontractwasnotacontractofsale.Bunkers(fueloil)

asconsumablegoodsarelikelytobeconsumedbeforetheendofacreditterm.In

other words, where title retention restrains the passing of title pending full

payment, bunkers probably no longer exist at the time the price is paid, or a

claimfor theprice isbrought intocourt.Thecourtreasonedthat thesupplyof

bunkers is widely known to have a long credit term combined with title

retention, and the express authority to use inpropulsion is usually inserted in

the contract. Therefore, thenatureof the contractof thiskind is the liberty to

usethebunkers forpropulsionprior topaymentcombinedwiththeagreement

tosellanyremainingbunkersatthedateofpayment86,ratherthanthepassingof

propertyinthebunkers,whichisthenatureofsalecontract.Oncethebunkeris

delivered, thebuyer isbound topay theagreedprice87.The failure topass the

propertyinthebunkersdoesnotreleasethebuyerfromsuchobligation.

Itwouldbegoodnewsonitsfacetoanytitle-retainingsellerthattherighttosue

forthepriceremainswiththem,andsection49,evenobiter,isheldtobenotthe

onlyauthority foranaction for theprice88.Nonetheless, it isnotat theheartof

thisdecisiontherighttosueforthepricebutthatthecontractofthatkindisnot

a contract of sale possibly has a global impact on the applicability of the SGA

84Bunkers,seen.80,at[58],p.1080 85ibid,at[2],p.1060 86ibid,at[33]ofp.1048,[27]ofp.106987ibid,at[34]ofp.1049,[44]ofp.1051,[37]ofp.107288ibid,at[58],atpp.1080-1

42

197989.Titleretentionhasbeenbroadlyusedincombinationwithasubstantially

long-term of credit in sale and purchase transaction including the sale and

purchase of consumable orworking goods, which are supposedly put into the

courseofconsumingorprocessingrespectivelyrightaftertakingdelivery90.The

impossibilityof transferring the title in thegoodswhen theyno longerexist at

thetimeofpayment,duetothepointonthismatterinthehighestauthoritycase,

Bunkers,wouldconvertaused-to-besalecontractintoanon-salecontract.Outof

the title retention context, it further leads to the reconceptualization of CIF

contractinwhichthepassingofriskisprecedingthepassingofpropertyinthe

goods91.Itcouldbelistedatleastotherfivecategoriesofothersupplycontracts

outofthetitleretentioncontextwouldbechallengedundertheBunkerruling92.

It cannot be denied the decisive role of title retention in this reasoning to the

extent thatwithout such arrangement, the property in the bunkers is likely to

passelsewherebeforetheconsumption.Contractsforthesupplyofbunkersare

unexpectedlycharacterizedintotwodifferentcategories,one,possiblyacontract

of sale, for supply without extending credit or on credit but without title

retention,andtheother,asuigeneriscontract,forsupplyoncreditandsubjectto

titleretention93. Again, itraisesaquestionontheessenceof titleretention: for

the security of purchase price or an arrangement to pass the property in the

goods.Functionalismdoesnottreattitleretentionasanarrangementtotransfer

ownership; instead, it considers title retention to have the effect limited to a

security interest. If functionalism had applied into the context of Bunkers, it

wouldhaveneverbeena questionwhether itwerea contractof sale since the

property constructively passed upon delivery or other events before the

89SeedetaileddiscussiononhowtheBunkerdecisionsmatterstotheSGA1979inGulliferL,seen. 29, at pp. 257-8; Bridge M, ‘The UK Supreme Court Decision in the Res Cogitans and theCardinalRoleofPropertyinSalesLaw’(2017)SingaporeJournalofLegalStudies345,atpp.356-990 GulliferL,seen.29; BridgeM,‘TheUKSupremeCourtDecisionintheResCogitansandtheCardinalRoleofPropertyinSalesLaw’(2017)SingaporeJournalofLegalStudies345,atp.356;TettenbornA,‘OfBunkersandRetentionofTitle:WhenisASaleNotASale?’[2016]Lloyd'sMaritimeandCommercialLawQuarterly24,atp.2691TettenbornA,‘OfBunkersandRetentionofTitle:WhenisASaleNotASale?’[2016]Lloyd'sMaritimeandCommercialLawQuarterly24,atp.28 92LowKFKandLoiKCF,‘BunkersinWonderland:ATaleofHowtheGrowthofRomalpaClausesShranktheEnglishLawofSales’[2018]JournalofBusinessLaw229,atp.24893GulliferL,seen.29,atp.257

43

consumptionormanufactureofthegoods.Itissuggestedthattitleretentionover

inventory should be re-characterized as “a retention of title floating charge”94.

However, it would lead to onerous inconsistency in interpretation of title

retention because this suggestion is limited to title retention in inventory

includingconsumable,workinggoodsormerchandise.Anotherrecommendation

istheapplicationofscintillatemporisdoctrinecreatedundertheReBondWorth

case95.Accordingly,atthetimetheoriginalgoodsaretransferredtoathirdparty

or put into the manufacturing process, the title to the goods is passed to the

buyer immediately96. It sounds on its face parallel with reasoning in a line of

caseswithregardtomanufacturedtitleretentionclause(discussedlater),thatis,

thetitle in theoriginalgoods isextinguishedat thetimethegoodsareput into

the manufacturing process. The problem is the court, if following the scintilla

temporis doctrine, would do violence on party autonomy concerning to the

passing of title. It is worth repeating that from the formalism perspective,

functionalismdoesnotrespectthefreedomofcontractbyturningacontractual

arrangement of title transfer into a statutory security interest. Therefore,

acceptance of scintilla temporis doctrine in this sense is notwell justified and

raises the question of recognition of title retention under the functionalism

approachasawhole.

2.3 Constructionoffiduciaryrelationship

Title retention is a good device for a seller to escape the position of general

creditors in the buyer’s insolvency when the goods are still in the buyer’s

possession.Thenormalcreditor/debtorrelationshipiscertainlynotanexpected

consequencebutlikelytohappenincasethegoodsaresub–sold.Theplaintiff

seeksanotherproprietary remedy relyingon the fiduciary relationship, that is,

theequitable right to trace.Romalpais aprominent case introducingequitable

principlesintothecommerciallawandconsideredasthefirstcaseupholdingthe

title retention clause. A line of subsequent cases has been divided into those

94ibid,atpp.264-595LowKFKandLoiKCF,seen.92,atpp.253-496ibid.LowKFKandLoiKCFbaseontheargumentofProfessorGulliferforthecorrectanalysisofCaterpillarinGulliferL,seen.82.

44

followingordistinguishing theRomalpa decisionand, combinedwithRomalpa,

contributingtothelawoftitleretentioninEngland.

2.3.1 Romalpamodel

The retention of title clause in Romalpa was elaborate and complicated but

showingtheimbalanceoftwoparts,namelybetweentheall-moniespartandthe

manufacturedpart.Inthefirstall-moniespart,therewasanadditionalobligation

imposingonthebuyertokeepthegoodsascertainedasthepropertyoftheseller.

Thispartexpresslystipulatedneithertheauthorityofthebuyertosellthegoods

nor the seller’s entitlement to the proceeds of sub–sale. Meanwhile, the

manufactured part allowed the buyer to manufacture new products from the

goodsandsell them toa thirdparty.Then, the sellerwasexplicitly calledasa

fiduciary owner of newproducts and entitled to any claim that the buyer had

againstthesub–purchaserarisingfromthesub–saletransaction.Theimbalance

betweentwopartswasexplainedthattheproblemdealtinthesecondpartwas

more complicated than thatof the firstpart97. Ironically, thedispute came into

beingwithintheframeworkofthefirstpartwhentheplaintifftriedtosubmitthe

proprietaryclaimontheproceedsofsub–saleofthegoods.Itisastonishingthat

thesellerwasentitledtotheproceedswithoutanyagreementonthesub-saleof

theoriginalgoodsandtheproceedsthereof,andthetracingrightisappliedtoan

authorized sale.The secondpart contained thewording indicatingsomewhata

fiduciaryrelationshipbetweenpartieswithregardtothemanufacturedproducts

from the original goods. The Court of Appeal concluded that the second part

implied the samerelationshipbetween the sellerand thebuyerwith regard to

theproceedsofsale98.ThemainauthoritycitedinRomalpaisReHallett’sEstate99

providingfortheestablishmentofthefiduciaryrelationshipasaprerequisitefor

therightoftracing.

That thebuyerhadanauthority tosellwasthecommonground inthiscase100.

Thus, the question presented was whether there was a fiduciary relationship

97Romalpa,seen.1,atp.68898Romalpa,seen.1,atpp.690,692-399(1880)13ChD696100Romalpa,seen.1,atp.680[F-G]

45

entitling the seller to trace theproceedsofsub-sale.The judgeof first instance

andthejudgesoftheCourtofAppeal,inthiscase,haddifferentfindingsonthe

fiduciaryrelationship.The judgeof first instancereliedheavilyonthebailment

createdbetweenthedefendantandtheplaintifftoconcludethatitshouldbethe

fiduciary relationship beyond the plain creditor/debtor one between the seller

and the buyer at hand101. Roskill LJ in the Court of Appeal complemented the

agency relationship that required the defendant to be bound by the fiduciary

obligationtowardstheplaintiff102.Meanwhile,GoffLJandMegawLJdidnotmake

any effort to label the fiduciary relationship between the plaintiff and the

defendant as sources of fiduciary obligations103. Although they inevitably had

differentconstructionsoftheretentionoftitleclauseinhand,theycameupwith

the same holding that a fiduciary relationship was established between the

plaintiffandthedefendanttoupholdthetracingremedyinfavouroftheformer.

Therefore, it raises a question about the nature of the fiduciary relationship

between the seller and the buyer found in Romalpa. So far, the fiduciary

relationship does not have a general definition 104 and categories of this

relationship is not exhaustive. Categories of fiduciary relationships are also

suggestednottohavethesamerules105.

Itislikelyanotherkindoffiduciaryrelationshipifwearesatisfiedwiththefact

thatanauthoritytosellmustbeaccompaniedwiththedutytoaccountimposed

upon the buyer with regard to the proceeds in order to achieve the whole

purposeoftheclause.Thepropertyofthegoodshadneverpassedtothebuyer

untilthesub-saleoccurred.Thus,theseller’sinterestintheproceedswasrooted

intheoriginalgoods. Inotherwords, thebeneficial interestvested intheseller

with respect to theproceedswasoriginal.Therefore, it canbe argued that the

101Romalpa,seen.1,atpp.680E-F,682C-G 102Romalpa,seen.1,atp.690C-F103Ulph J, ‘Equitable Proprietary Rights in Insolvency: The Ebbing Tide?’ [1996] Journal ofBusinessLaw482,atp.498104FinnP,‘ContractandtheFiduciaryPrinciple’(1989)12UNSWLawJournal76,atp.85,SealyLS,‘FiduciaryRelationships’(1962)20CLJ69atp.73,WeinribEJ,‘TheFiduciaryObligation’(1975)25TheUniversityofTorontoLawJournal1,atp.7105SealyLS,‘FiduciaryRelationships’(1962)20CLJ69atpp.73-4

46

duty to account for the proceeds to the seller was undoubtedly a fiduciary

obligationallowingthesellertohavetherightoftracing.

Constructionofafiduciaryrelationshipisproblematicbecausetheobligationto

account for theproceeds isnotaccompaniedbytheobligationtosegregatethe

proceedsforthesellerastrustmoney. InRomalpa,theretentionoftitleclause

didnotprovidefortheobligationtokeeptheproceedsofsub–saleinaseparate

account.Thesecondpartoftheconcernedtitleretentionclauseexpresslydealing

with the sale ofmanufactured goods only enabled the seller to any claim the

buyerhadarisingfromthesub–saletransaction.Itiswidelyacknowledgedthat

theobligationtosegregatetheproceedswouldspoilthebenefitofcredittermas

the submission of the defendant in Romalpa106. Thus, the buyer can use the

proceedsathisdiscretionduringthecredit term.TheCourtofAppealaccepted

that, in practice, the buyerwas not restrained from using the proceeds for its

ownbusinessduringthecreditperiod107,buthadastrongresponsethatitcould

reconcilewellwiththefiduciaryrelationship.

“No doubt in practice, so long as all went well the plaintiffs would allow the

defendants touse theproceedsofsale in theirbusiness,as Iunderstandtheydid;

butthingsceasedtogowell,andnowonehastodeterminethestrictrightsofthe

parties…”108

Dr.deLacyanalyzeditasadoctrineofwaiver109.Itissuggestedthatthedutyto

accounttothesellerisnotastrictfiduciaryrelationshipinthesensethatitcan

be waived in the buyer’s ordinary course of business and reactivated in the

buyer’s insolvency110.Therefore, theobligation toaccount isnotequated to the

obligationtosegregatethemoneyreceived.Itwassuggestedtobeaconcession

from the seller when it could not control the proceeds in the hands of the

buyer111. Nevertheless, in practice, sellers usually do not concern the source of

106Romalpa,seen.1,atp.689F-G107Romalpa,seen.1,atp.692E-F108Romalpa,seen.1,atp.692E-F109deLacyJ,‘RomalpaTheoryandPracticeunderRetentionofTitleintheSaleofGoods’(1995)Anglo-AmericanLawReview327,atp.347110ibid,atpp.335-9,forfurtherdiscussionondoctrineofwaiverinretentionoftitle111GoodhartWandJonesG,‘TheInfiltrationofEquitableDoctrineintoEnglishCommercialLaw’

47

money,eventrustmoney,receivedfrombuyers112.TheCourtofAppealprecisely

indicatedthesituationwhentitleretentionwouldefficientlyoperate,namely,in

the buyer’s insolvency. The doctrine of waiver suggested for the fiduciary

obligationofthiskindissomewhatreasonableandjustified.Itprovidesanswers

for arguments against the construction of agency at least two points113: the

absenceof aduty to segregate themoney received for the seller’s accountand

thatthetracingrightisnotduerightatthetimeofsub-salebutsubjecttoaquite

longcreditterm,forinstancesthefixingof75daysinRomalpa.

However,thewholeargumentontheagencyconstructionisconfusing.Whatever

categories the concerned fiduciary relationship belongs, a line of critical

questions remain:What is the extent of the duty to account? Must the buyer

account for thewhole proceeds to the seller? If the amount of the proceeds is

exceedingtheamountofoutstandingdebts,doesthebuyeraccountonlyforthe

valueofalloutstandingdebtsandenjoythesurplus?Andwhatiftheamountof

theproceedsisnotenoughtodischargeallindebtedness?Theaffirmativeanswer

to the second question is probably within the concept of fiduciary obligation.

However,inthecommercialcontext,itisconsideredawindfallfortheseller,and

it is not both parties’ intents. Romalpa courts were silent on this matter.

Caterpillar isthecasefollowingRomalpa inconstructinganagencyrelationship

when the goods were sub-sold before the buyer paid in full. The wording in

Caterpillar titleretentionclauseexpresslyrequiredthebuyertoholdthegoods

asafiduciaryagentandallowedthesub-saleofthegoodsintheordinarycourse

of business conditioned upon the account to the seller for the proceeds. The

concernedcourt interpreted theobligation toaccountequivalent toaccounting

forthewholeproceedsofsale.

Interestingly,theIrishcaseReInterview114dealingwiththeproceedsofsub-sale

subject to retention of title clause had a security interest approach. This case

even earlier was neither mentioned before the Court of Appeal in Romalpa.

(1980)43TheModernLawReview489,atp.507112deLacyJ,seen.109,atpp.337-8113SeemorediscussiononcriticismsonagencyconstructionoftitleretentioninGulliferL,see82,atpp.567-572114[1975]IR382

48

Disputesinbothcaseswereontheproceedsofsub–sale,butthetworelevant

title retention clauseswere drafted differently. The title retention clause inRe

Interviewwasa“proceeds”onethatexpresslystipulatedtheseller’sentitlement

toalldebtsarisingfromthesub–salebywayofsecurity115.Thewording“byway

ofsecurity”invitedthecourttoacceptthesubmissionoftheCompaniesAct1963

section99(1)and(2)(e)astheauthorityinfavourofthereceiverofthebuyer116.

Thesesectionscanbesaidtobeequivalent to theEnglishCompaniesAct1948

section 95(1) and (2)(e) respectively that requires any charge created by a

company, includinga chargeonbookdebts tobe registeredduly,otherwise, it

would be void against liquidators and creditors of the company.Romalpa was

quite a different situation since the relevant title retention clause did not

mention theproceedsof sub–salebut contained themanufacturing clause.The

wholeclauseinRomalpahadwordingcloselyrelatingtofiduciarynotionsuchas

thedutytostoretheoriginalgoodsandthenewlymanufacturedproducts,and

thestatusas“fiduciaryowner”ofthesellerwithregardtonewproducts.Itseems

thatthewordingisadecisivefeatureindeterminingthenatureoftitleretention.

However, after Re Interview, the Irish courts adopted Romalpa argument and

even broadened its application. Retention of title in Sugar Distributors Ltd v.

MonaghanCashandCarryLtd117isplainlyasimpleclause,andthejudgmentwas

deliveredfortheplaintifftotracetheproceedsofsub–sale.Thejudgefollowed

andcitedtheinterpretationofRomalpainotherIrishcases,namelyReStokesand

McKiernanLimited118.Accordingly,therighttotraceinthecontextofsimpletitle

retentionwas based on the fact that property of the goods remainedwith the

seller,andthepurchasersoldonbehalfofthesellerandaccountedtothelatter

forproceeds.InReHickey(WJ)Ltd119,retentionoftitleincorporatinganexpress

trustregarding thegoodsand theproceeds togetherwith theduty tokeep the

trustmoneyinaseparateaccountentitledthesellertotracetheproceeds120.The

115ibid,atp.388116ibid,atp.396117[1982]ILRM399,[1981]IEHC2 118ReStokesandMcKiernan,unreported,HighCourt,12December1978119[1988]I.R.126120de Lacy J, ‘IrishRetention of Title: TheTrustDimension’ (1990)Conveyancer andPropertyLawyer128,atpp.130–1.Inthisarticle,theauthorremarksthetrustdimensioninIrishcaselaw

49

influenceofRomalpaonIrishcaselawisrelativelysignificanttotheextentthat

its approach has been adopted many times. Nevertheless, in a recent case,

UnithermHeatingSystemsLtd-v-WallaceasofficialliquidatorofBHTGroupLtd

(InLiquidation),theproceedsclausewasdraftedtoauthorizethesub–saleinthe

normalcourseofthebuyer’sbusinessandassignallclaimsarisingfromsub–sale

totheseller121.Italsostipulatedthatthebuyerwouldholdtheproceedsontrust

for the seller122. The judge of first instance held that the proceeds were trust

moniesallowing the seller to trace.TheCourtofAppeal reserved thedecision,

using three English cases, E Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v

ArbuthnotFactorsLtd123,CompaqComputerLtdvAbercornGroupLtd&Ors124and

ReAndrabell125asguidance.

The holding in Romalpa is striking because the argument on the fiduciary

relationshipbetweenthesellerandthebuyer isformidable.Itissupposedlyan

importation of equitable doctrines into commercial law that enables a title-

retaining seller to bring a super–ranked proprietary claim in the buyer’s

insolvency. However, a new notion is not easy to accept since it significantly

opposes the commercialpracticeand theparties’ intent ina saleandpurchase

transaction.More importantly, it considerablyaffectsother interests, like those

of secured, preferential and unsecured creditors. Upholding the validity of the

retentionoftitleclause,inthiscase,hasbroughtupademandingconsideration

upon competing interests in insolvency and the need for transparency in

retentionoftitletransaction.Asdiscussedlater,theRomalpaapproachdoesnot

merittheapplicationofsubsequentlineofcaseswithregardtothetitleretention

claim for the sub-sale proceeds, but this case has never been reversed or

overruled.TheIrishexperienceandtherecentcaseCaterpillardemonstratethe

regardingtitleretention.121[2015]IECA191122ibid,atpara.16123[1988]1WLR150124[1991]BCC484125[1984]BCLC522

50

survival of Romalpa rule and the effort to draft a perfect “fiduciary” title

retentionclauseleadingtoinconsistencyintheinterpretationoftitleretention126.

2.3.2 NegationofRomalpaprinciple

Romalpa is among the leading cases introducing equitable doctrines into

commercial law 127 by recognizing the tracing right to the proceeds of an

authorized sub–sale subject to a retention of title clause. If it were widely

accepted, sellerswouldhave retentionof title as a device to escape the line of

unsecured creditors and jump to the super-priority position in the buyer’s

insolvency. Unlike secured creditors, they are not required to register their

proprietary interest.Although itsnamehasbecomeanothergenericnameof a

retentionoftitleclause,namely,Romalpaclause,itsapproachandtheorydonot

merittheapplicationinmanysubsequentcases.

Thelineofpost–Romalpacasescanbesortedintothreegroups:(1)dealingwith

the claim on the goods supplied; (2) dealing with the proceeds of sub–sale

includingassignmentofclaimsagainstthesub–purchaser;(3)dealingwithnew

products deriving from the goods supplied.Negation ofRomalpa principle has

occurredmostly in the secondgroupbecause the legal issue inRomalpa is the

nature of the seller’s interest in the proceeds of sale. There are a remarkable

numberofcasesconcernedwiththeproceedsofsub–sale.InHendyLennoxand

Re Andrabell, the title retention clause was drafted simply and loosely that

neithermentionedanytermrelatingtobailmentorfiduciarynordiditcoverthe

proceedsornewproducts.ThesecasesweredistinguishedfromRomalpaonthat

ground128. InEPfeifferWeinkellerei-Weineinkauf,Phillips J, inorder tohold that

the defendant was authorized to sell for his own account, remarked that the

fiduciary relationship inRomalpawasbasedon the “particularwording” of the

clauseandontheconcessionthattherewasabailmentbetweentheplaintiffand

126LowKFKandLoiKCF,seen.92,atp.238127TheothercaseisQuistcloseInvestmentLtd.v.RollsRazorLtd.[1970]AC567.MorediscussioncanbefoundinGoodhartWandJonesG,‘TheInfiltrationofEquitableDoctrineintoEnglishCommercialLaw’(1980)43TheModernLawReview489;PriestleyLJ,‘TheRomalpaClauseandtheQuiscloseTrust’inFinnP(ed),EquityandCommercialRelationship(TheLawBookCompanyLimited1987);UlphJ,‘EquitableProprietaryRightsinInsolvency:TheEbbingTide?’[1996]JournalofBusinessLaw482 128HendyLennox,seen.7,atp.499A-B

51

thedefendant129.Asdiscussedabove,theproblematicRomalpadecisionisthata

label like bailmentoragency stuckon title retention isnotamust to comeup

with a fiduciary relationship. Furthermore, the present author does not think

that the Court of Appeal in Romalpa solely relied on the second part of the

concernedtitleretentionclausetoimplythebuyer’sfiduciaryobligationtowards

the unpaid seller, as the argument of Gibson J in Andrabell130. The fiduciary

obligation isconstructeduponthepurposeoftitleretention,which is tosecure

the seller in the buyer’s insolvency. The purpose can serve any form of this

clause,and ithelpstounderstandthe implication, ifany,bytheclause. Indeed,

RoskillLJ’sargument,thenagreedbyGoffLJ,wasbasedonthewholepurposeof

theclausetolimittheauthoritytosell.

“When, therefore,oneisconsideringwhat,ifany,additional implicationhastobe

madetotheundoubtedimpliedpowerofsaleinthefirstpartofclause13,onemust

askwhat, ifany,additional implication isnecessarytomakeeffectivetheobvious

purposeofgivingtherequisitesecuritytotheplaintiffs?”

ThepreciseroleofthesecondpartinRomalpaistoclarifyandillustratehowthe

purposeof retention of title clauseworks in the construction of the respective

part.

“…foritwouldbestrangeifthefirstpartweretoaffordnorelevantsecuritywhen

thesecondpartis(asIthink)elaboratelydrawntogivesuchsecurityinrelationto

manufacturedormixedgoods.”131

Thatbeing so, if there is anauthority to sell, impliedorexpress, regarding the

goodsinoriginalstatusornewproducts,itshouldbeinlinewiththepurposeof

retentionoftitle132.InHendyLennoxandAndrabell,thecommongroundwasthe

authorityofthebuyertosellthegoods133.

129EPfeiffer,seen.123,atp.159C-D130ReAndrabell,seen.125,atp.528131Romalpa,seen.1,atp.690B-C132deLacyJ,seen.109,atpp.344-5formorediscussionontheimportanceoftheauthoritytosellontheconstructionoffiduciaryrelationshiprespectingretentionoftitle.133SeeHendyLennox,seen.7,atp.491G-H;ReAndrabell,seen.125,atp.527

52

The lesson of simple retention of title clause in Hendy Lennox and Andrabell

might be well studied. Title retention clause since then has been

comprehensivelydrafted.The terms relating toagency,bailment, and fiduciary

have been expressly incorporated to establish a fiduciary relationship by

retention of title, but the judge in Tatung (UK) Ltd v Galex Telesure Ltd134

distinguished his case from Romalpa. Accordingly, title retention in Tatung

expresslystipulatedtheplaintiff’sinterest in theproceedsasacontractualone,

whereasthetitleretentionclauseinRomalpadidnotmentiontheproceeds,and

the interest of the plaintiff arose by operation of law 135 . In Re Weldtech

Equipment,thecasefollowingTatung,theretentionoftitleclausestipulatedthe

assignment of any claim that the buyer has against the sub–purchaser to the

seller.Thesituationofthesellerwithregardtotheproceedsofsub–saleseemsto

be“no-win”136.

TheReAndrabell,TatungandReWeldtechEquipmentcourtswerenotwillingto

readthefiduciaryrelationshipinRomalpa.Thebuyerwasplacedintheposition

ofafiduciarytowardsthesellerbecausetheformerhadtheauthoritytosellthe

originalgoodssubjecttothelatter’stitleretentiontothegoodssupplied.Relying

upon the principle inReHallett’sEstate, the fiduciary relationship of this kind

thatisrootedintheseller’sproprietaryinterestsintheoriginalgoodsresultsin

the right to trace into the proceeds of sub–sale. The existence of the plaintiff’s

interestintheproceedsofsaleinacontractdoesnotpreventthetitleretention

clause fromestablishinga fiduciaryrelationshiptobe in linewiththeRomalpa

principle.

Despite the efforts of drafters to expressly state the buyer’s obligations as a

bailee,anagentora fiduciary,theholdingsweredisappointingsincethecourts

found the obligations were inconsistent with the fiduciary relationship137. In

Hendy Lennox and Andrabell, the existence of credit term and the lack of134(1989)5BCC325135ibid,atpp.334-5136See de Lacy J, ‘Reservation of Title and Charges on Company Book Debts: The Death ofRomalpa?’(1991)54ModernLawReview736,atpp.737-8;HicksA,‘RetentionofTitle-LatestDevelopments’[1992]JournalofBusinessLaw398,atp.409.137EPfeiffer,seen.123,atp.160E-H,161A-B,Tatung,seen.134,atp.333;Compaq,seen.124,atp.496;ReWeldtechEquipmentLtd[1991]BCC16,atp.17

53

obligationtokeeptheproceedsofsub–saleinseparateaccountweresignificant

featurestonegatetheRomalpaprinciple138.Thelattercaseevenwentfurtherto

interpret theobligationtoaccountas“obligationnottomixthemoneysreceived

by the fiduciary with any other moneys” 139 . Another feature found to be

inconsistentwiththenatureoffiduciaryofrelationshipistheseller’sinterestin

thedefeasibilityupon thepaymentof theoutstandingdebts. It is theequitable

righttoredeemthetitleofthegoodsandtheirproceedsthatthebuyerisentitled

to enjoy when all debts are discharged. The judges in Tatung140and Compaq

Computer141relied on a frequently quoted finding in Re Bond Worth Ltd. to

constructachargewithregardtotheproceedsofsub–sale.

“…any contract which, by way of security for the payment of a debt, confers an

interest in property defeasible or destructible upon payment of such debt, or

appropriates such property for the discharge of the debt, must necessarily be

regardedascreatingamortgageorcharge,asthecasemaybe.Theexistenceofthe

equity of redemption is quite inconsistent with the existence of a bare trustee-

beneficiaryrelationship.”142

This is preciselywhat the present author has quoted to discuss the purposive

approach inthecontextofsimpletitleretention.Thisapproachdidnothelpto

constructasimpleclausetobethecreationofachargeuponthegoodssupplied.

Irrespective of simple title retention or proceeds title retention, it is no doubt

that theseller’s interest in theproperty inanycasewillbedefeasibleuponthe

payment of the debts. The doctrine ofwaiveragain could throw a lighton the

defeasibility of the seller’s interest in the goods to see whether it could be

reconciled with the fiduciary obligation in the context of title retention. The

dischargeofthedebt,outoftheeventofthebuyer’sinsolvency,doesnotrequire

thebuyertoperformhisfiduciaryobligationstrictly.Thesellerdoesnotconcern

whetherornotthemoneyisreallytheproceedsofsale.

138SeeHendyLennox,seen.7,atp.499C-G;ReAndrabell,seen.125,atpp.532-3139ReAndrabell,seen.125,atp.530140Tatung,seen.134,atp.333141Compaq,seen.124,atp.495142ReBondWorth,seen.23,atp.248

54

Thestrongestargumentagainst theconstructionof fiduciaryrelationship is the

finding that the buyer is obliged to account for the proceeds of sub–sale

amounting to the sumofoutstandingdebts. This argument is challenged to be

contractualratherthanproprietaryone.InEPfeiffer,theplaintiffallegedthatit

was theduty toaccount forall theproceeds,but thedefendantwasentitled to

thesurplus,ifany,underthecontract.Inthissense,thebuyerdoesnothaveany

equityofredemptioninthebalanceofthefundbutapersonalclaimagainstthe

seller143.

2.3.3 Constructionofcharges

Itisunanimouslyacceptedthatasimpleretentionoftitleclausedoesnotamount

toaregistrablechargecreatedbythebuyeronthegoodssupplied.Itisnotthe

caseinvolvingthesaleproceedsornewproductsmanufacturedfromthegoods

thatarethesubjectmatterofasalecontract.Thenatureoftheinterestthatthe

seller has on the proceeds or new products, is at the heart of title retention

disputes.Toreplytheabsoluteproprietary interestclaimedbytheplaintiff, the

defendant is likely toproposetheaccessory interestbywayofsecurity.Courts

deal with the question of a charge first and then proceed to the question of

priority.ItisaclearapproachadoptedinCompaqComputer.Theheadingsofthe

following sub-sections are named after the title of two questions presented

beforethesaidjudge.

2.3.3.1 Chargeissue

Slade J introduced the purposive approach to retention of title in Re Bond

Worth144.Inhisfrequentlyquotedstatement,SladeJindicatedthataninterestby

wayof security inpropertymusthaveat least two featureswith regard to the

debtor,namely,(1)thedefeasibilityoftheinterestinpropertyuponpaymentor

realization of the property for the discharge of the debt and (2) the equity of

redemption. Slade J strengthened his finding by relying on the judgment of

Romer LJ in Re George Inglefield Ltd.145 about essential characteristics of a

143deLacyJ,seen.109,atp.350144ReBondWorth,seen.23,atp.248145[1933]Ch.1

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mortgage:thefeatureofequityofredemption,theequitablerighttoredeemthe

propertyuponthedischargeofthedebts,andwhenthevalueofthepropertyis

not sufficient to pay the debts, the mortgagee is still entitled to the balance

recoveredfromthemortgagor.

Despite the fact thatdraftershave learnedthe lessonofwording fromprevious

cases, it isnotadifficult taskto figureout thecharacteristicsofsecurity inany

retentionoftitleextendedtotheproceedsofsaleornewlymanufacturedgoods.

The buyerwill undoubtedly have theproperty in the subjectmatter by paying

thepurchasepriceto the seller.Retentionof titlewillbedestructibleupon the

dischargeofalldebtsowedtotheseller146.Itisalsocommonlyacceptedthatina

casewherethesubjectmatterisrealisedtomakethepaymentandthesumisnot

sufficienttocoverthedebts,thebuyerstillowesthebalancetotheseller.

Withregardtotheproceedsclause,theequityofredemptionhasbeenfoundas

an importantelementtoestablishacharge.Whentheamount ismorethanthe

debts,itissuggestedthatthebuyerhasaninterestinthesubjectmatterbyway

of equity of redemption. The wording of some retention of title clauses has

invited judges to read the proprietary residuary interest in the proceeds to be

vested in the buyer/debtor. InEPfeiffer, the clause stipulated that book debts

arisingfromthegoodssupplied“amountingto”thebuyer’sobligationwouldbe

passed on the seller. Relying exactly on the wording of the contract, the

concernedjudgeconstructedthattheassignmentis“onlyuptotheamountof[the

buyer]’soutstandingdebt”147.Itcanbeinferredthatthebuyerwasentitledtothe

balance if the sum of book debts is more than the value of the secured

obligations. However, many clauses have expressly provided that the buyer

would account to the seller for the full proceeds of sale or assign all rights

including those relating to the payment of purchase price of the sub–sale148.

Heavilyrelyingonthewordingofthecontract,plaintiffssubmittedthattheyhad

146SeeReBondWorth,seen.23,atp.249;EPfeiffer,seen.123,atp.161B-C;Tatung,seen.134,atp.333;Compaq,seen.124,atp.495147EPfeiffer,seen.123,atp.160D-G148SeeEPfeiffer,seen.123,atp.154C-D;Tatung,seen.134,atp.328;Compaq,seen.124,atp.491;ReWeldtechEquipmentLtd[1991]BCC16,atpp.16-7

56

anabsolutebeneficial interest in thesaleproceeds149.However,carefuldrafting

did not help. The interest of this kind was found inconsistent with other

obligationsinEPfeiffer,thatis,theseller’sinterestinbookdebtswasstipulated

tobeamountingto theoutstandingobligationwhereasthebuyermustaccount

toherall theproceeds150. InTatung andCompaq, itwas thedefeasibilityof the

seller’s interest upon payment of the debt leading to the implication of the

buyer’s residuary claim in the proceeds 151 . In Re Weldtech Equipment, the

extraordinarily brief judgment following theTatung case relied upon only the

phrase“forsecuringourclaim”toreachaconclusion152.

Theseller’sentitlementtoasummorethanthedebtsowedtoherisconsidered

tohaveawindfallprofitat theexpenseof thebuyerandherothercreditors153.

Thisisthereasontoreadthecontractirrespectiveofthewordingreferringtoan

absolute beneficial interest. It is acceptable that the buyer is entitled to the

surplusafterdischargingtheoutstandingdebtsbythemoneygeneratedfroma

sub-sale toavoid thewindfallprofit at theexpenseof thebuyer andherother

creditors.However, thequestion iswhetheritisaproprietaryright.Theentire

fundrecoveredfromthesub–saleincludingtheprofitmustbeusedtodischarge

all outstanding debts first. The buyer’s right to the surplus of the fund after

payingall thedebts is arguedtobeapersonal claimasa counterweight to the

obligationtopaythebalanceagainst thedeficiencyof the fund,ratherthanthe

equityofredemptiontotheproceeds154.Thewindfallmayalsooccuriftheseller

repossessestheoriginalgoods,themarketpriceofwhichhasbeenincreasedat

thattime.Thebuyerundoubtedlycannotclaimforthesurplusvalue.Thebuyer

inthissituationmaynotincuranyexpenseontheriseoftheeconomicvalueof

149SeeEPfeiffer,seen.123,atp.155H,156A-B;Tatung,seen.134,atp.333;Compaq,seen.124,atp.494150EPfeiffer,seen.123,atp.160E-H,161A-B151SeeTatung,seen.134,atp.333;Compaq,seen.124,atp.496152[1991]BCC16,atp.17. 153Tatung,seen.134,atp.333154Dr.JohndeLacyhasproducedaseriesofresearchpapersonthenatureofRomalpaprinciplewhereheinsistsonthenatureofthebuyer’srighttothesurplusispersonal,notproprietaryasequityofredemption.SeedeLacyJ,‘ProceedwithCare’(1989)10CompanyLawyer188,atp.189;deLacyJ,‘WhenisaRomalpaClausenotaRomalpaClause?WhenItisaChargeonBookDebts’(1992)13CompanyLawyer164,atp.167;deLacyJ,‘RomalpaTheoryandPracticeunderRetentionofTitleintheSaleofGoods’(1995)24(3)Anglo-AmericanLawReview327,atpp.340-1,350

57

thegoods,butevenso,themostimportantcontentionisthatthesellerstillhas

anabsoluteinterestasalegalandbeneficialowner.

The functional approach is not sufficient to identify retention of title as

conferringaregistrablechargeontheproceedsinthecontextoftitleretentionin

England. The wording of the contract to some extent constituting the seller’s

absolute interest in theproceedsorsettingupa fiduciaryrelationship, insome

caseslikeRomalpaorCaterpillartoconferupontheselleranabsoluteinterestin

the proceeds, but in some cases, as discussed above, was utterly failed in this

submission.Constructionoftheequityofredemptionirrespectiveofthewording

islikelytobeaviolentinterferencethatonlyreflectsthejudges’intention.

The issue is always on the nature of the seller’s interest in the proceeds: an

absolutebeneficialinterestorbywayofsecurity.Itiscriticaltofindoutwhether

atanytimethatthebuyerhasanabsoluteinterestinthegoodsandtheproceeds

tocomplywiththeorthodoxthatrequiresapersontocreateasecurityinterest

uponherownproperty.Noticeably,thequestionofwhoinitiallyhastheproperty

intheproceedshasnotbeenwelladdressed.Simpletitleretentionitselfdoesnot

conferupontheselleranyinterestintheproceedsofsale155.InEPfeiffer,Phillips

Jreliedonthewordingoftheretentionoftitleclause,thatis“claims…[thebuyer]

gets… including his profits”, to come up with the conclusion that it was the

assignmentof the rightsbelonging to thebuyer156. In response to theproceeds

titleretentionclause,courtshavefocusedontheissueofthedefeasibilityofthe

interestupon thedebtdischargeand theequityof redemption. It is likely that

negating fiduciary relationship between the seller and the buyer is theway to

vest the propertyof theproceeds in buyer as the judge’s argument inCompaq

Computer157.Theconcernedjudgefiguredoutthatthesecuritypurposewasnot

sufficientforaregistrablecharge,butitwaswhetherthetitlehadpassedtothe

buyerinordertocreateachargeupontheseller158.However,hedidnotproceed

155Simpleretentionoftitle inHendyLennoxandReAndrabellcaseonlydealtwiththequestionwhether the seller’s entitlement to the proceeds is the absolute beneficial interest. Securityinterestwasnotthequestionpresentedbeforethecourt.156EPfeiffer,seen.123,atp.160157Compaq,seen.124,atp.496158SeeCompaq,seen.124,atp.493;GoughWJ,seen.27,atp.546

58

withthismatter.Similarly,theTatungjudgedidnotgiveanyefforttoclarifywhy

the debtor had property in the proceeds of sale, and simply considered it

“unquestionably vested in the defendants”159. It is a somewhat inappropriate

approach.Thecorequestiontodeterminetheseller’sinterestintheproceedsis

whetheritisoriginalorgrantedbythebuyer160.Theproperanalysisshouldbe,

liketheargumentofthedissentingjudgeinCaterpillar,thatthepropertyinthe

originalgoodspassestothebuyeratthetimeofthesub-saleasanimplicationfor

theauthoritytosell.Therefore,thebuyerhastheoriginaltitletotheproceedsto

createachargeintheseller’sfavour.Thisanalysiswouldreversethefindingsin

InReHighwayFood,CaterpillarandBunkerscaseasdiscussedelsewhereabove.

With regard to new products, Borden (UK) Ltd v Scottish Timber Products Ltd

demonstratesthatsimpletitleretentiondoesnotgivetheplaintiffanyinterestin

newproductsmanufacturedfromthegoodssupplied161.Simpleretentionoftitle

isstilleffective insomecasesthat thegoodswereunderprocess. Itisbetter to

assertaclaiminthegoodssupplied,ratherthanthenewproductsincorporated

the original goods by some plain manipulation, that is, the goods can be

reconverted into their delivered state162. Retention of title is operated on the

originalgoods,likeenginessuppliedbythesellerincorporatedingeneratorssets

inHendyLennox.Simpleretentionoftitlecanextendtoprocessedgoodsthatare

notlosttheidentityoftheoriginalgoods,likesteelsheetcutfromsteelstripin

the Armour v Thyssen Edelstahlwerke AG case163. It is inferred from these twocases that the goods even being processed but not losing their identity of

originalsgoodscanberepossessedundertheeffectoftitleretention.

Newlymanufacturedproductsinthecontextoftitleretentionareunequivocally

the combination at least of materials supplied by the seller and the buyer’s

workforce. The classic specificatio principle 164 vests the ownership to the

159Tatung,seen.134,atp.335160WorthingtonS,seen.24,atp.39161[1981]Ch25,atp.47C-D162HendyLennox,seen.7,atp.493G-H,494D-G163[1991]2A.C.339;[1990]3W.L.R.810164Incaseofmanufacturing,theruleofacquisitionofownershipisclassifiedintoaccessioandspecificatio.Accessiooccurswhenasubordinatethingisjoinedtoadominantone,accordinglytheownerofthedominantthingwillacquiretheownershipofthewhole.Specificatioisthecasethat

59

manufacturerwhoisresponsiblefortheownerofmaterialsfordamages,except

for the materials capable of being reconverted into its delivered status. This

principle does not cause a severe problem when materials ceased to exist or

destroyedinmanufacturingprocesslikeyarnprocessedintocarpetorresininto

chipboard165.Itisamorechallengingtasktodealwiththecasewheretheoriginal

goods,althoughtheycannotbereconvertedonceprocessed,arecapableofbeing

identified. InChaigleyFarmsLtdvCrawfordKaye&GrayshireLtd(t/aLeylands),

theplaintiffproposedthat“meatismeat,liveordead”toextendsimpleretention

of title to livestock to carcasses166. InRe Peachdart167, it is submitted that the

suppliedmaterial,leather,waspossiblyidentifiedineachhandbagmadefromit.

Thus, thebuyerwasstillabaileeofhandbagsandanagent for thesellerwhen

selling them168. It is important to figure out whether the goods undergoing

process or manufacture are lost their original identity. When the course of

manufacture starts, the original goods have undergone a transformation to be

newproductsofseparate identity,despite the fact that theoriginalgoodswere

notcompletelyextinguishedorconsumed169.Thenthetitleisdestroyedbecause

thegoodsare losing their identityas rawmaterial at theverybeginningof the

manufacture operation. This proposition is logical and to some extent parallel

with the international trade law. For determining the country of origin of

importedgoods,thetariffshiftruleisappliedwhenalltheconstituentmaterials

ofthegoodsarefrommanycountries.Accordingly,thecountryoforiginiswhere

thefinishedgoodsundergoachangeintariffclassification.

The extinction of title of the original goods at the time of the manufacturing

processdoesnotresolvetheissuewithregardtotheplaintiff’sinterestinnewly

manufacturedproducts.Whohas the first titleofnewproducts?Thematterof

thefirsttitleisofimportancebecausethesellerwillhaveanabsoluteinterestin

new products if the answer is on him. Otherwise, the buyer will have a title

apersontransformsrawmaterialsbelongingtotheotherintoanewthing.SeemorediscussioninBridgeMandothers,TheLawofPersonalProperty(London:Sweet&Maxwell2013) 165SeeBorden,seen.161,atpp.41E-F,44E-F,CloughMill,seen.19,atp.125E-G166[1996]BCC957,atp.962 167[1984]Ch131168ibid,atp.141F-G169ibid, atp.142E-H;ChaigleyFarms, seen.166,atp.963,ModelboardLtdvOuterBoxLtd(InLiquidation)[1992]B.C.C.945;[1993]B.C.L.C.623,atp.953

60

sufficienttoconferasecurityinterestontheseller.Thebuyerisinthepositionof

amanufacturerwhocantakeadvantageofthespecificatioprinciple,intheother

hand,thecontractofsalestipulatesthatthesellergenerallyhasretainedthetitle

tomanufacturedgoods. Ifmanufactured title retentioncanconfer the absolute

interestuponthesellerwithregardtonewproducts,itissuggestedthatthefirst

title could be obtained by a contractual arrangement. Thus, retention of title

wouldbeadevicetocontractoutofrulesofpropertylaw170.OliverLJinClough

Millwas likely tosupport thisproposition171.However,GoffLJ in thesamecase

andothercourtsdidnotechoit.Ifthesellerhasthefirsttitleinnewproducts,he

will be entitled to the windfall benefit at the expense of the buyer who

incorporatesnotonlyhismaterialsbutalsohislabour172.Newproductscertainly

havevalueaddedbyincorporationofothermaterialsbelongingtothebuyeror

byherdesignorherworkforce.Itislikelyaweakpropositionifthevalueadded

isrelativelyminorincomparisonwiththegoodssuppliedbytheseller.Dealing

with thematterof thiskind, the judge inModelboard didnot take intoaccount

the value-addedmatter due to lack of evidence. He asserted that the windfall

benefitinrespectingnewproductswasakintothesituationthatthesellerretook

thepossessionoftheoriginalgoods173.Heraisedtwocharacteristicsofacharge:

(1) The title ofnewproductswould be vested in the buyer by payment of the

purchasepriceoforiginalgoods,and(2)Thesumowedtothesellerwasnotthe

price payable in connectionwith the sale of new174. Above all, the specificatio

principleinmostcasesmaybeimpliedlyappliedbytheargumentthatwhenthe

title inoriginal goods ceases toexist at the startof themanufacturingprocess,

the title of new products will be vested in the buyer 175 . A contractual

arrangementcannotbeeffectivetocontractoutpropertylawinordertoconfer

property in new products on the seller, simply because it is impossible for

anyone to confer ownership on the other inwhat he has no title at all176. The

170WebbD,‘TitleandTransformation:WhoOwnsManufacturedGoods?’[2000]JournalofBusinessLaw,atp.531171Borden,seen.161,atp.124B-C172Borden,seen.161,atp.119G-H,120A-E173ModelboardLtdvOuterBoxLtd(InLiquidation)[1992]BCC945,atpp.952-3174ModelboardLtdvOuterBoxLtd(InLiquidation)[1992]BCC945;[1993]BCLC623,atp.953175SeeBorden,seen.161,atp.44E-FbyTemplemanLJ,46E-FbyBuckleyLJ;RePeachdart,seen.167,atp.142G-H;CloughMill,seen.19,atp.125F-HbySirDonaldsonM.R.176WebbD,seen.170,atp.534

61

plaintiff’s interest in newly manufactured products under manufactured

retentionoftitleshouldbeofachargee.

2.3.3.2 Priorityissue

Prioritycanbeconsideredas theorderingofpriorityofsuccessivechargesand

absoluteinterestsifanyoverthesameasset177.Itistherankingtodistributethe

companyassetinwindingupinwhichholdersoffloatingchargescompetewith

preferentialcreditorsandunsecuredcreditors178.Registrationdoesnotaffectthe

priorityrankingofsuccessivechargestotheextentthattheorderofregistration

doesnotplayaroleintherankingprocess.Otherwise,itdeterminesthevalidity

ofchargescreatedbyacompanychargoragainstothercreditorsintheambitof

Companies Act 2006 section 859(H)179. Registration as a prerequisite for the

validity of company charges is relevant to the priority ranking of a particular

chargeincompetitionwithothersuccessivechargesandabsoluteinterests180.In

a substantial number of court decisions, retention of title extended to the

proceedsofsub–saleandmanufacturedgoodsisfoundtobearegistrablecharge

createdbyacompanychargor.Thiskindofchargefallswithintherequirementof

registrationtobeeffective.Inalmostalltitleretentioncases,theextendedclause

is void against receivers, administrators, liquidators or other creditors due to

want of registration. It is a non–complying registrable charge taking priority

subsequent toa registeredcharge irrespective that the former ispreviouslyor

subsequently created181. It should be noticed that the Insolvency Act 1986

recognizes the first priority position of the title-retaining seller respecting not

onlythegoodssuppliedbutalso“anypropertypresentingthegoods”182.However,

extended title retention is no longer a retention of title agreement within the

scopeoftheInsolvencyAct1986becauseithasbeenlongconsideredascreating

177GoughWJ,seen.27,atp.741178GoodeRM,PrinciplesofCorporateInsolvencyLaw(4thed.,Studented.,London:Sweet&Maxwell2011),atp.275179TheformerrulesarefoundinCompaniesAct1985section395(1)andCompaniesAct1948section95(1)180GoughWJ,seen.27,atp.899181SeetheruleinGoughWJ,seen.27,atp.903,932;McCormackG,seen.9,atp.132182InsolvencyAct1986Section251

62

disguised charges 183 . Therefore, the bank’s fixed or floating charge is less

vulnerable to retention of title with regards to the proceeds of sub–sale or

manufacturedproducts184.

Atitle–retainingseller,ingeneral,seeksforthefirstprioritytoothercreditorsto

theextentthatthegoodsandtheirderivativesdonotmakeupthebuyer’sassets.

Retentionoftitleislikelytobeasmartdeviceaimingatcopingwiththefactthat

unsecured sellers are not in the advantageous position to compete with bank

chargees over the sameproperty. If extended title retention is amounting to a

registrable charge, a question is raised whether it is attractive or practical to

submitaregistrationforthepurposeofranking.

TheregistrationsysteminEngland is transaction-based.TherecentCompanies

Act2006(AmendmentofPart25)Regulations2013introduceanewregimefor

registration of a company charge, but it still rejects a notice filing system.

Registrationrequiresasubmissiontotheregistrarof thecompanyaparticular

and a certified copy of a charge. In comparison with a notice filing system in

which a financial statement is the only document to submit, coveringmultiple

security agreements and having a capacity to be filed in advance, registration

underatransactionsystemisrelativelyburdensomeandcostly185.Withregardto

any sellerhavingapracticeof sellingon title retentionandmaintaininga long

trading relationship with buyers, she would be loaded with hard work of

registrationforeverysaletransaction,butthebenefitmaynotoutweighthecost.

The existing priority rules do not support the seller’s first priority to the

proceedsandmanufacturedgoods.ThepriorityrulesinEngland,whicharenot

basedontheorderofregistration,arerelativelycomplicated186.Somerulesmay

berelevantinthecontextofextendedtitleretention.

Themost important one is the rule governing competition between complying

and non–complying charges. Accordingly, a registrable company charge but

183InsolvencyAct1986section251184SeemorediscussioninGoughWJ,seen.27,atpp.930-1185SeemorecomparisonbetweennoticefilingandtransactionsysteminMcCormackG,SecuredCreditunderEnglishandAmericanLaw(CambridgeUniversityPress2004),atpp.138-149 186SeeGoode RM,seen.25,atp.187;GoughWJ,seen.27,atpp.900-1

63

unregisteredhastheprioritysubsequenttoregisteredcharges,despitetheorder

ofcreationasdiscussedabove187.Withregardtocompetingcomplyingcharges,

the order of creation is applied. The first created charge has priority over the

subsequentlycreatedcharge188.Withregardtothecompetitionbetweena fixed

charge and a floating charge, a complying floating charge takes priority

subsequent toa complying fixed charge irrespectiveof theorderof creation189.

Companiesregularlycreatefixedorfloatingchargesonbookdebtsandstockin

tradeinfavourofabankchargee.Furthermore,abankfloatingchargemayhave

a restrictive clause that prevents the company chargor from creating charges

rankingparipassuorpriortothem.Aregisteredrestrictiveclauseresultsinthe

priority of the concerned floating charge over subsequent fixed charges with

actual notice190. The proceeds of sub–sale or manufactured products deriving

from the goods supplied are within the assets appropriated for the security

interest of a bank chargee. Title retentionmay be created subsequently to the

bankfixedorfloatingcharge191.Thereislittleroomtocreateachargeunderan

extended title retention clause to have priority over banks and other financial

institutions.

Itisworthdeterminingachargecreatedbytitleretentionupontheproceedsor

newproductsisafixedorfloatingcharge,atleastforthepurposeofwinding-up

whereaholderofcomplyingfloatingchargerankspriortounsecuredcreditors,

but subsequently to preferential creditors. The judgments with regard to this

matter is controversial. In Re BondWorth it was held that they were floating

187SeeGoode RM,seen.25,atp.189;GoughWJ,seen.27,atp.903;188SeeGoode RM,seen.25,atp.188;GoughWJ,seen.27,atp.903;189SeeGoughWJ,seen.27,atp.905;McCormackG,RegistrationofCompanyCharges(Sweet&Maxwell1994),atp.134190SeetheruleinMcCormackG,RegistrationofCompanyCharges(Sweet&Maxwell1994),atp.134.TheregisteredrestrictiveclausewouldhavemadetheconcernedfloatingchargepriortosubsequentfixedchargeduetoconstructivenoticeiftheCompaniesAct1989werebroughtintoforce.Section103ofthisActprovidesthat“apersontakingachargeoveracompany’spropertyshallbetakentohavenoticeofanymatterrequiringregistrationanddisclosedontheregisteratthetimewhenthechargeiscreated”.Theseprovisionswereneverbroughtintoforceandhavebeenrepealed.TheCompaniesAct2006doesnothavesimilarprovision.However,thenewsection859D(2)(c)(introducedin2013)makesnegativepledgeclausespartoftherequiredparticularsforregistration.SeemoreinMcCormackG,RegistrationofCompanyCharges(Sweet&Maxwell1994),atp.135;GoughWJ,seen.27,atp.935;GrahamP,‘Registrationofcompanycharges’[2014]JournalofBusinessLaw175,atpp.191-2 191SeeReBondWorth;RePeachdart;Tatung;Armour,Modelboard;ReHighwayFoods

64

charges.Ontheotherhand,inEPfeifferandTatung,theproceedsofsaleandthe

assignmentofclaimsarisingfromorconnectingtothesub–saleweresubjecttoa

charge on book debts. In respect of newly manufactured products, in Borden,

judgescametodifferentconclusions.TemplemanLJandBuckleyLJconsideredit

asacompanybillofsalewhereasBridgeLJarguedthatitwasafloatingcharge

ontheconvertedproducts.

Thenatureofachargeasfixedorfloatingonedoesnotdependontheformbut

the true intention of the parties192. In other words, despite the label of fixed

chargestuckonthesecurityinterest,judgesarelikelytolooktothesubstanceof

contractualobligations.Clearly,inthecontextoftitleretentionthepartiesdonot

intend to name the interest conferred upon the seller because the latter is

seekingforabetterpositionthanofthechargor.Itisemphasizedthattocarryon

thetaskdeterminingthecategoryoftheconstructedcharge,judgesareexpected

tolooktothesubstanceoftransaction.Inpractice,thenatureofachargecreated

under extended title retention is not of concern since both fixed and floating

chargecannotgrantatitle-retainingsellertheexpectedfirstpriority.

The question of priority is raised out of the context of insolvency where the

proceeds in the formof book debts subject to title retention competewith an

assignmentofbookdebts to thirdparties.EPfeifferandCompaq are twocases

dealing with competing interests of the title-retaining seller and the assignee

overbookdebts.Eventhoughavoidchargewasfoundduetolackofregistration,

thelearnedjudgesinbothcasesstillproceededwithprioritypoint.Theassignee

was not amounting to the concept of creditors in the ambit of Companies Act

1948section95orCompaniesAct1985section395,butapurchaserofchosesin

action193. A charge is valid against purchasers of all kinds irrespective of being

registeredornot.Therearethreeapproachestotheissue:(1)thebasicrule,the

firstintimeprevails,whichisonethatfavourstheseller;(2)thedoctrinethata

bona fide purchaser for value of legal interest without notice, which gives

advantagetotheassignee;(3)theDearlevHallrulewhichgrantthefirstpriority192SeeAgnewandanotherv.CommissionerofInlandRevenue[2001]UKPC28,atp.725F-H.SeeGoughWJ,seen.27,atpp.601,604-5;GulliferL(ed),seen.25,atp.129193OditahF,‘Priorities:EquitableversusLegalAssignmentsofBookDebts’(1989)9OxfordJournalofLegalStudies513,atpp.519-520

65

tothepartygivingfirstnoticeofherintereststothedebtorwithoutnoticeofthe

priorassignmentofthesamesubjectmatter194.

Although the two latter rules may on its face have the same result, the two

approaches are different. The bona fide purchaser rule applies to resolve the

conflict between an equitable and a subsequent legal assignment,whereas the

Dearle v Hall rule applies to competing equitable assignments of choses in

action 195 . The seller’s interest in the proceeds of sub–sale is undoubtedly

equitable,butthenatureoftheassignee’sinterestisdebatable.ThedecisionofE

Pfeiffer,thenfollowedbyCompaq,reliedontheLawofPropertyAct1925section

136(1) to conclude that assignment of debtwas an equitable assignmentwith

regardtoprioritiesdespitethattheassigneecouldenjoyproceduraladvantages

ofalegaltitle196.ThelearnedjudgeappliedtheDearlevHallrulegivingjudgment

fortheassigneewhowastheonlypartygivingnoticetothedebtor.DearlevHall

rule requires giving the notice to attach and perfect interests arising from an

assignmentofchosesinaction197.TheargumentofPhillipsJiscriticizedbecause

he refused thenatureof the relevantassignmentasa legal interest198.Dearlev

Hallruleisunjustforthesellerwhoisnotingoodpositionincomparisonwith

theassigneetogivenoticetothedebtor.Thesellermaynothaveinformationof

thesub–saletransaction.Iftheseller’sinterestisanequitableassignmentbyway

offloatingcharge,sheispreventedfromanycontactwiththesub–purchaserso

longasthetransactionisconductedintheordinarycourseofbusiness.Itisnot

thecaseinvolvingthedoctrineofabonafidepurchaserinwhichanassignment

by way of charge can be registered so that the subsequent legal purchaser is

placed into the position of having constructive notice. Furthermore, bona fide

purchaserruleapplicableinthiscontextcanrunparalleltopriorityrulesinthe

insolvencycontextinthesensethatlackofregistrationcausesthesellertolose

thepriority.

194SeeCompaq,seen.124,atp.497;EPfeiffer,seen.123,atp.161E-H195McGheeJ,BridgeSandSnellEHT,Snell'sEquity(32nded./generaleditor,JohnMcGhee;contributors,StuartBridge...[etal.].London:Sweet&Maxwell2010),atp.;OditahF,seen.193,atpp.529-531196SeeEPfeiffer,seen.123,atpp.161H,162A-C,H,163A-B.197deLacyJ,‘ThePriorityRuleofDearlev.HallRestated’(1999)ConveyancerandPropertyLawyer311,atp.312 198OditahF,seen.193,atpp.519-520

66

The priority system in English law is not unitary but a scattered set of

intersectingrulesderivingfromstatuesandthecommonlaw.Lackingauniform

statutory system of priority rules, a priority dispute could be challenged by

judicial decisions to the extent that the latter could declare the former to be

false199.Title retention isnot consideredasa security interestbut its extended

form to the proceeds or the new products could be classified as a charge and

enjoytheexistingpriorityrules.Thenatureofcompetinginterests,theorderof

creation, and registration are among factors determining priority ranking, but

the order of registration does not play any role. An English transaction filing

systemrequireseverytransactiontoberegistered.Registrationofextendedtitle

retentiontovalidateachargeontheproceedsornewlymanufacturedgoods is

notappealingandencouragingbecausetheburdensomeandcostlyregistration

is not compensated by the first priority irrespective of at least the order of

creation or registration. A registered charge if any on the proceeds or new

productsislikelytobesubordinatetoothercharges,fixedorfloating,previously

created by long-termblanket financiers. Furthermore, under theDearlevHall

rule,theseller’sinterestisagainsubordinateintheconflictbetweentheclaimfor

the proceeds under title retention and the right of an outright purchaser of

receivables200.

2.4 Concludingremarks

The lawof title retention inEngland at the time of this thesis is rooted in the

common law, lacking specific statutory rules, and is depending entirely on the

generalrulesonthesaleofgoods,fiduciaryobligationsandcompanycharges.

The formalism approach does not support title retention to be treated as a

security interest although it is broadly accepted and practically used to secure

thepaymentofpurchaseprice.TitleretentionhasafirmlegalgroundoftheSGA

1979toenforcetheseller’srightparticularlyintheinsolvencycontextwherethe

administrator is refrained from treating the unpaid goods subject to title

199See the discussion on the change of judicial opinions with regard to the conflict betweenliquidationexpensesandaclaimsecuredbyafloatingchargeinRajakH, ‘LiquidationExpensesVersusaClaimSecuredbyaFloatingCharge’(2005)7InsolvencyIntelligence97200SeemorediscussioninGulliferL,seen.28,atpp.292-3

67

retentionas theon-goingwithoutpaying theprice to the seller.The seller can

callfortherepossessionoftheunpaidgoods,whicharedefinitelynotamongthe

buyer’sassetssubjecttoothersecurityinterestsorgeneralassetstoberealized

forpreferentialandunsecuredcreditors.

Meanwhile,thecommonlawtreatstitleretentiontoproceedsofsaleandnewly

manufacturedproductsasaregistrablechargethathasusuallybeenheldtobe

void against liquidators, administrators and other creditors due to lack of

registration.Thissituationissatisfactoryfromtheperspectiveoflong-termand

receivablefinanciers,andtosomeextentprovidingacounterweighttothesuper-

rankingof the title-retaining sellerwith regard to theoriginalgoods.However,

theRomalpaandrecentCaterpillarcaseconsiderthepositionofatitle-retaining

seller as an absolute beneficiary under the fiduciary doctrine rather than a

charge holder. Title retention to the proceeds can be treated differently under

thetwoapproaches irrespectivethat theyservethesamefunction.English law

onthismatterisinconsistent,unpredictableandthereforeunsatisfactory.

Does the English law of title retention need reform in order to bring title

retentionintheschemeofregistrationforthepurposeofpublicnotice?Despite

the likely unsatisfactory treatment of the proceeds clause, the requirement of

registration is possibly not urgent, even from the perspective of blanket and

receivablefinancierswhohavepriorityoveratitle-retainingsellerwithregardto

theproceedsandnewproducts.From the standpointof a seller, a transaction-

basedregistration isaburden ifregistration isrequiredtomaketitleretention

effectiveagainstthirdparties.

However,theBunker,Caterpillar,andReHighwayFoodsrulingshaveresultedin

the undesirable and unexpected legal consequenceswith respect to the sale of

goods law. It is recommended to treat title retentionwith regard tothe saleof

inventory as a title retention floating charge to cure unsatisfactory impacts on

the sale of goods law. Furthermore, this recommendation may restrict the

influenceofRomalpadecisionbecausethetitleretention floatingchargemakes

the questions of authority to sell and the absolute beneficial interest in the

proceedstobecomeirrelevant.However,otherpolicyquestionsarecoming,that

68

is,thecurrentprioritypositionoffloatingchargeandtheregistrationsystemare

notdesirablefromthestandpointoftheseller,andwhytitleretentiontocapital

equipmentisoutofthechargescheme.

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CHAPTER3 PURCHASE-MONEYSECURITYINTERESTS:ARTICLE9MODEL

3.1 Overview

The United States Uniform Commercial Code (UCC) is not a work of the

legislative process, instead it is a product drafted by the Permanent Editorial

Board, which is composed of the American Law Institute and the National

ConferenceofCommissionersonUniformStateLaw1.Itwasfirstpromulgatedin

1952 with the objective to “make uniform the law among the various

jurisdictions”2.Within theUS federalist system, the stategovernmentsestablish

and enforce commercial law subject to their police power3. Thus, the various

statelawsgoverncommercialtransactions.However,inadditiontounifyingthe

legal aspects of commercial transactions, the Code addresses all phases of

commercial activities “from start to finish”4among states. The adoption of the

UCCinallthestateswithorwithoutamendmentshassignificantlycontributedto

theUCCtarget,thatistheuniformityinthecommerciallawinthecountry.

Article9addressessecuredtransactions,andtogetherwiththeothertenarticles

ofthecode,ensureuniformityofthecommerciallawintheUS.Unlikeotherparts

of the UCC,which dealwith sale, negotiable instruments, document of title or

letterofcreditthatsubstantiallyinheritedworksfromthepreviousuniformlaws

and the state common law, the drafters of Article 9 started theirwork almost

afreshwith theambition to createnewconcepts, requisitesand formalities for

securityinterestsinpersonalproperty5.Themodernizationofthelawonsecured

transactions is considered “a major achievement” of the UCC6. Article 9 was

1ForewordtoOfficialTextandComments,inOfficialComments,atp.ix2UCC§1-103(a)(3)3ThestatepolicepowerisprovidedintheTenthAmendmenttotheUnitedStatesConstitutiontogivethestatesanypowers“notdelegatedtotheUnitedStates”norconstitutionallyprohibitedtothestates.4UniformCommercialCodeOfficialTextandComments(2014-2015ed.,ThomsonReuters2014)(hereinafterOfficialComments),atp.35BrookJ,ProblemsandCasesonSecuredTransactions(Aspen2008),atpp.16-76Seen.1,atp.ix

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entirelyrevisedin1998andagainamendedin20107.Allsectionsreferredinthis

thesisareoftherevisedArticle9.

3.2 Conceptofpurchasemoneysecurityinterest

Article 9 introduces the unitary approach and functionalism to the law on

securedtransactionsinpersonalproperty.TheenactmentofArticle9putanend

to the pre-Code situation where the law was divided into several segments

governing various security devices. The “comprehensive and systematic” set of

rulestreatingtheissueofpriorityisprobablythemostinnovatedpartofArticle

98.AnewconceptofPMSI(PMSI),whichwaspreviouslyaninterestarisingfrom

conditional sales or title retention sales, is recognized to have a super-ranking

priorityasanexceptiontothebasicfirst-to-file-or-perfectrule.APMSImustbea

securityinterestforthepurposeofArticle9first.

3.2.1 Securityinterest:FunctionalismandunitaryapproachinArticle9

3.2.1.1 Functionalism

The distinction among various security devices in personal property is now

extinguished under the formalism approach. All kinds of security devices are

reducedtotheoneandtheonlyconcept:asecurityinterest.Asecurityinterestis

definedinArticle1oftheCodeasfollows.

“Securityinterest”meansaninterestinpersonalpropertyorfixtureswhichsecures

paymentorperformanceofanobligation”9.

TheaboveconcepthasarelativelynarrowmeaningsincetheBankruptcyCode

definesitasa“liencreatedbyanagreement”10inwhichlienis“chargeagainstor

interestinpropertytosecurepaymentofadebtorperformanceofanobligation”11.

Security interests for the purpose of the Bankruptcy Code include real estate

7Seen.18Jackson TH and Kronman AT, ‘Secured Financing and Priorities among Creditors’ (1979) 88YaleLawJournal1143,atp.11449UCC§1-201(35)1011U.S.Code§101(51)1111U.S.Code§101(37)

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mortgages,deedoftrustsandsecurityinterestsinpersonalpropertywithinthe

scopeofArticle9.

Article 9 dealing with secured transactions has the scope of application to “a

transaction, regardless its form, that creates a security interest in personal

property and fixtures by contract”12. Thus, a contractual creation of a security

interestwithintheabovementioneddefinitionleadstotheapplicationofArticle

9, notwithstanding the form of the transaction or the name labeled, or the

intentiongivenbytheparties13.Thesubstanceofatransactionasadeterminative

featureof a security interestmakes the coverofArticle9asbroadaspossible.

Giving the definition a general, all-embracing meaning together with a list of

exceptions14isatechniqueaimingatprohibitingthecreationofnewdevices15.

PriortotheenactmentoftheUCC,thefunctionalapproachwasadoptedinmany

lawsdealingwithdifferentsecuritydevices inordertosetuparequirementof

registration to validate the transaction against third parties. Non-possessory

securityinterestswereinhighdemandinthenineteenthcenturybecauseofthe

riseofmanufacturingindustry,railroad,civilandindustrialconstruction,andthe

increaseofsaleoncreditforconsumergoods16.Newfinancingdevicesotherthan

achattelmortgageweredraftedincludingatrustreceipt17,afactor’slien18anda

12UCC§9-109(a)(1). Article9 isalsoapplied toanagricultural lien,a saleofaccounts, chattelpaper, payment intangibles, or promissory notes, a consignment and other security interestsarisingunderothersectionsoftheUCC,seeUCC§9-109(a)(2),(3),(4),(5),(6).13Comment2totheUCC§9-109(a)(1),seeOfficialCommentsatp.83914UCC§9-109(d)15GilmoreG,Securityinterestsinpersonalproperty(Little,BrownandCompany1965),atpp.295-716ibid,atp.2517Thetrustreceiptisadocumentcreatedbythebuyer,calledtrustee,toeffectthearrangementinwhich the financier, called entruster,will advance the purchasemoney to the seller of thegoods. The financer honours the draft submitted by the seller in theexchange of document oftitle, usually the bill of lading that consigns the goods to the latter and then endorses to theformer or the former is the consignee itself. Until the trustee tenders purchase price to theentruster,thelatterhasthetitletothegoodsbyretainingthedocumentoftitleandtheformerpossesses thegoods in trust for thepurposeof security for therepaymentandusuallyhas theright to sell thegoodsathand.The trust receipthasanadvantage toshift thesecurityinterestfromthegoodstotheproceedsofsale.SeeR.C.N.J,‘TheUniformTrustReceiptsAct’(1934)20VirginiaLawReview689,atp.690

72

conditional sale19. The purpose at first was to seek a judicial recognition and

ultimatelyevadethelawofchattelmortgageanditsfilingsystem,butitresulted

in new sets of rules and even new filing procedures20. The common feature of

thosetransactionswasthatacreditorofeachtypeexpectedtorealizetheasset

athandtodischargethedebtwhenadebtordefaultedorwenttobankruptcy.All

gave rise to an ostensible ownership situation, that is the separation of

ownership and possession, where third-party creditors were misled by the

debtor’spossessiontoconsiderthelatter’sspecificassetasunencumbered.

Toresolvetheostensibleownershipproblem,registrationorfilingistheperfect

replacement for possession as amethod to have the first priority claim in the

debtor’sparticularasset.Inthepast,atransferforsecuritypurposeinwhichthe

debtor/transferorcontinuinglypossessesthecollateralwastreatedasfraudand

thusheldtobevoid.Common-lawcourtsreliedonanEnglishstatutecalledthe

Statuteof13ElizabethIprovidingthatanytransfermadewith“intent[]todelay,

hinderordefraudcreditorsandothers”werevoid21.Thisstatutoryprovisiontook

theformofs.172oftheLawofPropertyAct1925andnowappearsass.423of

the Insolvency Act 1986 in England. This statute demonstrates two types of a

fraud concerning retention of possession. Itmay be a sham transaction in the

best-known Twyne’s Case where the donor retained possession after the

conveyance and acted as if it was his own. Therefore, the donor deceived

creditorsaboutthestatusoftheassetthatheownedthemfreeandclear.Inother

words,thedonorconveyedhisassettothedoneetosecretlysecurethepayment

ofthepreviousdebthehadowedthedonee.Possession,inthissense,manifests

the ownership regardless of the secret conveyance. On the other hand, a non-

possessorysecuredtransaction thatdoesnot involvea transferofproperty for

18Afactor’slienisfrequentlyusedtofinanceamanufacturingbusinessbycreatingasecurityoninventoryincludingrawmaterials,finishedproductsandaccountreceivablesrelatingtothesalethereof.19See more discussion in Glenn G, ‘The Chattel Mortgage as a Statutory Security’ (1939) 25Virginia Law Review 316; R. C.N. J, ‘The Uniform Trust Receipts Act’ (1934) 20 Virginia LawReview689;V.M.G.J,‘TheFactorsLienAct:Virginia'sNewSecurityDevice’(1951)37VirginiaLawReview1023;GlennG, ‘TheConditionalSaleatCommonLawandasaStatutorySecurity’(1939)25VirginiaLawReview55920GilmoreG.,seen.15,atp.29621Twyne'sCase,3Co.Rep.80b,76Eng.Rep.809(1601)

73

securitypurposeraisesaquestionofostensibleownershipwherethedebtormay

deceive creditors that heowns an itemof asset unencumbered22. Giving public

noticeofasecurityinteresttomakeiteffectiveagainstthirdpartiesisasolution

for the ostensible ownership problem. Prospective creditors are required to

carryduediligencetoexplorethepublicrecordofsecurity interestswhenthey

enter the transactionof thiskind.ThehistoricalbackgroundofAmerican filing

systemshowsthatpublic filing isasurrogate forpossessionof thecollateral to

bringapriorityclaim23.

TheAmerican lawonsecuredtransactions inpersonalpropertymostly focuses

onsolvingtheostensibleownershipproblemratherthantheclassicrequirement

ofnemodatquodnonhabet.Thenemodatprincipleraisesthequestionwhether

the debtor has sufficient rights or title to tender a transfer of property. The

followingexampledemonstratestheprimarydifferencesbetweenAmericanlaw,

whichfavourstheostensibleownershipapproachandEnglishlaw,whichstrictly

followsthenemodatprinciple.

Example:Thedebtorasatrueownerofamachinecreatesasecurityinterestin

favour of the lender and then disposes the same asset to the purchaser. The

debtor defaults against the lender. The lender claims the machine from the

purchaser24.

For both jurisdictions, the question presented would be whether the security

interest survives the sale. Under the Article 9, it is crucial first to determine

whetherthelenderfiledafinancingstatementcoveringthemachineathandor

whether she filed prior to the time the purchaser gives value and receives

22SeeHarrisSandMooneyC,Jr.,SecurityInterestsinPersonalProperty:Cases,Problems,andMaterials(6thedn,FoundationPress2016),atpp.162-7formorediscussiononretentionofpossession,fraudulentconveyanceandostensibleownershiptoexplorethehistoricalbackgroundofthefilingsystem23BeforeArticle9,manysecurityintereststatutesprovidedforafilingorrecordinginapublicofficeinordertorecognizenon-possessorysecurityinterests.Article9isadescendantofthesestatutes. See See Harris S and Mooney C, Jr., Security Interests in Personal Property: Cases,Problems,andMaterials(6thedn,FoundationPress2016),atp.16624ThisexampleisadaptedfromtheexamplestatedinDaviesI,‘ThereformofEnglishpersonalpropertysecuritylaw:functionalismandArticle9oftheUniformCommercialCode’(2004)24LegalStudies295,atp.301

74

deliverywithoutknowledgeofthegivensecurityinterest25.Otherwise,sheloses

the machine to the purchaser. If the security interest is perfected timely, her

claimissubjecttowhethershepreviouslyauthorizesthedebtortotransferthe

collateralfreeofthesecurityinteresttothirdparties26,orwhetherthepurchaser

is a buyer in ordinary course of business27. Under English law, it depends on

whetherthedebtorhassufficientrightstotransfergoodtitletothepurchaser.In

thecontextoftitleretention,thegoodfaithpurchasertheoryadoptedinsection

25(1)oftheSaleofGoodsAct1979isacounter-weightofthenemodatprinciple

toresolvethedisputebetweeninnocentpartiesuponthesameasset28.

If Article 9 public filing scheme is deemed as a must-have solution for the

ostensible ownership problem, not every transaction creating ostensible

ownership isbroughtwithin this requirement. It is argued that the capacityof

third parties to easily and accurately observe the separation ofownership and

possession is an exception to the general principle. In this sense, how parties

arrangetheirrightandobligationsisirrelevant29.Accordingly,manytransactions

couldbeexcludedfromtheArticle9’sscopeofapplication,oneofwhichiswhen

theostensibleownershipproblemissolvedbyanotherfilingregime30.

However, Article 9 is criticized to the extent that it fails to give a sound

explanationwhy a true lease and a true bailment are excluded from the scope

although both transactions raise the serious ostensible ownership problem31.

Both for- and against-functionalism commentators agree that the title analysis

25UCC§9-317(b)26UCC§9-315(a)27UCC§9-320(a)28DaviesI,‘TheReformofEnglishPersonalPropertySecurityLaw:FunctionalismandArticle9oftheUniformCommercialCode’(2004)24LegalStudies295,atpp.301-229BairdDGandJacksonTH,‘PossessionandOwnership:AnExaminationoftheScopeofArticle9’(1983)35StanfordLawReview175,atpp.179,19030ibid, at p. 190. Bairdand Jackson in their classicarticle figure outmany situations excludedfromArticle9’srule:certificatesoftitleregimewhichrecordssecurityinterestonautomobiles,widespread knowledge that possessor of an asset is not the owner, short-time ostensibleownershipsituationslikewhenapersonlendsalawnmowertoaneighbourorfilingrequirementinconsistent with the notion of negotiability as essential characteristic of money or bearerinstrument.31SeemorediscussioninBairdDGandJacksonTH,seen.29,atpp.197-201

75

still plays a vital role indetermining the application of Article 932. Courts have

givenagreatefforttodistinguishsecurityleaseandbailmentfromtrueleaseand

bailment.Thebailmentforprocessinggivesagoodexampleinthisrespect.The

bailment for procession is the case where the bailee processes the material

suppliedbythebailorandreturnsproductsinexchangefortheservicefee.InIn

ReMedomakCanningCo.33,thecourtlookedintothenatureofthetransactionto

find that it did not require a sale and purchase of the material to serve the

interests of both parties, and the bailee did not intend to acquire title to the

material. Thus, the court rejected the establishment of a PMSI in favour of the

bailorwhichwas submitted tobevoidagainst theholderofperfected security

interest in after-acquired property and upheld the status of a mere bailment.

InsteadofrelyingontheallocationoftitleasinInReMedomakCanningCo.,the

KineticscourtemphasizedontheArticle9purposethat“[promotes]certaintyin

commercial loan transaction”34. The court assumingly implied the ostensible

ownershipproblemwhenindicatingthatwhen“anyagreementgivingthedebtor

authority to exercise any outward indicia or manifestations of ownership or

control, awould-be creditor could easily bemisled intomaking a loan under an

effectivesecurityagreement”35.Thecourtignoredthetitle issuetoconcludethat

thebaileehas“rightsinthecollateral”withregardtothematerialsuppliedbythe

bailortoattachasecurityinterestforthethirdparty’sfavour36.

The two foregoing decisions demonstrate that a title allocation and ostensible

ownershipapproachcanbringdifferentoutcomes.Itleadstoinconsistencyand

uncertaintyinthetreatmentofleaseandbailmenttransactionsunderAmerican

personalpropertylaw.Fromafunctionalismperspective,itresultsfromthefact

that Article 9 does not apply to true lease and bailment37. From a formalism

perspective, it is the failure of Article 9 to distinguish between ownership and

32BridgeMGandothers,‘Formalism,Functionalism,andUnderstandingtheLawofSecuredTransactions’(1999)44McGillLawJournal567,atp.599;BairdDGandJacksonTH,seen.29,atpp.197-83325UCCRep.Serv.437(1977)34KineticsTechnologyIntern.Corp.v.FourthNat.BankofTulsa,705F.2d396(C.A.10(Okl.),1983)35ibid,atp.39936ibid,atp.40037BairdDGandJacksonTH,seen.29,atpp.200-1

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securityasdifferentconceptsbecauseArticle9stressesonostensibleownership

problemandde-emphasizes“ownershipasacharacteristicofsolvingdisputes”38.

However, functionalismdoesnotpreventAmericancourts fromrespondingthe

question of title allocation to dealwithArticle 9 priority dispute. InEvergreen

MarineCorp.v.SixConsignmentsofFrozenScallops39, thedebtorwhohad taken

thecargoesfromtheoceancarrierwithoutpresentingtheoriginalbilloflading

washeldtohaveatemporaryentrustmentofpossessionthatdidnotsufficethe

requirementof“rights in thecollateral” tocreateasecurity interest.Theocean

carrier was found to be a bailee, not an owner of the cargo; therefore, the

transactionbetweenthecarrierandthedebtorisnotasaleandpurchaseone40.

Thedecisionmanifestedthatother laws,suchasArticle2onthesaleofgoods,

bill of lading or general property law could interferewith the priority dispute

withregardtothequestionoftitleallocation.

Article 9 and functionalism are possibly indifferent to title and ownership

allocation,buttheproblemoftitleallocationcanbesupplementedbyotherlaws.

Themost criticised characteristic of Article 9 could be that party autonomy is

severelyignoredsothatalmostallarrangementshavingafunctionofasecurity

interest are brought in the scheme of Article 9 for the purpose of filing and

priorityranking.Itartificiallybroadenstheconceptofsecurityinteresttocover

in-substance secured transactions irrespective of the form that the parties

intentionally arrange for. The switch from formalism to functionalism is a

considerablechangeintermsoftheideologyandapproach,thatis,changingthe

focusfromtheallocationoftitletothirdparties’concern.Functionalismaimsat

ensuring that any contractual arrangement affecting existing or potential third

parties’rights, interestsorclaims inthesameassetmustbetransparent to the

rest of theworld. The partywho creates the ostensible ownership problem to

competingsecuredcreditorsandclaimantsoverthesameassetbearstheburden

to correct the situationbyeithergettingpossessionof theassetormaking the

publicfiling.38DaviesI,seen.28,atpp.303-4 394F3d90,21UCCRep.2d502(1stCir.1993)40SeemorediscussiononthiscaseinClarkBandClarkB,TheLawofSecuredTransactionsundertheUniformCode,volI(A.S.PrattandSons2010),atp.2-54,2-55

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3.2.1.2 Unitaryapproach

Asmentioned above, prior to the UCC, many devices having the function of a

security interest were created to meet the increasing demand of financing

businesstransactionsofallkinds,andtoavoidtherequirementoffilingandrigid

treatment under the lawof chattelmortgage. It resulted in the enactment of a

new statute to correspond to a newly-created device. TheUniformConditional

Sales Act 1919, the Trust Receipts Act 1933 and the Factor’s Lien Act were

typical examples. It resulted in various statutes accompanied by various filing

systems corresponding to various security devices. Furthermore, under the

federalist system, the lawof secured transactionswhichwasnota federal,but

statelawvariedfromstatetostate,reflectingsomewhat“localandregionaltastes

andstylesindrafting”41.Therefore,beforethepublicationoftheUCC, the lawof

securedtransactionsinpersonalpropertywassegmentalandcomplicated.This

contextgaverisetotheuncertaintyandcostlyexpensetodeterminethestatusof

a security device and choose the appropriate applicable law. The existence of

differentandseparatefilingsystemsdidnotfacilitateathoroughcreditchecking,

andtheyalsoincurredsubstantialexpense42.

The fragmentation of the law on secured transactions in personal property

unequivocallymotivatedaunitaryapproach indraftingArticle9.A transaction

irrespectiveofitsformasachattelmortgage,aconditionalsaleoratrustreceipt,

is simpler than it appears because it serves the same function of securing

paymentorperformanceofotherobligations43.

Functionalism other than formalism is employed to restrain the distinction

among types of financing, the creation of new devices, and the possibility of

severalseparatecorrespondingstatutes.However,functionalismwasnotanew-

born idea of Article 9; on the contrary, the pre-code security interest laws in

personalpropertyhad longadoptedthisapproach, themost typicalofwhich is

theUniformConditional SalesAct. On theone hand, in theAmerican pre-Code

context,wheneveranewsecurityinterestwasrecognizedbyitsfunction,anew41GilmoreG,seen.15,atp.14142ibid,atp.46343ibid,atp.289

78

statutewasenacted to coincidewithanewsecuritydevice.On theotherhand,

functionalism adopted in various statutes produced the fundamental similarity

amongthosedevices.Therefore, thestatutorydistinctionamongdifferent filing

systemsandtreatmentbecamecumbersomeandunnecessary.Itwasanintense

motivation to integrate the law in this area. Article 9 unitarily treats different

securitydevicesbutcarryingthesamefunctionintheoneandtheonlyregimeof

a sole concept of security interest. However, Article 9 fails to create a unique

filing system for the country. Subject to the constitution, the commercial law

remainsstatelaw;therefore,eachstatemaintainsaseparatefilingsystem.

3.2.2 Conditionalsale:Statutorysecuredtransactionunderfunctionalism

The conditional sale is defined as “a sale in which the buyer gains immediate

possession, but the seller retains title until the buyer performs a condition, esp.

paymentofthefullpurchaseprice”44.ItisarelativelypopulartermintheUnited

States, interchangeably used with the term “retention of title” and the like.

Despite the difference in terminology among jurisdictions, a conditional sale is

ultimatelyatransactionbasedonanarrangementthatthesellerretainsthetitle

to the goods supplied until and unless the buyer discharges the full purchase

price45.

Inthefirstplace,theconditionalsaleandthechattelmortgagewereindiscrete

anddistinctareas,contractlawandsecuredcredit lawrespectively46.American

common law did not use to treat a conditional sale as a security interest.

However,aconditionalsalehasoperatedbeyondaconventionalarrangementfor

paymentof contractprice, enablinga seller to reserve thegoods suppliedasa

means of payment when a buyer defaults. A conditional sale was considered

stronger than any popular security devices as a pledge or mortgage. To this

extent,thegoodswerefreeofthedebtor’sassetssubjecttoanychattelmortgage,

and the title-retaining seller could avoid the requirement of filing and the

44Black’sLawDictionary(9thedn,2009),atp.145445GilmoreG,seen.15,atp.6746Seemore discussion in Gilmore G, see n. 15, at pp. 66-8; Glenn G, ‘The Conditional Sale atCommonLawandasaStatutorySecurity’ (1939)25VirginiaLawReview559,atpp.569-570,578-585.

79

complicated procedure of foreclosure under the chattel mortgage law47. The

conditionalsaleorthetitleretentiontransactioncreatesanostensibleownership

situation to not only subsequent secured creditors but also earlier secured

creditors who may have a security interest in the debtor’s after-acquired

property. The earlier secured creditormay suppose the goods in the debtor’s

possession but secretly subject to title retention to be free or at least

encumbered by only subsequent claims. The apparent security function of a

conditionalsalehascausedagreatdealofconcerntothirdparties.Thiscontext

wasleadingtothejudicialandlegislativereactionthattheconditionalsale,once

usedtosecurepayment,shouldbetreatedasachattelmortgage48.Itissuggested

that the title-retaining sellerwho creates theostensibleownership problem to

bothearlierandsubsequentsecuredcreditorsshouldhavetheburdentocureit,

inotherwords,topublicizehisinterestandnotifytheearlierparties49.

TheUniformConditionalSalesActenactedin1922hadafunctionalapproachto

the extent that they defined the conditional sale as a secured transaction.

Therefore, the ostensible ownership created by these transactions could be

resolvedbytherequirementofregistration,butregistrationhadalimitedeffect

totheextentthatitwasneededtovalidatethesaleagainstbonafidepurchasers

and lien creditors who levied prior to the recordation 50 . A non-recorded

conditionalsaleremainedgoodagainstthecreditorsofthebuyer.

Article 9 replacing the Uniform Conditional Sales Act continues to treat a

conditional sale as a security interest. It converts a conditional sale or title

retentionfromacontractualarrangementtoasecuritydevicewithinthescopeof

this article. In the same section defining a security interest, it expressly states

that: “The retention or reservation of title by a seller of goods notwithstanding

shipment or delivery to the buyer […] is limited in effect to a reservation of a

"securityinterest."”51.Thistreatmentisre-emphasizedinArticle2onsales52.The

47GilmoreG,seen.15,atpp.67-848ibid,atp.68 49BairdDGandJacksonTH,seen.29,atp.18950GlennG,‘TheConditionalSaleatCommonLawandasaStatutorySecurity’(1939)25VirginiaLawReview559,atpp.579-58551UCC§1-201(35)

80

wordingof thesesections issomewhatunclearabouthowasecurity interest is

createdunderaconditionalsale.“Reservationofasecurityinterest”indicatesthat

itisseeminglynotamountingtoanoutrightsalewiththegrant-backofasecurity

interesttotheseller.Despitetheaboveconfusingwording,thetitleistransferred

tothebuyerunderthefurtherArticle2wording:“titlepassestothebuyeratthe

timeandplaceatwhichthesellercompleteshisperformancewithreferencetothe

physical delivery of the goods, despite any reservation of a security interest”53.

Therefore, it can be inferred that title retention is statutorily no longer a

contractualarrangementforthepassingoftitle.

Statutory reconceptualizationof title retentionor conditional saleasa secured

transaction is considered to extremely interfere with party autonomy on the

passing of title conditional upon payment of full purchase price54. It is also

inconsistentwiththecommonlawprinciplepreservingprivateproperty“against

alienation except by free consent”55. However, the development of conditional

sales in theAmericancommonlawand inpracticehasprobablycontributedto

andsupportedthe functionalapproach.Thepopularityofconditionalsaleswas

parallel with increasingly using after-acquired property secured transactions,

particularly in financing industrial equipment56. Whenever the buyer acquired

thegoodssuppliedby the seller, the concernedgoodswerepossibly caughtby

the after-acquired property arrangement between the buyer and the prior

securedpartytosecurethepre-existingdebt.Eventhoughthesellerwastheone

whoadvancedthefullvalueofthenewassettothebuyerunderasaleoncredit,

she was left with the position of an unsecured creditor for the price57. A

conditional sale or title retention, therefore, was designed to avoid the

undesirable position and to cope with the after-acquired property security

52UCC§2-401(1).“Anyretentionorreservationbythesellerofthetitle(property)ingoodsshippedordeliveredtothebuyerislimitedineffecttoareservationofasecurityinterest.”53UCC§2-401(2)54BridgeMG,‘Form,substanceandinnovationinpersonalpropertysecuritylaw’[1992]JournalofBusinessLaw,atp.59055ibid56 Wessman MB, ‘Purchase Money Inventory Financing: The Case for Limited Cross-Collateralization’(1990)51OhioStateLawJournal1283,atpp.1292-357GilmoreG, see n. 15, at p. 64-5; Lloyd RM, ‘Refinancing PurchaseMoney Security Interests’(1985)53TennesseeLawReview1,atpp.4-5

81

interest.TheAmericancommonlawquicklyrecognizedtheutilityofconditional

saleortitleretentionandadjustedtoadapttothenewsituation.

Article 9 successfully brings a conditional sale into the ambit of a security

interestirrespectiveoftheformthepartiesoptfortouncoveritpublicly.Itisthe

debtor’spossessionof thegoods, rather than the contractual allocationof title,

underaconditionalsalecausingtherisktoothercompetinginterestsinthesame

asset58. In this respect, it is a persuasive argument and a good justification to

treataconditionalsaleor titleretentionasasecurity interest.The justification

for the treatment of title retention as a security interestmay not theoretically

defeattheargumentbasedonpartyautonomyandformalism,whichregardsthe

buyerashavingonlypossessoryinterestandthesellerasremaininganabsolute

owner. Nevertheless, functionalism regarding conditional sale in the American

contextisapragmaticapproachinthesensethatitfocusesonthebenefitofall

relatedparties;thus,itoutweighsanytheoreticalconsiderations.

3.2.3 Purchase-moneysecurityinterest

APMSIistakingplaceatitleretentionarrangementtoprotecttheunpaidseller

frompaymentdefault.Theunpaidseller,fromnowoncalledasecuredcreditor,

has a purchase-money priority which prevails over both other earlier and

subsequent security interests.TobeaPMSI, a security interestmustbewithin

theUCC§9-103definitionthatreferstonotonlyasinglebutatrioofdefinitions,

namely PMSI, purchase-money collateral, and purchase-money obligation. A

PMSI is a security interest in goods “to theextent that thegoodsare purchase-

moneycollateralwithrespecttothatsecurityinterest”59.

Then purchase-money collateral is defined as “goodsorsoftwarethatsecuresa

purchase-moneyobligationincurredwithrespecttothatcollateral”60.

58ibid,atp.19759UCC§9-103(b)(1)60UCC§9-103(a)(1)

82

Inturn,apurchase-moneyobligationmeans“anobligationofanobligorincurred

asallorpartofthepriceofthecollateralorforvaluegivento enablethedebtortoacquirerightsinortheuseofthecollateralifthevalueisinfactsoused.”61

Inbrief,aPMSIoccurswhenthepurchase-moneycollateralsecuresapurchase-

moneyobligation. Inotherwords, thegoods,whichare thesubjectmatterof a

salecontractandnot thedebtor’spre-existingasset,arethecollateralsecuring

paymentoftheirpurchaseprice.

Thepurchase-moneystatusdependsonneitheranexpressindicationofaPMSI

noradescriptionofitsnaturesinasecurityagreementorafinancingstatement,

and it does not require a separate security agreement, or a separate financing

statementcreateduniquelyforthepurchase-moneycollateral62.

ThescopeofaPMSI isbroaderthantitleretention.Thedefinitionofpurchase-

moneyobligationcategorizesaPMSI intoasellerPMSIanda lenderPMSI.The

sellerPMSIisthemostequivalenttotheconceptoftitleretentionorconditional

salesincetheobligationofanobligor/buyeristhepaymentof“allorpartofthe

priceof thecollateral”, that is thepurchasepriceof thegoods supplied.On the

otherhand,tohavealenderPMSI,acreditorwhoisathirdpartygivesvaluetoa

debtor/buyer to acquire the collateral. It is relatively straightforward to prove

that the goods subject to the sale contract are the collateral securing the

respectivepurchaseprice in the contextof a sellerPMSI. It isnot the caseof a

PMSIlenderwhomustprovethepurposeoftheloan:theadvancewasmadeto

letthedebtoracquirethecollateral,andthisadvancewas“infactsoused”63.

Purchase-money collateral and purchase-money obligation are considered

essentialelementstodescribehowtoestablishaPMSI64,butthedeterminationof

a purchase-money obligation plays a crucial role65. Although the definition of

purchase-money obligation seemingly placesPMSIs into two categories, that is

“the price of collateral” referring to seller PMSI and “value given to enable”61UCC§9-103(a)(2)62InreSaxe,491B.R.244(Bankr.W.D.Wis.,2013),atp.24963GilmoreG,seen.15,atp.78164Comment3totheUCC§9-103,seeOfficialCommentsatpp.829-3065InrePrice,562F.3d618(4thCir.,2009),atp.624

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referringtolenderPMSI,theOfficialCommentdoesnottrytodistinguishthem.

Comment3totheUCC§9-103providesalistofexpensesthatcanbeincludedin

both categories, namely “obligations for expenses incurred in connection with

acquiringrightsinthecollateral,saletaxes,duties,financecharges,interest,freight

charges,costsofstorageintransit,demurrage,administrativecharges,expensesof

collectionandenforcement,attorney’sfees,andothersimilarobligations”66. Itcan

beinferredfromthislistthattheterm“price”cannotbeunderstoodincommon

sense67.Sincethislistisnotexhaustive,anyexpensethatsharessimilarfeatures

ofalllistedexpensescanbeadded.Itisnotlimitedtotransactioncostslikesale

taxes,dutiesandfinancechargesthatmayenhanceoraddvaluetothecollateral,

butalsoanyincurredinconnectionwiththeacquisitionofcollateral68.

Comment 3 stating “a close nexus between the acquisition of collateral and the

securedobligation”figuresoutacircumstancewhenasecurityinterestdoesnot

qualifyapurchase-moneystatus69.Whenthecollateralisobtainedonunsecured

credit, and subsequently, a security interest is created to secure the purchase

price,itisnotaPMSI70.Inthissense,thewordingwithregardtoalenderPMSI

provision, that is “valuegiventoenablethedebtortoacquirerights”mayleadto

the assumption on the sequence of the loan and the acquisition of collateral.

Accordingly, the loan comes first and then acquisition, or at least they

simultaneouslyoccur71.Courtshavedealtwithseveralcaseswheretheloanwas

advanced after the possession and even the acquisition of property. InNorth

Platte State Bank v. Production Credit Ass’n of North Platte72, the debtor/buyer

had physical possession of the goods before the execution of the security

agreementwiththelenderwhohonouredthechequedirectlytothesellerforthe

purchasepriceandthenclaimedaPMSIinthegoods.Thegivencourtheldthat

the debtor/buyerhad both possession and title in the goods before the lender

extendedcredit,therefore,eventhoughthemoneyadvancedtopaythepurchase66Comment3totheUCC§9-103,seeOfficialComments,atp.83067InrePrice,seen.65,atp.626,InreGraupner,356B.R.907(Bankr.M.D.Ga.,2006),atp.912,91968InrePrice,seen.65,atp.56269Comment3totheUCC§9-103,seeOfficialComments,atp.83070Comment3totheUCC§9-103,seeOfficialComments,atp.83071GilmoreG,seen.15,atp.78472200N.W.2d1,189Neb.44(Neb.,1972),atpp.46-8

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price,itdidnothelpthedebtortoacquireanyrightinthecollateralbecausehe

hadalreadyhad all73.Thedistinctionbetween themoneyadvancing toacquire

thecollateralfromthemoneypayingthepurchasepriceisvital,onlytheformer

of which qualifies to be a PMSI. It is not sufficient to have a purchase-money

status if the lender has awritten security agreement covering the collateral in

questionandadvancesmoneytopaythepurchaseprice74.InInreCunningham,

itclarifiesthataPMSIisnotqualifiedifthelenderadvancesmoneytofinancea

pre-existingobligation75.

In contrast, the Spartan Motors court76discussed whether the after-advanced

fundsmayqualifythepurchase-moneystatus,consideringmainlytheissuethat

possessionandtitleof thegoodshadpassedbeforethe loan isadvanced77.The

givencourtreliedonGilmore’scommentarythatinducedacourttofindwhether

“theloantransactionappear[ed]tobecloselyalliedtothepurchasetransaction”78.

Gilmoreemphasizedthat“rigidadherencetoparticularformalitiesandsequences

shouldnotbe required”79. It was held that a transactionwas sufficiently closely

allied where the negotiation for a sale and purchase is conditional upon the

availability of the loan and/or at the timeof the sale, the lender committed to

extending amount required to pay the purchase price80. The Spartan Motors

courtdoesnotnegatethefindingoftheNorthPlatteStateBankcourt;rather,it

clarifiesNorthPlatteStateBank case by stating that in the latter case, the loan

was not a factor for negotiating the sale and purchase, and the lender did not

commit to giving value enabling the debtor to pay the purchase price81. Under

SpartanMotorscourt’sview,possessionandtitleareelements,importantbutnot

dispositive, in the “closely allied” test82. The sequence of the loan and the

acquisitionofpropertyisnarrowandinflexibletodetermineaPMSI.TheSpartan

73ibid,atp.5274ibid75(Bankr.W.D.N.C.,2012),atpp.7-976GeneralElec.CapitalCommercialAuto.Fin.,Inc.v.SpartanMotors,Ltd.,675N.Y.S.2d626,246A.D.2d41(N.Y.A.D.2Dept.,1998)77ibid,atp.63178ibid.79GilmoreG,seen.15,atp.78280SpartanMotors,seen.76,atp.63281SpartanMotors,seen.76,atp.63382SpartanMotors,seen.76,atp.633

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Motorscourt’srulingispersuasivebecausethe“closelyallied”testdemonstrates

theinterrelationbetweentheadvanceandtheacquisitionofnewassetsbeyond

thesequenceofhappening.

The common lawhas shed lighton the relatedness between the PMSI and the

underlyingcontract.ThecorecharacteristicofaPMSIisthatthepartiesengage

in thegiven transactionbearing inmind that the securedcreditor finances the

transactionof acquiringnewassets, inotherwords, theup-comingassetother

thanpre-existingonesecuresthe loanadvancingtoacquire it. ItmakesaPMSI

different from ordinary security interests and distinguishes a purchase-money

transactionfromothersecuredtransactionsforgeneralbusinesspurposes.

3.3 Establishmentofpurchase-moneysecurityinterest

TherequisiteforclaimingpriorityisthataPMSImustbeenforceableagainstthe

debtorandthirdparties; inotherwords, itshouldbeattachedtothe collateral

andperfected.TheestablishmentofaPMSImustcomplywiththegeneralrules

ofasecurityinterestthatrequireattachmentandperfection.

3.3.1 Attachment

Attachmentplaysadispositiverole todeterminetheeffectivenessofasecurity

interest not only against a debtor but also subsequent purchasers and other

securedandnon-securedcreditors.Asecurity interest cannotbeperfected if it

doesnotattachtoanycollateral83.Unlessotherwiseprescribed, theattachment

occurswhen a security interest “[becomes] enforceable against the debtorwith

respecttothecollateral”84.Therearethreeprerequisitesfortheenforceabilityof

a security interest,namely (1) “valuehasbeengiven”, (2)debtor’srights in the

collateralorpowertotransferrightsinthecollateraltoasecuredparty,and(3)

“thedebtorhasauthenticatedasecurityagreementthatprovidesadescriptionof

thecollateral”85.Itdoesnotmatterwhichfeatureoccursfirst,butallofthemmust

existtomakeasecurityinteresteffective.

83UCC§9-308(a)84UCC§9-203(a)85UCC§9-203(b)

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Thefirstrequirementisthat“valuehasbeengiven”86.Thisrequirementisusually

undisputedbecausetheextensionofcreditisusuallyclear87.

Thesecondrequirement is that thedebtormusthave“rightsinthecollateralor

thepowertotransferrightsinthecollateraltoasecuredparty”88.Itmanifeststhe

idea of functionalism that is not strictly requires full ownership to create a

security interest. Under the principle ofnemodatquodnonhabet (no one can

transferwhatshedoesnothave)89,asecurityinterestonlyattachestotheextent

ofrightsthatadebtorhas90.Adebtorcannotgrantasecurityinterestmorethan

whatshehas91. In thissense, forexample, thesecurity interestonlyattachesto

25%undividedinterestinanitemofequipmentifthedebtoronlyco-ownsthis

itemtothisportion.

“Rights in the collateral” has been construed under the concept of other laws,

particularlyArticle2onthesaleofgoods,showingthatmerepossession isnot

qualified92.EvergreenMarineCorp. isagoodcasetoseehowthetitleallocation

playsavital role indefining “rights in thecollateral” asdiscussedelsewhere in

the thesis93. The debtor can acquire “rights in the collateral” by estoppel for a

security interest to attach. In FirstNational Bank of Omaha v. PleasantHollow

Farm,Inc94,AandBhadaproductionagreementwhereAownedthecropandB

plantedandgrewthecropbyitsequipmentandemployees.Abankadvanceda

loan toB secured by the crop upon the physical inspection of the land. At the

timeofinspection,theofficerofAdidnotmakeclearthatAownedthecrop.The

court ruled that A could not be estopped to deny that B has “rights in the

86UCC§9-203(b)(1)87 Harris S and Mooney C, Jr., Security Interests in Personal Property: Cases, Problems, andMaterials(6thedn,FoundationPress2016),atp.14588UCC§9-203(b)(2)89HarrisSandMooneyC,Jr.,seen.87,atp.14690Comment6totheUCC§9-203,seeOfficialComment,atp.84891HarrisSandMooneyC,Jr.,seen.87,atp.14692Seemorediscussiononcaselawinvolving“rightsinthecollateral”inClarkBandClarkB,TheLawofSecuredTransactionsundertheUniformCode,volI(A.S.PrattandSons2010),fromp.2-52top.2-6393Seesub-section3.2.1.1ofthisthesis94532NW2d60,30UCCRep.2d269(Mo.CtApp.1993)

87

collateral” to attach a security interest95. The debtor is also deemed to have

“rightsinthecollateral”ifitdoesnothaveaformaltitlebutthecontroloverthe

assetandbearingariskofloss96.“Rightsinthecollateral”maybeexaminedunder

theostensibleownershiptheorywherethedebtorcanmispresentthepotential

creditorsbythecontrolorpossessionofthecollateralasinthecaseKinetics97.

However,Article9isconsideredasanexceptionofthenemodatrule.Itallowsa

debtortocreateasecurityinterestthatattachestogreaterrightsthanthedebtor

hasinsomecases98.Toenforceasecurityinterest,otherthan“havingrightsinthe

collateral”,adebtoralternativelyisrequiredtohave“thepowertotransferrights

in the collateral”. This requirement reflects an exception to thenemodat rule.

According to the nemo dat rule, when a security interest is created on the

collateral, a debtor only has residual rights in this property to create a

subsequentsecurityinterest.Strictlyspeaking,thenemodatrulegrantsthefirst

priority to the first-in-time attached security interest in the same collateral.

However,thefirst-to-file-or-perfectruleandthepre-filingability,whicharenot

inlinewiththenemodatrule,giverisetoatypicalsituationthatapriorattached

is subordinate to a later-in-time attached security interest. The competition of

conflicting security interests in the same collateral is solved by the ranking

relyingontheorderof filingratherthantheorderofattachment99.Thetimeof

filing isdipositiveeventhoughat thatmomentthe first-to-filesecurity interest

has not yet attached to the collateral, and the latter-to file competing security

interest is perfected earlier 100 . The notice filing system enables filing of a

financing statement to be done prior to the attachment and perfection of a

95SeemorediscussiononthiscaseinClarkBandClarkB,TheLawofSecuredTransactionsundertheUniformCode,volI(A.S.PrattandSons2010),atp.2-59,2-6096ChambersburgTrustCo.v.Eichelberger,588A2d549,15UCCRep2d1080(Pa.Super.Ct.1991)97Seesub-section3.2.1.1ofthisthesis98 Comment 6 to the UCC §9-203, see Official Comment, at p. 848. See more discussion,particularlyexamplesofthissituationinHarrisSandMooneyC,Jr.,‘UsingFirstPrinciplesofUCCArticle 9 to Solve StatutoryPuzzles in Receivables Financing’ (2010) 46Gonzaga Law Review297,atpp.301-2,PlankT,‘Article9oftheUCC:ReconcilingFundamentalPropertyPrinciplesandPlainLanguage’(2013)68TheBusinessLawyer439,atpp.456-999SeeExample2inPlankT, ‘Article9oftheUCC:ReconcilingFundamentalPropertyPrinciplesandPlainLanguage’(2013)68TheBusinessLawyer439,atpp.456-7100SeeExample3inPlankT,‘Article9oftheUCC:ReconcilingFundamentalPropertyPrinciplesandPlainLanguage’(2013)68TheBusinessLawyer439,atpp.457-9

88

securityinterest.Thus,filingisamethodofperfection,butinsomecertaincases,

filing does not guarantee a perfected security interest because the security

interest has not yet attached to the collateral. Therefore, the priority rules of

Article9,irrespectiveofthedebtoronlyhasresidualrightsinthecollateral,place

thecreditorhavingsubsequently-attachedsecurityinterestbutfirst-to-fileinthe

first priority position. It is considered “the power to transfer rights in the

collateral”forenforceabilityandattachment.

Inbrief,thefirst-to-file-or-perfectruleasanexceptiontothenemodatprinciple

empowersthedebtortheability to transferrights in thecollateral toasecured

party. Consequently, having rights in the collateral is not the only capacity to

haveasecurityinterestattachingtothegivencollateral.Thepriorityrulescreate

the power to transfer rights in the collateral to meet the requirement of

enforceabilityandattachment101.

Mostofthecollateraltypescallfortheexistenceofasecurityagreement.Itisthe

thirdrequirementforattachment,butnottheonlyonepossibility.However,the

secured party’s possessionorother control over someparticular collateral are

alsothemethodstoattach102.Withrespecttoasecurityagreement,theUCC§9-

203(b)(3)(A)expresslyrequiresthedebtor’sauthenticationandadescriptionof

thecollateral.Asigned-writingsecurityagreementcontainingsuchadescription

is ideal,but it isnotalways the case. It is very commonbefore courts that the

plaintiff alleges on a financing statement giving details of collateral combining

withotherdocumentsotherthana“labelled” securityagreement,oneofwhich

may show the debtor’s signature or authentication. Generally, the definitionof

“agreement” and “security agreement” in the UCC does not strictly demand a

separate document for a security interest103. In InreNumericCorp.104, the First

Circuit Court holds that “[a] writing or writings, regardless of label, which

101HarrisSandMooneyC,Jr.,‘UsingFirstPrinciplesofUCCArticle9toSolveStatutoryPuzzlesinReceivablesFinancing’(2010)46GonzagaLawReview297,atp.302102UCC§9-203(b)(3)103Agreementisdefinedas“thebargainofthepartiesinfact,asfoundintheirlanguageorinferredfromothercircumstances,includingcourseofperformance,courseofdealing,orusageoftrade…”.UCC§1-201(a)(3).Securityagreementmeans“anagreementthatcreatesorprovidesforasecurityinterest”.UCC§9-102(a)(74).104485F.2d1328(1stCir.,1973)

89

adequately describes the collateral, carries the signature of the debtor, and

establishesthatinfactasecurityinterestwasagreedupon,wouldsatisfyboththe

formalrequirementsof thestatuteandthepoliciesbehind it”105. Today, the term

“authenticate” and “authenticated” are aiming at replacing “sign” and “signed”

respectively106.Therefore,evidenceofasecurityinterestagreementisbroadened

beyondtherequirementofthesignedwritingtoencompassauthenticationofall

records. The debtor’s authentication requirement is deemed to suit two

purposes: One is an evidentiary base to prevent disputes over the type of

collateralsubjecttothesecurityinterest,andthesecondistoserveasaStatute

ofFrauds107.

Thecontentofasecurityagreementmusthavethedescriptionofcollateral,the

purpose of which is evidentiary108 . The standard of description is that “it

reasonably identifies what is described”109. It does not require the exact and

detaileddescription110.TheUCCsuggestsseveralwaystosufficethedescription

test111, the most noticeable of which is identifying the collateral by a type of

collateral defined in the Code112. Generally, there are four primary types of

collateral,namelyconsumergoods,equipment, farmproducts,and inventory113.

However,inaconsumergoodstransaction,identifyingcollateralbythecategory

of consumer goods is not sufficiently described unless it has descriptive

components beyond the type 114 . Although generic terms like equipment,

105ibid,atp.1331.SeemoreinBaystateDrywall,Incv.ChicopeeSav.Bank,429N.E2d1138,385Mass.17,32U.C.CRep.Serv.1315(Mass.,1982),atp.1141,InreJojo’s10Rest.Llc,455B.R.321,74UCCRep.Serv.2d441(Bankr.Mass.,2011),atp.326106TheformerUCCrequiresapropersecurityagreementsignedbythedebtor.TherevisedUCC§9-102(a)(7) defines “authenticate” to encompass “sign” and “attachor logicallyassociatewiththe recordanelectronic sound, symbol,orprocess”.With regard to the requirement of securityagreementasaconditionforenforceability,theformerandtherevisedUCCaredifferentonlyintherequirementofsignatureandauthenticationrespectively(SeeInreRowe,369B.R.73(Bankr.Mass.,2007,note2,atp.80)107Comment 3 to theUCC §9-203(a)(3), seeOfficialComment,at pp. 847-8. See In reNumericCorp.seen.104,atp.1331108Comment2totheUCC§9-108(a),seeOfficialComment,atp.837109UCC§9-108(a)110Comment2totheUCC§9-108,seeOfficialComment,atp.837111UCC§9-108(b)112UCC§9-108(b)(3)113Comment4totheUCC§9-102,seeOfficialComment,atp.817114UCC§9-108(e)andComment5totheUCC§9-108,seeOfficialComment,atp.837

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inventoryor farmproductsaredeemed tobegooddescription forattachment,

super-genericdescriptionisnotsufficient.Collateraldescribedas“allthedebtor’s

asset”or“allthedebtor’spersonalproperty”orthelikewordingdoesnotmeetthe

requirement of description115 . The underlying policy of these provisions is

suggested that debtors and creditors are expected to have appropriate

considerationindraftingthecollateraldescriptionotherthanmakinguseofthe

boilerplateof“allassets”,andthelikelyresultisthatsomepropertyofthedebtor

wouldbeunencumbered116.

Afinancingstatement,meanwhile,expandsthesufficientindicationofcollateral

beyond the description under the section 9-108 to embrace “allassets” or “all

property” 117 . Attachment and filing clearly serve different purposes, and

description might suffice for the purpose of filing but not necessarily for the

purpose of attachment118. In some situations where there are gaps between a

securityagreementandafinancingstatementwithrespecttothedescriptionof

collateral, thedescription in the formerprevails sinceattachmenthasa roleof

attaching the security interest to the specific collateral.Meanwhile, a financing

statement serves as giving notice to third parties and determining of priority

betweencompetinginterestsinthesamecollateral.Itdoesnotmakethestatusof

collateral effective unless the security interest attaches to the concerned

collateral.InInreNightwayTransp.Co.,Inc119,afterconsideringthefunctionofa

securityagreementandafinancingstatement,thecourtconcludedthatitwasthe

securityagreementgoverningtheextentofthecreditor’ssecurityinterest.

Anywordinglike“allequipment”mayraisethequestionwhetheritencompasses

after-acquired items since after-acquired collateral and future advances are

allowedundertheUCC120.Whenthedescriptionofcollateraldoesnotexpressly

providefortheafter-acquiredproperty,itistheintentionofpartiesdetermining

115UCC§9-108(c)116HarrisSandMooneyC,Jr.,seen.87,atp.150117UCC§9-504118Comment2totheUCC§9-504,seeOfficialComment,atp.98111996B.R.854(Bankr.N.D.Ill.,1989),atp.857120UCC§9-204(a)(c)

91

the issue rather than statutory rules121. With regard to some collateral like

inventoryandreceivablesthatareconstantlyturningoverintheordinarycourse

ofcertainbusinesses,courtsmayholdthat thegiven inventoryandreceivables

include not only items at the date of the security agreement but also after-

acquiredones122.

Attachment is at the heart of the American law on secured transactions in

personal property. A security interest is not effective, in other words, a debt

remainsunsecured,untilandunlessitattachestothecollateralirrespectiveofa

financingstatementmaybepreviouslysubmitted.

3.3.2 Perfection:Filingafinancingstatement

Theterm“perfection”,“perfect”or“perfected”inArticle9referstoalegalstepto

establish priority over other interests in the collateral. A perfected security

interest is the one that has attached, and all statutory requirements are

fulfilled123.Differentmethodsofperfectionarerecognizedtosuitdifferenttypes

of collateral124. There may be more than one method available to a type of

collateral 125 , for instance, the goods can be perfected by either filing or

possession. Itisnoticeablethatfilingafinancingstatementisthemostpopular

method applying to almost all types of collateral, except deposit accounts and

letter-of-creditrightsandmoneytakenastheoriginalcollateral126.Perfectionby

filingconstitutesacentralpartofArticle9since“afinancingstatementmustbe

filed to perfect all security interest”127 subject to exceptions128 . Filing is not

necessary when a security interest can be perfected by other permissible

methods 129 including perfection upon attachment 130 , perfection upon the

121Comment3totheUCC§9-108,seeOfficialComment,atp.837122InreNightwayTransp.Co.,Inc,seen.119.atp.858-9123Comment2totheUCC§9-308(a),seeOfficialComment,atp.874-5124HarrisSandMooneyC,Jr.,seen.87,atp.160forclassificationofmethodsofperfectionwithregardtotypesofcollateral125HarrisSandMooneyC,Jr.,seen.87,atp.158126UCC§9-310(a)andUCC§9-312(b)127UCC§9-310(a)128UCC§9-310(b)129Comment2and3totheUCC§9-310,seeOfficialComment,atpp.878-9130UCC§9-310(b)(2)

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occurrenceofanotherevent131,perfectionunderotherlaw132orthelawofother

jurisdiction133,perfectionbytakingpossession,deliveryorcontrol134.

Filingafinancingstatement,whichisamethodofperfection,setsupthepriority

ofasecurityinterestagainstthirdparties.InGeneralMotorsAcceptanceCorp.v.

WashingtonTrustCo.ofWesterly,thecourtverifiedthatfilingadditionallycarried

the function of guaranteeing that third parties will have notice of existing

security interests in collateral135, or to be exact, the possibility of a perfected

securityinterest.Article9doesnotstrictlyrequireanylegalstepofestablishing

asecurityinteresttobedonechronologically.Asecurityinterestcanattachafter

thefinancingstatementisfiled.Forinstance,eventhoughafinancingstatement

is filedwith regard to the after-acquired collateral, a security interest attaches

andisperfectedonlywhenthedebtoracquiresrightsintheconcernedcollateral.

TheAmericanfilingsystemisoneofnoticefiling.Afinancingstatementwiththe

limitedamountofinformation,insteadofasecurityagreement,isfiledinorder

to notify prospective creditors about a security interest possibly attaching to

particularassetsofthedebtor.Sufficientinformationforafinancingstatementis:

(1)thenameofthedebtor,(2)thenameofthesecuredpartyorarepresentative

ofthesecuredpartyand(3)thecollateral136.Thesecuredparty’snamedoesnot

play any role in the searching system, and any change in the secured party’s

namedoesnotcauseseriouslymisleading.Meanwhile,thedebtor’snameplaysa

crucial role because the index for filing and searching is built upon it137. The

significanceofthedebtor’snameinfilingandsearchingleadstomanyrevisions

of relevant provisions of Article 9. The success of the notice filing name-based

system depends substantially on how convenient and correct that the filing

record or the search logic can reveal a financing statement containing the

prospectivedebtor’sname.

131UCC§9-310(b)(1),(5),(9)132UCC§9-310(b)(3)133UCC§9-310(b)(10)134UCC§9-310(b)(4),(5),(6),(7),(8)135386A.2d1096,120R.I.197(R.I.,1978),atp.1099136UCC§9-502(a)137Comment2totheUCC§9-503(a),seeOfficialComment,atp.978

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Thereare two “safeharbours” to indicate the collateral coveredbya financing

statement. The description can pursue the requirement of Section 9-108.

Accordingly, a sufficient description should reasonably identify what is

described138. Specific listing and describing by categories are among the list of

examples of reasonable identification139. A financing statement otherwise can

indicatethatitcoversallassetsorallpersonalproperty140.Thelatterindicationis

likely to be inconsistent with sub-section 9-108(c) that denies super-generic

description.However, the requirementof identificationof collateral in security

agreement as a requisite for attachment and identification of collateral in a

financing statement have different roles. Identification of collateral as “all the

debtor’s assets” or “all the debtor’s personal property” is not sufficient for the

purposeofasecurityagreement,butstillgoodforthepurposeoffiling141.

A financing statement does not require the identity of the filer since the given

identity is not included in the search system142, but the filer must obtain an

authenticated authorization from the debtor 143 , including the ipso facto

authorization. An authenticated security agreement suffices the ipso factor

authorization;thus,thefilerdoesnotneedaseparateauthorization144.

Filing of a financing statement is not effective to perfect a security interest

subjecttootherstateorfederalfilingsystem145orstatecertificate-of-titlelaw146.

Statecertification-of-titlelawsrequireconsensualsecurityintereststobenoted

on the certificate of title. Automobiles, the popular collateral is covered by

certificate-of-title laws. In Pet Food Experts, Inc. v. AlphaNutrition, Inc.147,both

competingsecuredcreditorsfailedtobelistedasalienholderontheTitleofthe

138UCC§9-504(1)andUCC§9-108(a)139UCC§9-108(b)140UCC§9-504(2)141Seediscussioninsub-section3.3.1onattachmentofthisthesis142Comment2totheUCC§9-509,seeOfficialComment,atp.989143UCC§9-509(a)(1)144UCC§9-509(b)andComment4totheUCC§9-509,seeOfficialComment,atp.989145UCC §9-311(a)(1). See Comment 2 to the UCC §9-311, see Official Comment, at p. 881.Documented ship, civil aircraft, railroad rolling stock, patents, copyrights and trademarks areamongthelist.SeeClarkBandClarkB,TheLawofSecuredTransactionsundertheUniformCode,volI(A.S.PrattandSons2010),at2-97and2-98.146UCC§9-311(a)(2)147(R.I.Super,2016)

94

vehicle, even though one of them did file an appropriate financing statement

validly indicatingthecollateralasallofdebtor’s“presentlyownedandhereafter

acquiredequipment”148.Theforegoingsecurityinterestswereheldunperfected149.

The interplay between certificate-of-title law and Article 9 is discussed in

Sovereign Bank v. Hepner (In re Roser)150. The certificate-of-title law replaces

Article 9 to the extent of procedural matters that includes filing, recording,

releasing, renewing, or extending liens151. In turn, Article 9 governs priority

betweenasecurityinterestfiledunderthecertificate-of-titlelawandtherights

ofaliencreditorarisingfromArticle9inlightofperfectiondaterecordedinthe

CertificateofTitle152.

The notice filing systemdoes not providemuch information. The filing record

doesnotrevealotherintereststhatmayattachtothecollateralincludingtaxand

otherstatutoryliens153.Thewholepurposeofnoticefilingsystemistogivepublic

noticethatthecollateralindicatedispossiblysubjecttotheclaimofthesecured

partyofrecord154,but it isapossibilityratherthanaconfirmationofasecurity

interest.Anyonehavingan interest ischargedwiththeburdentomakefurther

inquiryto“disclosethecompletestateofaffairs”155.UndertheInreOakRockFin.

LLCruling156,diligentinterestedpartieswoulddiscoverthestatusofcollateralby

searchingthepublicrecordandtakeappropriateaction,otherwisesufferedthe

consequences157.

Thenoticefilingsystemsupportsthefirst-to-filecreditortogainthecompetitive

advantageoverthelater-to-filecreditor.Therequisiteinformationinafinancing

148ibid,atp.13149ibid150613F.3d1240(10thCir.,2010)151ibid,atp.1245152ibid153HarrisSandMooneyC,Jr.,seen.87,atp.167154Comment 2 to theUCC §9-502, seeOfficialComment,at p. 973;Courts have reaffirmed theforegoing purpose; see In re Comprehensive Review Technology, Inc., 138 B.R. 195 (Bankr.S.D.Ohio,1992),atp.200reviewinganumberofcasesstatingthepurposeofnoticefilingsystem;seeInreOakRockFin.,LLC,527B.R.105(Bankr.E.D.N.Y.,2015),atp.115155Comment2totheUCC§9-502andComment4totheUCC§9-322,seeOfficialComment,atp.973and910respectively156527B.R.105(Bankr.E.D.N.Y.,2015)157ibid

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statementdoesnot include theamountof securedobligations.The later-to-file

creditorcannotknowthevalueoftheprevailingclaiminadvanceexceptthatthe

first-tofilecreditorwillhavethefirstpriorityagainstthecollateralofrecordto

secureevenanobligation incurredlater thanher interests.Therefore, the first-

to-filecreditorcancompetitivelybidonsubsequent loansagainst thecollateral

of record that is currently in the debtor’s asset and not qualified to grant a

prevailingPMSItothelater-to-filecreditor158.

Limitedinformationsuppliedforfilingissaidtohavesomebenefit.Itreducesthe

cost of filing, searching and filing administration159. It supports the grant of a

security interest on inventory and receivables 160 .The asset of this kind is

frequentlyturningoverintheordinarycourseofthedebtor’sbusiness.Inventory

or account financing is also done periodically or involved series of loans. An

inventory or account financier files an initial financing statement and renews

every five years to cover such categories of collateral rather than refiling

wheneveranadvanceismade.Thefilingnoticesystem,therefore,matcheswell

with the first-to-file-or-perfect rule. A debtor in this contextwho has repeated

transactionswiththesamesecuredcreditordoesnotincurmoretransactioncost

tofinanceeverypurchaseofinventory161.

However, the filingnoticesystemdoesnotsupportadebtorwhowould liketo

grant many security interests in the equipment collateral to different secured

creditors.The later-to-filecreditor isnotwillingtoextendsecuredcreditwhen

her interest is lower-ranking,andtheprevailingclaimcannotbedetermined in

advance. In this sense, a transaction-based registration system is relatively

attractive.Thissystemprovidessufficientinformationthelater-to-filecreditorto

decide,andeachregistrationiscorrespondingtothediscreteamountofsecured

obligation in the absence of a future advance clause. Therefore, it is relatively

open to a debtorwhowould like to take out loans against the same collateral

fromdifferentcreditors.

158JacksonTHandKronmanAT,seen.8,atp.1180159BairdDG, ‘NoticeFilingandtheProblemofOstensibleOwnership’(1983)12TheJournalofLegalStudies53,atp.59160ibid,atp.59;JacksonTHandKronmanAT,seen.8,atp.1180161JacksonTHandKronmanAT,seen.8,atp.1180

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3.4 Purchase-moneysecurityinterestpriority

3.4.1 Overview

One of themost striking achievements of Article 9 is the first-to-file-or-perfect

rule.Priorityrankingno longerdependsontheorderthatsecuredtransactions

are created. The order of filing or perfection has become the primary rule

resolvingconflictingsecuredclaimsonthecollateral.Nevertheless,avalidPMSI

hasitspriorityoutofthefirst-to-file-or-perfectrule.Asanexceptiontothefirst-

to-file-or-perfect rule, the PMSI priority is non-temporal162allowing the first

rankingoverearlierfiledsecurityinterestsinthesamecollateral.

The first priority of a PMSI would not be questionable if the after-acquired

property interest holder were required to accomplish some new act of

perfection; in other words, the after-acquired property interest was not

perfected automatically upon the debtor’s acquisition of property, therefore

couldnotberankedaccordingtotheearliertimeoffiling.Inthissense,thePMSI

holderhadtheadvantageto fileher interestbeforetheafter-acquiredproperty

interest holder acknowledged that the debtor acquired new property or took

appropriateactiontoprotectherinterest.However,theArticle9’srecognitionof

after-acquiredpropertysecurityinteresttobeautomaticallyperfectedwhenever

thedebtoracquirestheconcernedcollateralraisesthequestionwhetheraPMSI

deservesthefirstpriorityirrespectiveofthetimeoffilingorperfection163.

The first priority of PMSI can be justified under the “situational monopoly”

theory. The after-acquired property clause creates a “situational monopoly”

enabling a first-to-file secured lender to have a special competitive advantage

overotherlendersindealingallsubsequentloanstoadebtor164.Therecognition

of PMSI can blunt the situational monopoly created by the after-acquired

property clause to the extent that a debtor can obtain new loans on nearly

competitive termswhether from an after-acquired property interest holder or

162Comment2totheUCC§9-324,seeOfficialComment,atp.919163SeeGilmoreG,seen.15,atpp.743-8,777;JacksonTHandKronmanAT,seen.8,atp.1165164Jackson TH and Kronman AT, see n. 8, at pp. 1167-1172 for more discussion on how thesituationalmonopolyiscreated

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othercreditors165.The firstpriorityofPMSI isrelativelypersuasivebecausethe

debtor has more opportunities to access to credit than under the “situational

monopoly”situation.

The “new money” theory can additionally shed light on the first priority of a

PMSI166. The purchase-money financing is extended to acquire discrete assets

that are not previously owned by the debtor, and the purchase-money loan is

securedbythenewassets.Article9strictlydefinesaPMSItocoverthistypeof

transactiononlyinordertodistinguishapurchase-moneyloanfromanyfunding

forgeneralbusinesspurposes167.Thenewassetsacquiredunder thepurchase-

moneyloancancontributevaluetothedebtor’swholeassets,thenbenefitother

creditors to some extent. Furthermore, the PMSI does not touch or shrink the

debtor’s pool of assets subject to earlier-perfected security interests. The

purchase-moneyloan,therefore,doesnotthreatenearlier-securedloan,anditis

not the matter of concern to earlier creditors except that an earlier creditor

wouldliketoextendcreditagainsttheup-comingassets168.

CompetitorswithaPMSIholdercanbeclassifiedintothreetypesforthepurpose

of this present thesis: (1) unsecured creditors including lien creditors and the

debtor’s trustee in insolvency, (2) sub-purchasers, (3) secured creditors169. A

PMSImustcomplywiththegeneralrulesofprioritysinceitisatfirstasecurity

interest.Article9providessomespecificpriorityrulesforaPMSItomakeitan

exceptiontogeneralsecurityinterests.

165JacksonTHandKronmanAT,seen.8,atp.1172166JacksonTHandKronmanAT,seen.8,atpp.1175-8formorediscussiononthenewmoneytheoryandthetracingrequirementwithregardtoaPMSI167UCC §9-103; Jackson TH and Kronman AT, see n. 8, at p. 1175; Keith GM, ‘A Primer onPurchaseMoney Security Interests Under Revised Article 9 of the Uniform Commercial Code’(2001)50UniversityofKansasLawReview143,atp.166;SeemorediscussionontheconceptofPMSIinsub-section3.2.3ofthisthesis168KeithGM,‘APrimeronPurchaseMoneySecurityInterestsUnderRevisedArticle9oftheUniformCommercialCode’(2001)50UniversityofKansasLawReview143,atp.166;JacksonTHandKronmanAT,seen.8,atp.1177169This classification is based onand adapted to theclassification of competitorswith generalsecured creditors by Clark B and Clark B,The LawofSecuredTransactions under theUniformCode,volI(A.S.PrattandSons2010),at3-1

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3.4.2 Purchase-moneysecuredcreditorvs.unsecuredcreditors

Fundamentally,adebtorisboundbyasecurityagreementeventhoughitisnot

perfected.Article9distinguishestheattachmentandtheperfectionofasecurity

interest to theextent that the formerdealswith theeffectivenessof a security

interest and the latter determines the priority ranking. A perfected security

interestdoesnot strengthen the securedcreditor’spositionagainst thedebtor;

ontheotherhand,failuretoperfectdoesnotchangetheparties’relationship170.

Whenasecurityinterestfulfillstherequirementofattachment,itisenforceable

against not only the debtor but also third parties including purchasers and

creditors171.ThisgeneralruleissubjecttomanyexceptionsstipulatedinArticle

9.Forexamples,anunperfectedsecurityinterestissubordinatetotheinterestof

lien creditors and certain buyers 172 , or an unperfected security interest is

subordinate to a perfected security interest173. A general unsecured creditor

cannotdefeatthepriorityofasecuredcreditoroverthecollateralontheground

thatthesecurityinterestsisnotperfected174.Thereisnoexceptionwithregardto

generalunsecuredcreditorsunlesstheyclaimthecollateralinthestatusoflien

creditorsorthroughatrusteeinthedebtor’sinsolvency.

Lien creditors are protected against an unperfected security interest. A lien

creditor is defined as (1) “a creditor that has acquired a lien on the property

involvedbyattachment,levy,orthe like”; (2) “anassigneeforbenefitofcreditors

fromthetimeofanassignment”;(3)“atrusteeinbankruptcyfromthedateofthe

filingofthepetition”;or(4)“areceiverinequityfromthetimeofappointment”175.

When the rights of a lien creditor intervene between the attachment and the

perfectionof a security interest, orat the time the security interest is filedbut

unattached,thesecuredcreditor’sprioritypositionisdefeatedbytheintervening

170InreBrooker,36B.R.839(Bankr.M.D.Fla.,1984),atpp.840-1171UCC§9-201(a),§9-203(b)172UCC§9-317173UCC§9-322(a)(2)174ClarkBandClarkB,TheLawofSecuredTransactionsundertheUniformCode,volI(A.S.PrattandSons2010),at3-3175UCC§9-102(a)(52)

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claim176.Unlikeothersecurityinterests,aPMSIenjoysagraceperiodof20days

startingfromthedayadebtorreceivesdeliveryofthecollateraltobeperfected.

AnunperfectedPMSI isgoodagainst therightsof liencreditorsat thetimethe

latterarisesifthegivenfinancingstatementisfiledwithintheabovementioned

graceperiod177.

Under thebankruptcy law, at the time thepetitionof thebankruptcy is filed, a

bankruptcy trustee178is given the rights and powers of a hypothetical person

who has an unsatisfactory judicial lien on the debtor’s property under the

relevantnon-bankruptcy law179.This is calleda strong-armclause.Thus,under

Article 9, a trustee can avoid any unperfected security interest on the date of

petition. The debtor-in-possession who is a business debtor filing Chapter 11

petitionandcontinuingtooperateitsbusiness180alsohastherightsandpowers

of a lien creditor under Article 9 to avoid certain unperfected security

interests181.Thepolicyforthetrustee’savoidingpowerisclear.Itissaidtobea

mirror reflecting the situation of unperfected security interests at the time a

judicial lien intervenes innon-bankruptcycases182. It isseeminglyasanctionto

lenderswhodelaygivingpublicnoticeoftheirsecurityinterests183.Thepurpose

ofperfectionisnotonlyforsettinguppriorityagainstothersecurityinterestsin

thesamecollateral,butitalsoaimsatavoidingthetrustee’s“strongarm”power.

3.4.3 Purchase-moneysecuredcreditorsvs.purchasers

A “purchaser” is defined broadly as a person “taking by sale, lease, discount,

negotiation,mortgage, pledge, lien, security interest, issue or reissue, gift, or any

other voluntary transaction creatingan interest inproperty”184.When a security

176UCC§9-317(a)(2)(A)177UCC§9-317(a)178ThetrusteeisappointedinbankruptcycasefiledunderChapter7oftheBankruptcyCode“forthepurposeofliquidatingthepropertyoftheestateanddistributingtheproceedstocreditors”.SeeHarrisSandMooneyC,Jr.,seen.87,atp.45717911U.S.C§544(a)180 ThebankruptcycaseisfiledunderChapter11oftheBankruptcyCodeforthepurposeofreorganization.Generally,atrusteeisnotappointed.SeeHarrisSandMooneyC,Jr.,seen.87,atp.45718111U.S.C§1107and§544(a)182UCC§9-317(a)(2).SeeHarrisSandMooneyC,Jr.,seen.87,atp.466183 HarrisSandMooneyC,Jr.,seen.87,atp.467; ClarkBandClarkB,seen.174,atp.6-12184UCC§1-201(29)and(30)

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interestattachesto thecollateral, it isenforceableagainst thirdparties,namely

other secured creditors, general creditors and purchasers. In the competition

with general purchasers, a secured party has a shelter of section 9-315(a)

providingforcontinuanceofasecurityinterestinthecollateralnotwithstanding

sale,lease,license,exchangeorotherdispositionthereof;andtheattachmentof

identifiable proceeds. In other words, when the collateral is disposed of, the

secured party can both follow the collateral in the hand of a third-party

transfereeandclaimfortheproceeds,butshemayhaveonlyonesatisfaction185.

The UCC, and particularly Article 9, also aim at promoting the free flow of

commerce186.Thecontinuanceofsecurityinterestinthecollateralisamatterof

concerntobonafidepartieswhoacquirethecollateralintheordinarycourseof

business.Bonefidepurchasersinmanycasestakefreeofsecurityinterestunder

the shelter of other provisions in Article 9, leaving the secured party only the

securityinterestattachingtotheproceeds.Inbrief,thegeneralruletoenforcea

security interest against purchasers upon attachment can be defeated in three

circumstances:

- Abuyerisabuyerofgoodsinordinarycourseofbusiness;

- A secured creditor authorizes the dispositionof the collateral free from

thesecurityinterest;

- Abuyerreceivesdeliverybeforethesecurityinterestisperfected.

3.4.3.1 Buyersofgoodsinordinarycourseofbusiness

Under section 9-320(a), a buyer of goods in ordinary course of business, not

including persons buying farm products187, takes free despite the fact that the

security interest isperfected,andthebuyerknows itsexistence. It iscrucial to

determinewhosatisfies thestatusof abuyer inordinary courseofbusiness.A

buyerinordinarycourseofbusinessisdefinedinArticle1as“apersonthatbuys

185Comment2totheUCC§9-315,seeOfficialComment,atpp.892-3186ClarkBandClarkB,seen.174,atp.3-2187Abuyerof farmproductsfromapersonengagesinfarmingoperationscannottakefreeofasecurityinterestcreatedfromthelattereventhoughtheformerisabuyerinordinarycourseofbusinessbutcanassertSection1324oftheFoodSecurityActof1985,7U.S.C§1631.SeeUCC§9-320(a)andComment4tothissectioninOfficialComment,atp.907.

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goodsingoodfaith,withoutknowledgethatthesaleviolatestherightsofanother

personinthegoods,andintheordinarycoursefromaperson,[…],inthebusiness

ofsellinggoodsofthatkind188”.Itexcludedanybuyerwho“acquiresthegoodsina

transfer in bulk or as security for or in total or partial satisfaction of a money

debt”189. In otherwords, it is not necessary to check the public recordwhen a

buyer buys in the ordinary course of business from a seller in the business of

selling goods of that kind, in good faith and without knowledge that the sale

violatesathird-party’ssecurityinterest,anddoesnottakeinbulk,orassecurity

for,ortosatisfyantecedentdebt.

Itemphasizesthat thebuyermustbuy fromtheseller“inthebusinessofselling

goodsofthatkind”,thatisalmostlimitedtothesellerofinventory190.Section9-

320(a) dealing with buyers of goods in ordinary course of business primarily

appliestoinventorycollateral191.However,itindicatesthatthesectionprimarily,

otherthansolely,appliestotheinventorycollateral192.Furthermore,thesecond

sentence of the statutory definition clarifies that the sale to the buyer must

comportwith“theusualorcustomarypracticesinthekindofbusinessinwhichthe

seller engages orwith the seller’s own usual or customary practices”193. A buyer

whobuysaworn-outcarfromthesellerwhoisinthebusinessofrentingcarsis

notlikelytohaveashelterofabuyerinordinarycourseofbusinessbecausethe

seller is not engaged in selling cars, used or new. However, it is the ordinary

course of business if selling worn-out cars are the seller’s usual practice

constitutingacourseofdealings,orthispracticeisprovedtobequitepopularin

theindustryofthatkind,eventhoughitisnottheseller’sprimarybusiness.The

Tanbro court concluded that despite a secondary business, the salewithin the

industrynormcouldbeintheordinarycourseofbusiness194.

188UCC§1-201(9)189ibid190ClarkBandClarkB,seen.174,atp.3-24191Comment3totheUCC§9-320,seeOfficialComment,atp.906192Comment3totheUCC§9-320,seeOfficialComment,atp.906193UCC§1-201(9)194TanborFabricsCorp.v.DeeringMilliken,Inc,350NE2d590,19UCCRep.(NY1976),citedinClarkBandClarkB,seen.174,atp.3-24

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Reading together the foregoing statutory definition and the provision under

section9-320(a)withregardtothebuyer’sknowledgeofthesecurityinterest,it

shouldbeinterpretedtobeamereknowledgeofasecurityinterestencumbering

the goods tomeet the requirement of a buyer of goods in ordinary course of

business195.Thus,knowledgeofasaleviolatingthetermsofsecurityagreementis

notqualified.

Itisrequiredthatasalemusthavetakenplace196.ItreferstoArticle2definition

of a sale as “thepassingof title fromtheseller to thebuyer forprice”197, and the

title to thegoods isnotpassedprior to“theiridentificationtothecontract”198. It

depends on the seller’s commitmentwith regard to delivery to determine the

passingoftitleortheparties’agreement199.Paymentoffullpurchasepriceisnot

acriteriontodeterminethepassingoftitle.Anyarrangementamountingtotitle

retention or reservation has an effect of reserving a security interest 200 .

Therefore, when the debtor/dealer transfers the collateral to a buyer in the

ordinarycourseofbusinesssubjecttotitleretention,thefactthatthelatterhas

notyetpaid thepurchaseprice in fulldoesnot cutoffher claimasabuyer in

ordinarycourseofbusinessagainstthedealer’ssecuredparty.

A buyer in the ordinary course of business cannot have a shelter of section9-

320(a) if the security interest is not created by her immediate seller. It is a

scenarioof theso-calledpurchaseof“pre-encumbered”goodswherethegoods

aresubjecttoasecurityinterestthattheimmediatesellerdoesnotcreate201. A

buyer, even though qualifying as a buyer in ordinary course of business

purchasingfromthesellerofthiskind,cannottakesfreeofthesecurityinterest.

Inpractice,abuyerintheordinarycourseofbusinessbuyingfromthesellerin

thebusinessof thatkind isnotmotivated to conducta searchofpublicrecord

whichistime-consumingandcostly.Investigatingintheseller’ssourceoftitleas195Comment3totheUCC§9-320,seeOfficialComment,atp.906196ClarkBandClarkB,seen.174,atp.3-30197UCC§2-106(1)198UCC§2-401(1)199UCC§2-401200UCC§2-401(1)201 SeediscussionindetailinRichardHN,‘Section9-320(a)ofRevisedArticle9andtheBuyerinOrdinaryCourseofPre-EncumberedGoods:SomethingOldandSomethingNew’(2000)38BrandeisLawJournal9

103

recommended by the Official Comment to avoid the title conflict 202 is not

desirable in this context.There isno clearexplanation in theOfficialComment

whyabuyerinordinarycourseofbusinessfromthesellerwhocreatedasecurity

interest have more favoured protection than a buyer in ordinary course of

business of pre-encumbered goods. Both of them buy from the seller in the

businessofthatkindandhavenoalerttocheckthestatusofthegoods.

3.4.3.2 Authoritytomakedisposition

Section9-320(a)onlyapplieswhenthedispositionofthecollateraltoabuyerin

ordinary course of business is unauthorized 203 . It refers to section 9-315

providing that the secured party can follow the collateral in the hand of third

parties unless she authorizes the disposition free and clear of the security

interestathand204.Variousmannersofauthorizeddispositionsbroughttoagreat

numberoflitigationsundertheformerArticle9thatwasreadasfollows:“unless

thedispositionwasauthorizedby the securedparty in the securityagreementor

otherwise”205.ItwasclarifiedinthePEBCommentarythatthesecuredpartymust

authorizethedispositionofthecollateralfreeandclearofthesecurityinterest,

andwhether it isaneffective,expressorimplied,authorization isaquestionof

fact206. The revised Article 9 adopts the standpoint of the PEB stressing and

adding the wording that the disposition must be authorized free and clear to

enable a third party to take free. Furthermore, whether a conditional

authorization, for instance, the consent to a disposition conditioned upon the

secured party’s receipt of the proceeds, constitutes an effective authorization

underSection9-315(a)(1)isatthecourt’sdiscretion207.

Under the revised Article 9, the secured party’s entitlement to the proceeds,

under Section 9-315(a)(2) or under expressed terms of an agreement, is not

202Comment3totheUCC§9-507,seeOfficialComment,atp.985203Comment6totheUCC§9-320,seeOfficialComment,atp.907204UCC§9-315205 FormerUCC§9-306(2).SeemorediscussiononcaselawinvolvingtheformerUCC9-306(2)withregardtoexpressandunconditional;conditional;andimpliedauthorizationinThomasS,‘TheroleofAuthorizationinTitleConflictsInvolvingRetentionofTitleClauses:SomeAmericanLessons’(2014)CommonLawWorldReview29,atpp.47-59206PEBCommentaryNo.3Section9-306(2)and9-402(7)207Comment2totheUCC§9-315,seeOfficialComment,atp.893

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itself amounting toaneffectiveauthorizationofdisposition208. In the contextof

title retention contractually expanding to the proceeds, Article 9 treats it as a

PMSI in the collateral and in the proceeds created by an agreement. In the

absenceofanexplicittermauthorizingthedispositionofthecollateralfreeand

clearofthesecurityinterest,eveninthecaseofinventorycollateral,itisnotan

easy task for any purchaser to prove an effective authorization of disposition.

TheattachmentofaPMSIoranygeneralsecurityinteresttotheproceeds,under

section 9-315(2) or an agreement, does not manifest the secured party’s

intentiontoauthorizethedispositionfreeandclearofthesecurityinterest.Itis

instead a solution to copewith the problemof ostensible ownership. Taking a

security interest inpersonalproperty, though itmay seemstrange, is to follow

theproceeds209.Tothisextent,thestatusofcollateralasequipmentorinventory

isnottakenintoconsideration.Whenthecollateralisinventory,asecuredparty

assuminglyexpects thedispositionof thecollateral togeneratetheproceedsto

dischargedebts.However,theexistenceofproceedsclauseitselfisprobablynot

more than the authorizationof disposition subject to a security interest, and a

purchaser must prove more to constitute an authorization to dispose of the

collateralfreeandclear.Afterall,theauthoritytosellprovisiondoesnothavea

great impact on a buyer in ordinary course of business who has a stronger

shelter of Article 9-320(a) to take free of a security interest created by an

immediateseller.Inotherwords,checkingthepublicrecordorinquiringintothe

authorization tosell isnotaburden imposedonabuyer inordinary courseof

business210eventhoughtheybeartheriskofbuyingfromasellerwhodoesnot

createaconflictingsecurityinterest.

3.4.3.3 Buyersreceivedelivery

Eventhoughabuyerisnotqualifiedasabuyerinordinarycourseofbusinessor

proofofeffectiveauthorizationcannotbeestablished,abuyercantakefreeand

clearofasecurityinterestundersection9-317(b).Accordingly,buyersmustgive

value and receive delivery of the collateral without knowledge of the security208ibid209 WessmanMB,seen.56,atp.1286;ScottRE,‘ARelationalTheoryofSecuredFinancing’(1986)86ColumbiaLawReview90,atp.925210RichardHN,seen.201,atp.37

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interest and before it is perfected211. A purchase-money secured party has a

graceperiodof20daysafter thedebtor receivesdeliveryof collateral to file a

financing statement212. Therefore, if a purchase-money secured party files a

financing statement timelybutaftera buyer receivesdeliveryof the collateral,

theformerhaspriorityoverthelatter,butsubjecttowhetherthelatterisabuyer

inordinarycourseofbusinessornot.

3.4.4 Purchase-moneysecuredcreditorsvs.othersecuredcreditors

Betweencompetingsecuredcreditors,Article9adopts“thefirst-in-time,first-in-

right”principlesingeneral,anditreliesheavilyonthefirst-to-file-or-perfection

rule. A PMSI is an exception since itmay gain the priority superior to earlier

secured credits. This part discusses the general priority rules governing

conflictingsecurityinterestsfirstandthenproceedsonpriorityrulesgoverning

PMSIs.

3.4.4.1 “First-in-time,first-in-right”rule

The first-to-file-or-perfect rule applies to the competition between perfected

security interests.Whenever twoconflicting security interestsareunperfected,

the order of attachment governs the priority between them213. In Pet Food

Experts214, the court found thatnotonly twocompeting security interestswere

notperfected,theyalsoattachedtothecollateralsimultaneously.BecauseArticle

9 fails togovernthecase, thegivencourtreliedonequity togive judgment for

thecreditorhavingafter-acquiredpropertyclause.ThePetFoodExperts’rulingis

thatthepriorityshouldbegiventothepartythatcarriedthemostdiligence.Itis

inlinewiththeArticle9first-to-file-or-perfectrulethatfavoursthediligentparty

who conducted a searchof other possible creditors and duly filed the security

interest215.

211UCC§9-317(b)212UCC§9-317(e)213UCC§9-322(a)(3)214PetFoodExperts,Inc.v.AlphaNutrition,Inc.(R.I.Super,2016)215ibid,atp.18andfootnote13

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Withrespecttoconflictingperfectedsecurityinterestsinthesamecollateral,the

first-to-file-or-perfectionruleisappliedandinterpretedtoservethepurposeof

thenoticefilingsystem.Section9-322providesthatamongperfectedconflicting

security interests, the first-to-file one takes priority. The above priority rules

looksimpleatfirstglance,butitraisescriticalquestionswhenitisimplemented

withintheschemeofanoticefilingsystem.Inasimplescenariowithtwoloans

fromtwocreditors, the first-to-file loantakespriority. It isnotalwaysthecase

when the first-to-file creditor makes future advances, or subsequently enters

new security agreements covering the collateral described in the pre-existing

financingstatement,orinallforegoingsituations,thedebtorpaidofftheoriginal

loan. A financing statementmay be filed initially to perfect a specific security

agreement. In other words, a specific security agreement initiates a financing

statement to perfect the concerned security interest. However, a financing

statementdoesnotcontainmuchinformationexceptforthedebtor’sname,the

securedparty’snameand the indicationof the collateral.The collateral canbe

described by categories or simply referred to “all asset” or “all personal

property”thatdoesnotrevealanyspecificinformation.Itdoesnotindicateany

securityagreement. In InterbusinessBankv.FirstNat.BankofMifflin.,the court

asserted that a financing statement did not necessarily refer to or have a

connectionwithanyspecificsecurityagreement; instead, itcoveredthecertain

collateralthatwaspossiblysubjecttoaclaim216.InInreGilchristCompanyandIn

reComprehensiveReviewTechnology,Inc.,thecourtsgrantedjudgmentforfuture

advances and new security agreements covered by an earlier-filed financing

statement217. In InreGilchristCompanyand InreOakRockFin.case,subsequent

securityagreementscoveredbyearlier-filed financingstatementsweregranted

firstpriorityevenwhenthedebtorpaidofftheoriginalloans218.

Ithasbeenlongconfirmedthatafinancingstatementandasecurityagreement

arenot interrelated.A financing statementdoesnot coveraparticularsecurity

agreementbut certain typesof collateral. Forthispolicy, a financingstatement

216318F.Supp2nd230(M.D.Pa,2004),atpp.240-1217403F.Supp.(197E.D.Pa.,1975);and138B.R.195(Bankr.S.D.Ohio,1992)respectively218SeeInreGilchristCompany,403F.Supp.(197E.D.Pa.,1975),InreOakRockFin.,LLC,527B.R.105(Bankr.E.D.N.Y.,2015),atpp.119-121

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canbefiledundertheauthorizationofadebtororapotentialdebtorpriortothe

formationofasecurityinterestortheattachmentofasecurityinterest.Thefiling

dateofaninitialfinancingstatementiseffectivewithregardtomultiplesecurity

agreements, both previously and subsequently executed, so long as succeeding

continuation statements are duly filed to continue the effect of the initial

financing statement. A financing statement is effective for five years after the

date of filing. It will lapse on the expiration of the effective period unless a

continuationstatementisfiledwithinsixmonthsbeforetheendofthisperiod219.

Filing a separate financing statement is not required for every transaction,

provided that a transaction is within the scope of the pre-existing financing

statement;otherwiseprescribed,itwouldnullifythepurposeofnoticefiling220.

Althoughfilingisamethodofperfection,thankstopre-filing,itseparatelysetup

aprioritydate for theconcernedsecurity interest that isnotdependentonthe

date of perfection. When a security interest is filed before it attaches to the

collateral,thegivensecurityinterestisperfectedatthetimeofattachment,butit

enjoys the priority according to the time of filing. The first-priority security

interest with regard to a future advance or after-acquired property can be

maintained even though at the time of filing, both parties did not have any

agreementoranyintentiontoincludeasubsequentsecurityagreementorafter-

acquired property or future advance 221 . In brief, the notice filing system

accompaniedby the limited requirementof informationandpre-filing capacity

enable a financing statement to covermultiple security agreements having the

collateralasdescribed.

Under a notice filing system, a financing statement is floated to cover all the

assets or personal properties of the debtor in order to perfect any security

agreementbearing the samedebtor, creditorandcollateralwithin the scopeof

thestatement,andsetsupthedateofpriorityforthesecurityinterestathand.In

combinationwith the recognition of floating lien under the provision of after-

acquiredproperty,afloatingfinancingstatementempowersthesecuredcreditor219UCC§9-515(b)and(c).220Comment2 to theUCC§9-322, seeOfficialComment,atp.910;See InreGilchristCompany,403F.Supp.(197E.D.Pa.,1975),atp.202221Comment2totheUCC§9-502,seeOfficialComment,atp.973

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a great advantage over other creditors. In other words, it is likely to leave

nothing for the debtor to create the first security interest in favour of

subsequentlyfiledcreditors.

3.4.4.2 Priorityruleofpurchase-moneysecurityinterest

Tohavethe firstpriority,aPMSImustsatisfytherequirementofsection9-324

thatisclassifiedaccordingtothetypesofcollateral,namely(1)generalornon-

inventorypurchase-moneypriority, (2) inventorypurchase-moneypriority, (3)

livestockpurchase-moneypriorityand(4)softwarepurchase-moneypriority.

The priority rule with regard to general purchase-money and inventory

purchase-moneyprioritywillbediscussed indetail.Livestockandsoftwareare

specialcollateralinthecontextoftheUSAthatcanbeleftoutofthediscussion

forthepurposeofthisthesis.

a. Non-inventorypurchasemoneysecurityinterest

The general rule for purchase-money priority provided in the sub-section 9-

324(a)appliestoallcollateralexceptforinventory,farmproductslivestockand

software.Inventoryaregoods,otherthanfarmproducts,which“areleasedbya

person as a lessor”, or “are held by a person for sale or lease or to be furnished

under a contract of service”, or “are furnished by a person under a contract of

service”, or “consist of raw materials, work in process, or materials used or

consumedinabusiness”222.The implied criterionof the term “inventory” is that

thesalesorleasesareorwillbeinthedebtor’sordinarycourseofbusiness223.

The creditor may lose an incentive to perfect her interest early because the

purchase-moneypriorityisnon-temporal.Thus,totakepriorityoveranearlier-

perfected conflicting security interest in the same collateral, a PMSI must be

perfectedwhenthedebtorreceivespossessionofthecollateralorwithintwenty

days after that224. The purchase-money creditor’s knowledge of pre-existing

222UCC§9-102(a)(48)223Comment4totheUCC§9-102,seeOfficialComment,atp.817224UCC§9-324(a)

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conflicting security interest or that other creditor has filed against the same

collateraldoesnotdisqualifythepurchase-moneystatus225.

Timely perfection is necessary to protect potential creditors who rely on the

debtor’spossessionandtheaccuracyofthepublicrecordtodealwiththedebtor.

It is worth noting that the filing system does not call for labeling the security

interestasapurchase-moneyone.Searchersdonothaveinformationaboutthe

status of collateral. To potential creditorswhomay have a later-in-time filing,

purchase-moneyornon-purchase-moneycollateralismeaninglessinanydealing

withthedebtor.Nonetheless,withouttherequirementoftimelyperfectedPMSI,

potential creditorswould have beenmisled by the debtor in possession if the

purchase-money creditor had delayed her filing. It would have resulted in

relatively serious consequence because a later-in-time filed PMSI has the first

priority. The twenty-day grace period allowed for non-inventory purchase-

moneyprioritymayplacethePMSIinsecrettemporarily.Thegraceperiodbonus

is justifiedon theground that it is thebusinesspracticeof filingafterdelivery

regarding non-inventory purchase-money collateral226. To earlier-in-time filed

creditorswithafter-acquiredpropertyclause,thepublicrecorddoesnotreveal

much informationaboutan interveningsecurity interest, that iswhether it isa

PMSIthatmakespre-existing interests tobesubordinate.Again,beforemaking

additional advances against the debtor’s new property, it is strategic tomake

furtherinquiries.

Thequestionaboutwhenthedebtor“receivespossession”ofthecollateralisalso

in dispute since Article 9 does not define the term “possession”. It is worth

mentioning that the term “receives possession” is interpreted correspondingly

with respect to the trigger date running the grace period for non-inventory

collateral and the time of giving notification for inventory purchase-money

priority227. Possession inArticle 9 ismentioned in two contexts: (1)within the

scheme of notice filingwhere the debtor possesses the collateral, and (2) as a

225Comment3totheUCC§9-324,seeOfficialComment,atp.919226CommenttotheformerUCC§9-312,citedinGilmoreG,‘ThePurchaseMoneyPriority’(1963)76HarvardLawReview1333,atp.1387227SeeComment4totheUCC§9-324,seeOfficialComment,atp.920,andGilmoreG,seen.15,atp.799

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method of perfection 228 . Court decisions show the split of authority in

interpreting the term “possession”: a line of cases employed the obligation

standard,whiletheotherappliedthephysicalcontrolstandard229.

Althoughconstructivepossessionistreatedasanalogoustoactualpossessionin

some circumstances, the draftsman of the originalUCC, Gilmore in his treatise

Security Interests in Personal Property interprets possession as the debtor’s

physical possession at her place of business. The Kunkel court230 relied on

Gilmore’sinterpretationtogivejudgmentforthepurchase-moneycreditorsince

thedebtorhadneverobtainedpossessionofthecollateraltotriggerthedateof

giving notice as a condition to perfect an inventory PMSI231. In InreAutomatic

BookbindingService,Inc.232, itwasheldthatpossessionwasreceivedat thetime

alltheinstallmentsweredeliveredattheplaceofthedebtor/buyerratherthan

thelatertimewhenthegoodswerefullyinstalledtocompletetenderofdelivery

terms. The given court cited Gilmore to highlight physical possession and

clarified themeaning of possession under the notion of ostensible ownership.

The commentary to the section 9-324 also indicates that the debtor receives

possessionofcollateralinthiscontextwhencomponentpartsofthegoodsarein

possession of the debtor. This situation is sufficient to impressother potential

lendersthatthedebtoracquiresinterestsinthegoodsasawhole233.

The situation where the debtor receives possession under a non-Article 9

transactionandlaterbuysthegoodssubjecttothesecuredcreditiscomplicated

duetothecompetitionbetweenthephysicalcontrolstandardandtheobligation

standard.Itisbettertodiscusstheobligationstandardwithrespecttothegiven

issuebeforemovingtothephysicalstandardsincetheleadingcaseBrodieHotel

Supply,Inc.v.UnitedStates234setupacornerstonefortheobligationstandardbut

then were mentioned or distinguished in many cases adopting the physical228ibid,atp.522229 CitizensBankv.FED.FinancialServices,509S.E.2d339,235Ga.App.482(Ga.App.,1998),atp.340230Kunkelv.SpragueNationalBank,128F.3d636(C.A.8(Minn.),1997)231SeeUCC§9-324(b)(3)fortherequirementofinventorypurchase-moneyprioritythatwillbediscussedlatter.232471F.2d,546,11U.C.C.Rep.Serv.897(4thCir.,1972)233Comment3totheUCC§9-324,seeOfficialComment,atp.919234431F.2d1316(9thCir.,1970)

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control approach. In Brodie, Lyon (the debtor) “took possession” of the

restaurantincludingequipmentfromBrodieseveralmonthsbeforeheentereda

bill of saleexecuteda chattelmortgagewithBrodie, anda financing statement

was filed to secure the unpaid purchase price of the equipment235. TheBrodie

courtheldthatthetriggerdateforten-daygraceperiod236iswhenLyonbecamea

debtor for purposes of Article 9 irrespective of the debtor had possessed the

equipment long before. The given court relied on the definition in Article 9

describingadebtoras “apersonwhoowespaymentorotherperformanceofthe

obligation secured” 237 to argue that Lyon did not owe performance of the

obligation secured by the collateral until the time of the bill of sale238. Thus,

BrodietimelyperfecteditsPMSItoprevailovertheearlier-filedsecurityinterest.

Disputes have demonstrated that a sale on approval239and a lease-purchase

transaction240are commonsituationswhereapurchase-moneycreditordidnot

perfect a PMSI at the time a debtor physically possess the goods under the

bailment and the lease respectively. That the debtor physically possessed

property before the creation of a security agreement may raise the question

whether this security interest qualifies for the purchase-money status. As

discussedelsewhereinthischapter,thelaterpassingofthetitleandthe“closely

allied”testwillgiveanswer.Courtshavealsoratifiedthepurchase-moneystatus

ofthetransactionathandwhenthecreditor-debtorrelationshipwasheldtobe

theeventrunningthegraceperiod241.Tothecontrary,manycourtsappliedthe

physical possession standard. Several decisions tried to distinguish the case at

hand from Brodie in terms of the completion of the deal. In Brodie, the

prospective debtor took possession of the goods during a negotiation for

purchase; thus, he was not obligated until and unless the sale was closed.

235ibid,atpp.1317-8236The former UCC §9-312(4) provided ten days after the debtors receives possession as thegraceperiodtoperfectanon-inventoryPMSI.237FormerUCC§9-105(d)238Brodie,seen.234atp.1318239PriorBros.,Inc.,Matterof,632P.2d522,29Wn.App.905(Wash.App.,1981)240BrodieHotelSupply, Inc.v.UnitedStates, 431 F.2d 1316 (9th Cir., 1970),RainierNat.Bankv.InlandMachineryCo.,631P.2d389,29Wn.App.725(Wash.App.,1981),ColorLeasing3,L.P.v.F.D.I.C.,975F.Supp.177(D.R.I.,1997)241InreMcHenry,71B.R.60(Bankr.N.D.Ohio,1987),atp.63

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However, in James Talcott, Inc. v. Associates Capital Company, Inc242, the lease-

optionagreementboundthedebtorretroactivelyasofthedeliverydate,andthe

leasee/buyerpossessedtheequipmentasa“debtor”atthedateofdelivery243.In

In ReMicheals244, the court found that, unlike Brodie, the eventual debtor was

obligatedtopurchasetheequipmentsincehesignedpurchaseordersthat took

placebeforedelivery245.TheInReMichaelscourtwentfurtherbyacknowledging

thephysicalcontrolstandardasabetterapproachandcriticizingtheobligation

standard246. The physical control standard is considered to reduce “the risk of

mistaken reliance by potential or existing creditors on the debtor's apparent

ownership of assets” and promote “the underlying policies of the Uniform

CommercialCodeinaffordingcertainty,predictabilityforcommercialtransactions,

and public disclosure” 247 . Meanwhile, the obligation standard “provides an

opportunity for mischief and transforms the 20-day grace period into an open-

ended time forperfection” and discourages early filing and the policy of timely

perfectionwith respect topurchase-moneypriority248. Furthermore, itneglects

the ostensible ownership problem arising from the time the debtor physically

possessesthecollateral249. Itallowsthepurchase-moneypriority tobeeffective

bysubsequentevents,suchassigningthecontractofsaleorexecutionofsecurity

agreementthatcannotbeobservedbythirdparties250.Additionally,themeaning

oftheterm“debtor”or“collateral”inthephrase“thedebtorreceivespossessionof

thecollateral”isinconsistentwiththerespectiveterm“debtor”or“collateral”ina

financingstatement.“Debtor”and“collateral”indicatedinafinancingstatement

are not factors reflecting an existing creditor-debtor relationship since filing a

financing statement can precede the formation of a security agreement. The

242 491F.2d879(6thCir.,1974)243ibid,atp.883244 156B.R.584(Bankr.E.D.Wis.,1993)245ibid,atp.590246ibid,atp.590-1247ibid,atp.590248ibid, at p. 591. See Cornman J, ‘When Is aDebtor "In Possession"UnderU.C.C. § 9-312(4)?’(1987)19ArizonaStateLawJournal261249BairdDGandJacksonTH,seen.8,atp.198250ibid,atp.199

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obligationstandardisalsoinconsistentwiththemeaningofpossessioninother

disputeslikeKunkelorAutomaticBookbindingServices251.

If it is agreed that filing is a good method to solve the ostensible ownership

problem arising from non-possessory secured credit252 , Article 9 would be

applied uniformly if the physical control standard rather than the obligation

standard were adopted to determining the grace period. The physical control

approachensurespredictabilityandcertaintyforcommercialtransactionsthatis

theunderlyingpolicyandpurposesofArticle9andtheUCC253.

However, there is the criticismof the physical control standard. This standard

focuses on disguised security interests and ignores a true lease or a true

bailment254.Itdoesnotconsiderthatnon-Article9transactionsdonotfallwithin

thefilingscheme,soitisunfairtorequiregiventransactionstobefiledinorder

to protect the eventual PMSI255. The physical control standard also ruins the

commercialutilityoftransactionslikeasaleonapprovalorleasewithpurchase

option256.

The adoption of the obligation standard and the physical control standard in

interpreting the phrase “debtor receives possession” results in the split of

authority. Nonetheless, cases like Talcott and In re Michaels, even though

categorized in the physical control line of cases257, still looked to “obligated”

factor. In other words, the grace period was triggered at the time of actual

possessionbecausethedebtorwasfoundtobeobligatedatthistime.InCitizens

Bankv.FED.FinancialServices258, the court is correct to comment that the line

between theobligation standardand thephysical standard is just “superficially

251SeetheabovediscussiononKunkelandAutomaticBookbindingServicescase252BairdDGandJacksonTH,seen.8,atp.183253Cornman J, ‘When IsaDebtor "In Possession"UnderU.C.C. § 9-312(4)?’ (1987) 19ArizonaStateLawJournal261,atpp.276-7254ZinneckerTR,PimzyWhimsyintheEleventhCircuit:ReflectionsonInreAlphatechSystems,Inc,(2005)40GonzagaLawReview379,atpp.413-15255ibid,atpp.416-7256ClarkBandClarkB,seen.174,atp.3-72257SeeCornmanJ,seen.253,atp.272;ZinneckerTR,seen.254,atpp.411-2,424-5;SeeMatterofMiller,44B.R.716(Bankr.N.D.Ohio,1984),atp.720;CitizensNat.BankofDentonv.Cockrell,850S.W.2d462(Tex.,1993),atp.464258235Ga.App.482(Ga.App.,1998)

114

divergent” 259 , at least with regard to situations where physical possession

precedestheexecutionofsecurityagreementandunderlyingsalecontract.The

current official commentary to the UCC upholds the obligation standard by

stating that possession in the purchase-money priority contextwith respect to

theforegoingissuecommenceswhenthegoodsbecomecollateral260.Possession

inthepurchase-moneyprioritycontextisinterpretedinanon-uniformmanner.

Incaseswherethedebtorowedperformanceofobligationsecuredbytheasset

at thetimephysicalpossessionwasreceived, thephysicalstandardapplies.On

the other hand, the obligation standard is adopted in cases where physical

possessionprecedesthesecurityagreement.

b. Inventorypurchase-moneypriority

Aperfected PMSI in inventorymust complywith the sub-section9-324(b)and

(c) to attain super-priority. The requirement is relatively burdensome to the

extent that it involves not only timely perfection but also notification to the

holderoftheconflictingsecurityinterestinthesamecollateral.

ThegraceperiodforperfectiondoesnotapplytoaninventoryPMSI.Thegiven

security interest must be perfected when a debtor receives possession of the

inventory261.Whenthedebtorreceivespossessionisdeterminedinlinewiththe

similar requirement with respect to non-inventory purchase-money security

discussedabove262.

Notification is required in order to protect the earlier-filed secured creditor

against the debtor’s fraud263. The draftsmen of Article 9 explain the need for

notificationbasedonthepracticeof inventory financing.An inventory financer

typically makes periodic advances upon the debtor’s application against up-

coming inventory or periodic release of old inventory when new inventory is

259ibid,atp.486260Comment3totheUCC§9-324,seeOfficialComment,atp.920261UCC§9-324(b)(1)262Comment4totheUCC§9-324,seeOfficialComment,atp.920263FeddersFinancialCorp.v.ChiarelliBros.,Inc.,221Pa.Super.224(Pa.Super.,1972),atp.231;InreDaniels,35B.R.247(Bankr.W.D.Okla.,1983),atp.250

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received, believing that she has the first priority in the new inventory264 .

However, a fraudulent debtormay grant the PMSI in the inventory to another

creditor265. When the inventory secured creditor learns about the up-coming

inventoryencumberedbyasuper-priorityPMSI,shemayconsidernot tomake

anadvance that is subordinate toanother interest.Notification isnot required

for non-inventory purchase-money priority because periodic advances against

up-coming goods are unusual in financing equipment and consumer goods266.

Notification must be authenticated267. It does not limit to written form but

encompassing authentication of all records, that is both intangible form and

tangibleform268.

Partiestobenotifiedarecreditorswhohavefiled“afinancingstatementcovering

the same types of inventory prior to the date of filing of the PMSI”269. Overall, a

purchase-money creditor is only required to send a notification to earlier-filed

creditorswhohaveasecurityinterestinthesameinventory.Apurchase-money

creditor should search the public record to identify earlier-filed creditors and

sendthenotificationtotheaddressprovidedintherelevantfinancingstatement.

Anearlier-filedcreditorisconsideredtoreceivenotificationwhenitisdelivered

tothisaddress270.

The notification should be sent within five years before the debtor receives

possession of the collateral271. It does not matter that a holder of conflicting

inventorysecurityinterestsreceivesnotificationbeforeorafterthePMSIisfiled,

solongasboththeperfectionofPMSIandreceiptofnotificationoccurbeforea

debtorreceivespossessionoftheinventory.InKunkelasdiscussedabove,which

is decided under the formerUCC, the debtorwas held not ever to possess the

inventory to trigger the date determining the period of giving notification. In

otherwords,sincethedebtorhadneverpossessedtheinventory,thepurchase-

264Comment4totheUCC§9-324,seeOfficialComment,atp.920265ibid266ibid267UCC§9-324(b)(2)268SeeUCC§9-102(a)(7),(70)andComment9toUCC§9-102,seeOfficialComment,atp.823-4269UCC§9-324(c)(1)270Comment6totheUCC§9-324,seeOfficialComment,atp.920271UCC§9-324(b)(3)

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moneycreditorwasnotrequiredtogivenotificationtotheholderofconflicting

inventorysecurityinterests.ThecommentarytotherevisedUCCagreeswiththe

Kunkelcourt’srulingtorecognizethesuper-priorityofperfectedPMSIevenifthe

notificationisnotgiventotheextentthatthedebtorneverreceivespossessionof

the collateral272 . A purchase-money secured party is not required to send

notificationseparatelyforeachtimesheexpectstoacquirethePMSI,thatis,for

each time the debtor receives possession of the inventory, so long as the

inventory described in the notification are corresponding to the inventory

delivered273.

Anotificationshouldstatethat“thepersonsendingthenotificationhasorexpects

toacquireaPMSIininventoryofthedebtor”anddescribetheinventory274.Article

9 and relevant commentary do not give any instruction on how detailed and

precise a notification should be. However, a notification should function as a

warningtoearlier-filedcreditorsholdingconflicting inventorysecurity interest

about the first-priority encumbrance on the up-coming inventory275. Several

casesundertheformerUCCshowedmanysituationsthatanotificationqualified

therequirementforthesuper-prioritystatusofaperfectedPMSI276.InFedders277,

the courtheld that thedescription listing a line of inventorywas sufficient for

purposesofinventorypurchase-moneypriorityandrejectedthecontentionthat

inventory must be described by the serial number278. The notification in In re

Daniels279didnot contain the term “purchase-money”, rather, itmentioned that

concernedthebank“[had]taken,or[planned]totakeasecurityinterest”inaline

ofcollateralincludinginventory280.However,thebankwasheldtohaveasuper-

priority on the ground that the prior-filed creditor could not be misled nor

272Comment5totheUCC§9-324,seeOfficialComment,atp.920273FeddersFinancialCorp.v.ChiarelliBros.,Inc.,221Pa.Super.224(Pa.Super.,1972),atp.231274UCC§9-324(b)(3)275Comment4totheUCC§9-324,seeOfficialComment,atp.920276Theformersection9-312(3)(c)providesforthedescriptionofinventory“byitemortype”.Thephrase“byitemortype”isabolishedintherevisedsection9-324(b)(4)277FeddersFinancialCorp.,seen.273278ibid279InreDaniels,35B.R.247(Bankr.W.D.Okla.,1983)280ibid,atp.248

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confused by a notification letter that only a purchase-money creditor was

requiredtosend281.

c. Purchase-moneysecurityinterestsinproceeds

Thepriorityinthedebtor’sassetsubjecttoasecurityinterestisextendingtoits

proceedsirrespectiveofthesecurityagreement,orthefinancingstatementdoes

not include the proceeds as the collateral 282 . The proceeds, in general, is

automatically perfected. If the security interest in the original collateral is

perfected, the security interest in proceeds is perfected, too283. The effective

periodofanautomaticallyperfectedsecurityinterestinproceedsistwentydays

running from the date of attachment. On the 21st day, the security interest in

proceedsbecomesunperfectedunless ithasa continuanceofperfection284.The

identifiable cash proceeds including “money, checks, deposit account and the

like”285 remain perfected indefinitely if the security interest in the original

collateral is perfected286. However, the perfection of cash proceeds does not

depend on the continuance of perfection of the original collateral287. Thus, the

cash proceeds receive further protection than pure cash collateral. The only

methodstoperfectdepositaccountormoneyasoriginalcollateralarecontrolor

possessionrespectively288.

Fornon-cashproceedsthataredefinedas“proceedsotherthancashproceeds”289,

perfection other than automatic perfection should be done timely to keep the

perfection runs continuously. Timely perfection is necessary to avoid a gap of

unperfectedstatusbetweentheautomaticperfectionandthenextperfection.A

securityinterestinproceedsshouldbeperfectedbyafinancingstatementoran

281ibid,atp.251282UCC§9-315(a)(2)and§9-203(f)283UCC§9-315(c)284UCC§9-315(d)andComment4totheUCC§9-315,seeOfficialComment,atp.893285UCC§9-102(a)(9)286UCC§9-315(d)(2)287UCC§9-315(d)(2)andComment7totheUCC§9-315,seeOfficialComment,atp.894288SeeUCC§9-312(b)(1),(3)andComment5totheUCC§9-312,seeOfficialComment,atp.885.Accordingly,perfectionbycontrolarisesfromanagreementamongthesecuredparty,debtorandbank.Thebankcomplieswithinstructionsofthesecuredpartywithrespecttodispositionofthefundsondeposit,althoughthedebtorretainstherightstodirectsuchdisposition.289UCC§9-102(a)(58)

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amendmentwhen the attachment of the proceeds occurs orwithin the 20-day

periodof automatic perfection290. A continuously perfected security interest in

proceeds,thus,enjoythetimeoffilingorperfectionastothesecurityinterestin

the original collateral291. However, if the proceeds are the kind of collateral

perfectedbyfilingafinancingstatement,anditisnotobtainedbycashproceeds,

itisotherwiseperfected292withouttakingfurthersteps.

The proceeds collateral can be perfected as after-acquired property to achieve

the sameresult if the financing statement covers the typeof theproceeds.For

instances, a financing statement describes the collateral as inventory and

receivableaccount.Theaccount,therefore,isboththeproceedsoftheinventory

andtheafter-acquiredcollateral.However,thedistinctionbetweentheproceeds

and the after-acquired property is particularly meaningful in the bankruptcy

context.Thepropertyacquiredafterthecommencementofthebankruptcycase

isnotsubjecttoasecurityinterestcreatedbeforethattime293.Ontheotherhand,

this rule does not apply to the proceeds of the collateral subject to a pre-

bankruptcysecurityagreement294.

Basically, thepurchase-moneypriority isextendingtothe identifiableproceeds

of purchase-money collateral so long as the security interest in proceeds is

perfectedunderthegeneralrulesasdiscussedabove295.However,thedistinction

betweencashproceedsandnon-cashproceedsisadditionallyessentialsincethe

twocategorieshavedifferenttreatmentswithregardtotheinventorypurchase-

money priority. The purchase-money super-priority in inventory is only

extendingto identifiablecashproceeds“receivedonorbeforethedeliveryofthe

inventory to a buyer”296. In Sony Corp. of America v. Bank One, West Virginia,

HuntingtonNA297,theissuebeforethecourtiswhetherthebuyer’scheckdated

oneday later than theshipmentwere the cashproceeds received “onorbefore

290UCC§9-315(d)(3)291UCC§9-322(b)(1)292UCC§9-315(d)(1)29311U.S.C§522294ibid295UCC§9-324(a)andComment8totheUCC§9-324,seeOfficialComment,atp.921296UCC§9-324(b)29785F.3d131(C.A.4(W.Va.),1996)

119

the delivery” of the goods298. The court argued that the term “on or before the

delivery”aimedatdistinguishingcashproceedsandaccountproceeds299.Inother

words, the UCC draftsmen differentiated transactions in which buyers pay in

cash from transactionsparties setupa credit arrangement300.ThedebtorSony

and the buyerwere found to arrange a cash transaction rather than a sale on

credit.Itwasheldthatinthemodernbusinessthesedays,slightdelaybetween

unloadingofgoodsandtheissuanceofacheckinpayment forthosegoodshad

beenreasonablyexpectedandnotattributedtotheextensioncredittothebuyer

for that short period of time301. Thus, the inventory purchase-money priority

extendedtothecashproceedsofinventory.TheKunkelcourtfollowedSonyCorp.

andadditionallyexplainedthatacashsalewasasaleinwhichthesellerdidnot

expresslyextendcredittothebuyerregardlessofdelayinpayment302.

The distinction between the purchase-money priority in inventory and non-

inventory collateral is justifiedbydifferences between inventory financingand

non-inventory financing. Account or receivable financers seldom rely on

accounts generated from the sale of equipment, whereas they rely on account

generated from the sale of inventory303. The policy on its face seems to favour

account financiers and put inventory financiers in a disadvantageous position.

Inventory financiers cannot follow the collateral sold in theordinary courseof

the debtor’s business, and their entitlement to the proceeds is limited to cash

proceeds. However, this policy is justified by the fact that the cash generated

from an account financier is used for paying the inventory financing 304 .

Furthermore, the cross-collateralization is solely accepted with regard to

inventory PMSIswhere the new purchase-money inventory collateral replaces

theoldone.

298ibid,atp.136299ibid300ibid,atp.137301ibid302Kunkel,atp.646303ClarkBandClarkB,seen.174,at3-72;Comment8totheUCC§9-324,seeOfficialComment,atp.921304Comment8totheUCC§9-324,seeOfficialComment,atp.921

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d. PMSIincommingledgoods,accession,productsormass

The collateralmay be put inprocessing ormanufacturing that their identity is

lost. In this situation, the collateral becomes commingled goods which are

defined as “goods that are physically unitedwith other goods in such amanner

thattheiridentityislostinaproductormass”305.Article9doesnothavespecific

ruleswithregardtoPMSI in thisrespect. Inotherwords, thegeneralruleswill

apply. A security interest does not remain in the original collateral that has

become the commingled goods since the identity thereof is lost in the

manufacturing process306. However, the security interest attaches the resulting

productormass307. If theoriginalcollateral isperfected,asecurity interest ina

productormassisperfectedandenjoysthefilingdateoftheoriginalcollateralto

establishpriority308.Although theprovisionofArticle9 is silent, the respective

official comment clarifies that the security interest in the product and mass

cannot exceed the value of the debt secured by the security interest in the

commingledgoods309.Whenaproductormassismadefrommorethanonetypes

ofcommingledgoodssubjecttomanysecurityinterestsofdifferentcreditors,the

securityinterestsrankequallyinproportiontothevalueofthecollateralatthe

timeitbecamecommingledgoods,regardlessofthepurchase-moneystatus310.

Article9distinguishesaccessionfromcommingledgoods.Accessionisdefinedto

be“goodsphysicallyunitedwithothergoodsinsuchamannerthattheidentityof

the original goods is not lost”311. Section 9-335 governs a security interest in

accession inaminimalway.The security interest continues in theaccession312,

and the accession remains perfected so long as the security interest in the

originalcollateralisperfected313.Anaccessionfinanciercanremoveanaccession

from other goods if she has priority over the claims of other parties in the

305UCC§9-336(a)306UCC§9-336(b)andComment3totheUCC§9-336,seeOfficialComment,atp.949307UCC§9-336(c)308UCC§9-336(d),(e)309Comment4totheUCC§9-336,seeOfficialComment,atp.949310UCC§9-336(f)(2)andComment4totheUCC§9-336,seeOfficialComment,atp.949311UCC§9-102(a)(1)312UCC§9-335(a)313UCC§9-335(b)

121

whole314. However, she is required to reimburse for the cost of repair of any

physical injury to other goods or the whole315. This section does not answer

whetheranaccessionfinancieracquiresasecurityinterestinawhole;andifyes,

whether she has a perfected security interest in awhole316. The priority rules

withregardtoanaccessionborrowfromthegeneralrulesofpriority including

the priority of a PMSI317. Having a good financing statement and a timely

notification, apurchase-money securedcreditoralwayshaspriorityoverother

inventoryfinanciersastotheitemsdescribedregardlessoflaterfiling.However,

asecurityinterestinanaccessionisalwayssubordinatetoasecurityinterestin

the whole that is perfected in compliance with a certificate-of-title statute

coveringalmostall kindsofmotorvehicles318. It canbe said thatSection9-335

givesrelativelyclearandconciserulestotheareaofaccessionfinancing319.

3.5 Concludingremarks

Under the unitary approach and functionalism adopted by Article 9, title

retention,likeotherdevicesthatsecurepaymentorperformanceofobligations,

regardlessofforms,istreatedasasecurityinterest.Theunitaryapproach,which

brings together requisites and formalities for security interests into a single

statute,wastriggeredtosolvethesegmentalandcomplicatedstatusof the law

onsecuredtransactionspriortothepublicationoftheUCC.Itshouldbestressed

that the dynamic of creating newsecurity devices by function, the adoptionof

functionalism in pre-Code statutes corresponding to new devices and the

federalistsystemintheUnitedStatescontextconsiderablyresultindemandfor

the unitary treatment of security interest. Functionalism strongly supports the

unitary approach to the extent that it restrains the differentiation among

financinginstruments,thecreationofnewsecuritydevicesthataimsatevading

the requirement of filing or perfection, and the possibility of enacting new

statutestoconfrontwithnewdevices.

314UCC§9-335(e)315UCC§9-335(f)316Comment5totheUCC§9-335,seeOfficialComment,atp.948317UCC§9-335(c)318UCC§9-335(d)319ClarkBandClarkB,seen.174,atp.9-90

122

Title retentionor conditional sale is the cornerstone of the PMSI. The cover of

PMSIextendstoloansadvancedbythirdpartiestoacquirerightsinthecollateral

because it shares the same characteristic of title retention, that is the

contributionofnewvaluetothedebtor’sbusiness.BothkindsofPMSIssupporta

relatively competitive debt financing market that cannot be attained if it is

dominatedormonopolizedbyafirst-to-filecreditorwithafter-acquiredproperty

clausewithouttherecognitionofthePMSIandtherespectivefirstpriority.

Article 9 distinguishes types of collateral that are typically categorized into

inventory, equipment, farmproducts and consumer goods. Inventory,which is

expectedtobeconsumedorprocessedorsoldintheordinarycourseofbusiness,

receivesspecialtreatments.InthecontextofaPMSI,cross-collateralization,the

first priority that is limited to the cash proceeds and the requirement of

notificationsenttoearlier-filedsecuredpartiesareparticularruleswithregard

totheinventorycollateral.

A filing notice system that is simple, fast and cost-saving is also a core

requirement for the operation of the PMSI. Generally speaking, it provides a

relativelyaccurate,easily-determineddateforprioritypurposesthatispremised

onthe filingdate.Furthermore, it isnotnecessaryto filea financingstatement

corresponding to a specific secured transaction. This advantage is specifically

practicalwhenthecollateralisinventory,eveninthecaseofaPMSI.However,a

notice filing system accompanied by the first-to-file priority rule has some

weaknessto theextent that it favoursthe interestofa first-to-filecreditor.The

later-in-time creditor does not have enough incentive to file against the same

collateral to have only subordinate interest irrespective of the order that

advances are made. The notice filing system does also not reveal much

information relating to the filed security interests, especially the amount of

securedobligation.

Althoughtherearesomerestraintsonlater-in-timecreditorsandthedebtor,itis

undoubtedthatthebenefitofafilingnoticesystemoutweighsitscost.Article9is

a goodmodel for the secured transaction lawinpersonalproperty in termsof

efficiency,andfortherecognitionoftitleretentionasasecuritydeviceinterms

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ofpromotingtransparencyandcompetitivedebtfinancingmarket.Transplanting

the treatment of title retention in Article 9 into a jurisdiction is certainly

involving the adoption of functionalism doctrine, and it also raises questions

about the transplant of notice filing system and the unitary approach as well.

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CHAPTER4 RETENTION OF TITLE IN THEAUSTRALIANPERSONALPROPERTYSECURITIESACT2009

4.1 Overview

PriortotheenactmentofthePersonalPropertySecuritiesAct2009(hereinafter

“PPSA”), the Australian law on secured transactions and the treatment of title

retentionwerebasedmainlyontheEnglishcommonlaw1.Therewerefourtypes

of secured transactions recognized at common law and in equity, namely

mortgage,charge,pledge,andlien2,allofwhichwereinterestscreatedorgranted

bythedebtoroverherexistingorfutureasset.Titleretentiondoesnotamountto

aregistrablecharge irrespectiveof thegoodssubjectmatterof this transaction

wereappropriatedtosecurethebuyer’sobligationofpayment.Itdidnotfallinto

theschemeofcompanychargesregistrationbecausetheseller/creditorretained

the title to the goods supplied. Because the title to the goods belonged to the

unpaidseller,she could reclaim thegoods in thebuyer’s insolvencyorprevent

themfromfallingintothescopeoffloatingchargecreatedbythebuyer/debtor3.

If title retention was contractually extended to the proceeds or products

manufacturedorassembledfromtheoriginalgoods,theunpaidseller’sinterests

intheproceedsorendproductswerelikelytobeconstruedasbeingcreatedby

wayofchargeandsubject toregistrationundertheCorporationAct tobevalid

againstthirdparties.4.Concerningtheproceeds,Australianlawslightlydeparted

fromEnglishlawtotheextentthatcourtsoftheformerjurisdictionwerewilling

toenforcethetrustclause5.InAssociatedAlloy6,theAustralianHighCourtupheld

1StumblesJGJ,‘ThePPSA:TheExtendedReachoftheDefinitionofthePPSASecurityInterest’(2011)34UniversityofNewSouthWalesLawJournal448,atp.449;BrownD,‘AustralianSecuredTransactionLawReform’inGulliferLandAkseliO(eds),SecuredTransactionsLawReformPrinciple,Policies,andPractice(HartPublishing2016),atp.1452WhittakerB,‘ReviewofthePersonalPropertySecurityAct2009:FinalReport,’(CommonwealthofAustralia,2015)www.ag.gov.au,atp.113DugganA,‘RomalpaAgreementsPost-PPSA’(2011)33SydneyLawReview645,atpp.646-74ibid,atp.6475 SeemorediscussionontherelevanceofAssociateAlloycasetoEnglishlawindeLacyJ,‘CorporateInsolvencyandRetentionofTitleClauses:DevelopmentsinAustralia’(2001)2InsolvencyLawyer64

125

the effectiveness of the title retention trust clause over the future-acquired

proceeds the buyer received from selling products made from the goods the

seller had supplied7and denied construing the clause at hand as a registrable

charge8. This decision somehow confirmed that parties to a transaction could

evadethesecuredtransactiontreatmentbyoptingforotherforms.

Aftera long reformprocessstarting from the1970s, thePPSA2009came into

forceon30January20129.Theoutcomewasnotthecodificationofpre-existing

rules. Instead, it set up a new regime for the law on secured transactions in

personal property following the PPSA pattern initiated by Canadian law 10 .

Canadian common law provinces and federal territories implemented their

PPSAs from1976 to198211.NewZealand then followed theCanadianprovince

SaskatchewanPPSA to build the secured transaction law inpersonal property,

and the New Zealand PPSA 1999 came into effect on 1May 200212. The PPSA

model borrows the concept and structure from Article 9 of the UCC 13 .

Accordingly, it adopts the functional approach and “notice filing” registration

system and brings all security devices by function into a unitary treatment

regarding creation,nowcalledattachmentandperfection,priority rankingand

enforcement. Italso introducestheconceptofPMSIthatreplacesthepre-PPSA

treatmentoftitleretention.

6AssociatedAlloysPtyLtdvACN001452106(2000)202CLR5887ibid,atpp.603-6108ibid,atpp.610-19BrownD,‘AustralianSecuredTransactionLawReform’inGulliferLandAkseliO(eds),SecuredTransactionsLawReformPrinciple,Policies,andPractice(HartPublishing2016),atp.145.FormoreinformationonAustralianpersonalpropertysecuritylawreform,seeBrownD,ibid,atpp.146-8;FisherS,‘PersonalPropertySecurityLawReforminAustraliaHistory,Influences,ThemesandTheFuture’indeLacyJ(ed),TheReformofUKPersonalPropertySecurityLawComparativePerspective(Routledge-Cavendish2010),atpp.366-386;DugganAandBrownD,AustralianPersonalPropertySecuritiesLaw(2nded.edn,LexisNexisButterworths2016),atpp.18-2410DugganAandBrownD,AustralianPersonalPropertySecuritiesLaw(2nded.edn,LexisNexisButterworths2016), at p. 23; Barns-GrahamVandGulliferL,‘TheAustralianPPSReforms:WhatwilltheNewSystemLookLike?’(2010)4LawandFinancialMarketsReview394,atp.39411WalshC,‘TransplantingArticle9:TheCanadianPPSAExperience’inGulliferLandAkseliO(eds),SecuredTransactionsLawReformPrinciples,PoliciesandPractice(HartPublishing2016),atp.49(footnote5)12GedyeM,‘TheNewZealandPerspective’inGulliferLandAkseliO(eds),SecuredTransactionsLawReformPrinciples,PoliciesandPractice(HartPublishing2016),atp.11513WalshC,seen.11,atp.49;GedyeM,seen.12,atp.115

126

TheAustralianPPSAhasaPPSAstyleand learnsthe lessonfromNewZealand,

Canadian,andUnitedStateslegislation14.TheworksofUNCITRALandUNIDROIT

alsohavesomeimpacts15.SincetheimplementationofthePPSA2009,Australian

lawyersandrelatingpartieshavegotacquaintedwithnewvocabularyinthelaw

onsecuredtransactions.Asecurityinterestfromthepresenttimehasastatutory

definition, and the meaning is broader than ever before16. The parties to a

security interest are called the secured party and the grantor. The grantor, in

general,istheonehavingtheinterestinthecollateraltowhichasecurityinterest

is attached17. The term “grantor” instead of the term “debtor” as inArticle 9 is

usedtoacknowledgethatthegrantormaynotbetheonewhoowespaymentor

performanceofanobligationsecuredbyasecurityinterest18.Thesecuredasset

iscalledasthecollateralthatisdefinedas“personalpropertytowhichasecurity

interest is attached”19 . Other terms are also imported as “attachment” and

“perfection”.

4.2 Conceptofpurchase-moneysecurityinterest

4.2.1 Securityinterests:Functionalapproach

ThePPSAsetsupaunitaryregimeforsecuredtransactionsinpersonalproperty.

Allthesecuritydeviceswithregardtopersonalpropertyarebroughtunderthe

ambitofasinglelaw.Thefunctionalapproachbroadensthescopeofapplication

to embracemany transactions that have been traditionally regarded as quasi-

security interests liketitleretention. Italsoestablishesaunifiedsetofrules to

governattachment,perfection,priorityandenforcement,andasingleelectronic

registration system for all types of security interests. Under the unitary

14 Parliament of the Commonwealth of Australia HR, Personal Property Securities Bill 2009ExplanatoryMemorandum(2008-2009),atp.1015ibid16Barns-GrahamVandGulliferL,‘TheAustralianPPSReforms:WhatwilltheNewSystemLookLike?’(2010)4LawandFinancialMarketsReview394,atp.39417PPSA2009s1018ibid19ibid

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approach, the PPSA replaces over 70 Commonwealth, State, Territory statutes,

commonlawandequityrulesgoverningpersonalpropertysecurityinterests20.

The reformofpersonalpropertysecurities law inAustralia is a reformof legal

thinking to be in line with what has implemented in other common law

jurisdictions like the United States, Canada, and New Zealand21. The functional

approachisemployed,andallsecuritydevicesaretreatedunderasingleconcept

“securityinterest”.Securityinterestforthefirsttimeisstatutorilydefinedas:

“an interest inpersonalpropertyprovided forbyatransactionthat, insubstance,

securespaymentorperformanceofanobligation (without regard to the formof

thetransactionortheidentityofthepersonwhohastitletotheproperty).”22

ThisdefinitionissimilartoCanadianandNewZealandPPSAsandisnotfarfrom

theUCCdefinition.Courtswilllookatthesubstanceofatransactionratherthan

the form to find outwhether it creates a security interest. A slight difference

between the American and Australian definition is that the Australian texts

emphasize the irrelevance of the identity of the person having title to the

property.

The PPSA provides a non-exhaustive list of transactions securing payment or

performanceofanobligationasexamplesofsecurityinterests23.Theyareafixed

charge,afloatingcharge,achattelmortgage,aconditionalsaleagreement,ahire

purchaseagreement,apledge,atrustreceipt,aconsignment,aleaseofgood,an

assignment,atransferoftitle,andaflawedassetofarrangement.Thislistgives

examples of transactions falling within the PPSA’s scope due to the security

function thereof rather than limiting the concept of a security interest to the

listed transactions24. Fixedcharge, floating charge, chattelmortgage,pledgeare

conventionalsecuredtransactionslongacceptedinAustraliawhereasothersare

securityinterestsinsubstancerecognizedfromtheenactmentofPPSA.

20ibid21Barns-GrahamVandGulliferL,seen.16,atp.39522PPSA2009s12(1)23PPSA2009s12(2)24WhittakerB,seen.2,atp.45

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ThePPSAadoptstheostensibleownershipastheprimaryprinciple,recognizing

it as amaterial concern that could be solved by the requirement of perfection

includingregisteringafinancingstatement;otherwise,thegivensecurityinterest

could not prevail over competing interests in the same collateral in some

instances25. The PPSA has a scope of application beyond security interests in

substancetocoverthreekindsoftransactioncalled"deemed"securityinterests,

namelytheinterestof(1)atransfereeunderatransferofanaccountorchattel

paper, (2) a consignorwhodelivers goods to a consignee under a commercial

consignment, (3) a lessor or bailor of good under a PPS lease 26 . These

transactionsare treatedas security interests irrespectiveof theydonotsecure

paymentorperformanceofanobligation.Transactionsofthosekindalsocreate

the problem of ostensible ownership like a non-possessory security interest.

Therefore,theextensionofthePPSAtothosegiventransactionsisforperfection

andpriorityranking,butnotforapplyingenforcementrules.

The Australian PPSA provides a good lesson to deal with the ostensible

ownershipproblemarisingfromtrueleaseandbailment,whichdoesnotsecure

paymentorperformanceofanobligation.UnlikeArticle9,PPSA-stylelegislations

includeleaseandbailmentintotheirschemeofperfectionandprioritybutlimit

thescopeofapplicationtocertaintypesofleaseandbailmentcalledaPPSlease.

IntheAustralianPPSA,aPPSleasegenerallyembracesanyleaseorbailmentof

goodsthathaveaparticular longterm, for instances formorethanoneyearor

more than 90 days concerning serial-numbered property27,and the lessor or

bailor must regularly engage in the business of leasing or bailing goods

respectively28.InAlbarranandOthersvQueenslandExcavationServicesPtyLtd,it

is argued that the lessee has rights not limited to possessory rights, but also

proprietaryrightstoattachasecurityinteresttotheconcerneditem29.Thecourt

reliedon thepolicyaddressed in theNewZealandCommission’s reporton the

25WhittakerB,seen.2,atp.39-4126PPSA2009s12(3)27PPSA 2009 s 13(1). The lease or bailment term may have more than one-year term, orindefiniteterm,oratermofuptooneyearthatisautomaticallyrenewableorrenewableattheoptionofoneparty.28PPSA2009s13(2)29[2013]NSWSC852,atpara.26

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PPSAtotreat thecommercial leasesimilar tochattelmortgagesandchargesas

well as title-based securities because it raises the same degree of apparent

ownership30. It is understandable that a long-term lease can raise a relatively

severeostensibleownershipproblem.However,withoutanexplanation,itisnot

clear why a lessee or a bailor must be engaged in the business of leasing or

bailinggoods respectively.Bailment iswortha fewwordsofdiscussion in this

respect.Basically,twotypesofbailmentaresubjecttothePPSA,oneofwhichin

substance secures payment or performance of an obligation to be treated as a

security interest31. The other is deemed security interest thatmust have three

conditions, twoofwhicharementionedabove,namely (1)more thanone-year

term in general, (2) the bailor is regularly engaging in the business of bailing

goods,and(3)“thebaileeprovidesvalue”32.

InReArcabiPtyLtd,tofindthatthebailorwasnottoengageinthebusinessof

bailing goods, the court relied on New Zealand Court of Appeal’s argument in

Rabobank33.TheRabobankcourtinterpretedtheword“inthebusinessof[bailing]

goods”asthattheowneractuallyintendedtogainprofitfromthebailmentand

excluded bailment where the bailor did not receive payment, and it is the

businessofthebailee34.

Withregardtotheconditionrequiringthebaileetoprovidevalue,theReArcabi

PtyLtdcourtavoidedansweringthegivenquestionthatwasconsidereddifficult.

Otherwise, it provided two alternative interpretations 35 . One was the

requirement that the bailee provided consideration at large that included

services the bailee provided the bailor, and bailment was incidental to such

30ibid,atpara.3131[2014]WASC310,atpara.1932PPSA2009s13(3)33ReArcabiPtyLtd,seen.31atpara.2434RabobankvMcAnulty,[2011]NZCA212,atpara.40.TheNewZealandPPSAhastheequivalentprovisionthattreatsaleaseformorethanoneyearasasecurityinteresteventhoughitdoesnotmeet the requirement of the security interest definition. This provision mentions “lease andbailment of goods” to embrace into a lease formore than one year, but the remainder of theprovisionrefersonly lease.TheRabobankcourt came toconclusion that the reference to leaseshouldbeconsideredasshorthandreferencesbacktothephrase“leaseandbailmentofgoods”.Ibid,atpara.27.35ReArcabiPtyLtd,seen.31,atpara.26

130

performance.Awarehouseagreementandcarrepairinagaragewereexamples

inthissense.Theotherwasthespecificconsiderationthatthebaileegaveforthe

bailment. It is argued that the latter alternative was preferable since it was

aiming at limiting the application of PPS lease on bailments36. The former

alternativemay includeallbailments intotheconceptofPPS leasebecausethe

baileealwaysprovidesconsiderationbyperformingaservice37.

The provisions for PPS lease do not probably take into account of Article 9

experiences concerning bailment for processing where the bailee use the

materialsuppliedbythebailorandreturnproductsinexchangeforthefee38.The

bailmentofthiskindislikelynotatthecommonknowledgethatthebaileedoes

not own the goods likewheat in a grainwarehouse, or cars in the garage for

repair,particularlywhenthebaileealsomanufacturesitsowngoodstosell.The

materialinpossessionofthebaileeraisesseriousostensibleownershipproblem

sincethebaileecanmisinterpretherinterestinthegoodstothirdparties.

BailmentforprocessingisalsoagoodillustrationthattheAustralianPPSApolicy

dealing with ostensible ownership is likely to have a gap if it excludes the

bailmentofthiskindfromthescopeofthePPSlease.Thebailorisdoubtedtobe

“regularlyengagedinthebusinessofbailinggood”.Itcanbeprimarilyarguedthat

the bailor in the given transaction is regularly engaging in the business of

bailment because the profit gained is the value added when the bailee return

processed or manufactured goods. However, in this transaction, the bailee

receivesservice feeotherthanmakingpayment forusingthematerials. Itdoes

notmeet the requirement that the bailee provides value if a relatively narrow

interpretationisaccepted.

AlthoughAustraliaandtheUnitedStatesbelongtothecommonlawtradition,the

context in Australia is not similar to that of the United States, which had long

adoptedfunctionalisminmanystatutesto treat, for instances,conditionalsales

and trust receipts as registrable security devices prior the publication of the

36DugganAandBrownD,AustralianPersonalPropertySecuritiesLaw (2nded.edn,LexisNexisButterworths2016),atp.8137ibid38Seediscussioninpart3.2.1.1ofthisthesis

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UCC39.Formalism,whichstrictlystressesthelegalformofpropertytransferand

the grant theory in which a debtor must own the asset to create a security

interest, has a deep root in the Australian-Anglo common law thinking40. The

focus on the questionwho owns the property from the formalismperspective

surprisingly complements the operation of functionalism. In Albarran, it was

correctlyassertedthat theconceptofownershipwasnot irrelevanteven inthe

case of PPSA priority framework41 . In this case, the defendant leased and

transferred possession of caterpillars to the company M. M was periodically

invoicedandpaidtothedefendanttheamountcorrespondingtofinancecharges

payablebythedefendanttoitssecuredcreditorswhofinancedthedefendantto

acquire the caterpillars.M then created security interests in favour of F in the

caterpillars. F throughitsreceiversclaimedpossessionof thecaterpillars. The

Albarran court tried to answer the question who was the true owner of the

vehiclesandfoundthatMownedoneandthedefendantownedthetwoothers42.

Mhadpaidoutallexpensesincurredforthedefendanttoacquireonecaterpillar,

and after that, the defendant did not render any invoice relating to this

caterpillar. Concerning two caterpillars belonged to the defendant, the court

foundthatMpossessedunderaleaseaccompaniedbyanagreementtotransfer

titleupon thedischargeof the finance43.The leasewasqualifiedasaPPS lease

thatrequiredregistration.

It isworthnoticingthat thesurroundingcircumstancesrelatingto threemotor

vehiclesweresimilarexceptthatMdidnotpayoutthefinancechargesrelating

to the concerned two caterpillars. This fact was apparently invisible to third

partieswhowere likely to take security interests in the caterpillarsdue toM’s

possessionandpossiblyaclearconcernedpublicrecordshowingthattheywere

unencumbered. TheAlbarrancourtwas correct to distinguish ownership from

“rightsinthecollateral”thatMhadtoattachasecurityinteresttothecaterpillars.

M’s full ownership acquired by the discharge of the finance cut off any

39Seediscussiononpart3.2.1.1ofthisthesis.40GulliferL (ed),GoodeonLegalProblemsofCreditandSecurity (4th edn, first published2008,Sweet&Maxwell2012)atp.1141AlbarranandOthersvQueenslandExcavationServicesPtyLtd[2013]NSWSC852,atpara.1142ibid,atpara.11-943ibid,atpara.17

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proprietaryrightsofthedefendantintheconcerneditem.Incontrast,therights

of defendant in the other items remained and lack of registration resulted in

subordinationtotheclaimofothersecuredcreditorswithrespecttothoseitems.

The United States case law demonstrates confusion and uncertainty when it

deals with ostensible ownership problem arising from commercial lease and

bailment44. TheAustralianruling inAlbarranprovesthat it isnot the failureof

functionalism to distinguish between ownership and security as different

concepts,buttheuncertaintyinAmericanlawinthisrespectisaresultoffailing

tobringtrueorcommercialleaseandbailmentintotheambitofArticle9. The

PPSA treatment of PPS lease is valuable for any jurisdiction, even the United

States, that considersbringing leaseandbailment into the scopeof the lawon

securedtransactionsinpersonalpropertyforperfectionandpriority.

4.2.2 Purchase-moneysecurityinterest

Aconditionalsale is among the listof security interests.The term “conditional

sale”, which is under common understanding in the American and Canadian

context amounting to title retention, is imported into the PPSA. However, a

conditional sale in the Australian context is broader than title retention. In

businesscommonsense,itisanagreementsubjecttoanyconditionnotlimited

to title retention tobe satisfied to completea sale transaction45. It issuggested

thattheterm“conditionalsale”shouldberemovedandthearrangementwould

be referred as “an agreement to sell subject to retention of title” to avoid any

ambiguityanduncertainty46.

Since title retention is subject to an in-substance security interest under the

PPSA,atitle-retainingsellercanprotectherinterestunderthePMSIframework

to gain the super-priority position. Title retention as a security interest in

substance from now on does not degrade the priority claim over the goods

suppliedsolongastheseller/securedpartycomplieswiththerequirementofa

44Seediscussiononsub-section3.2.1.1ofthisthesis45WhittakerB,seen.2,ap.4646ibid,atp.47

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PMSI. Nevertheless, the regime of PMSI has drastically changed the nature of

relationshipsarisingfromRomalpaagreements.

Apurchase-money security interest (“PMSI”)47isdefined in section14(1)PPSA

2009:

(a) asecurityinteresttakenincollateral,totheextentthatitsecuresallorpart

ofitspurchaseprice;

(b) a security interest taken in collateral by a personwho gives value for the

purpose of enabling the grantor to acquire rights in the collateral, to the

extentthatthevalueisappliedtoacquirethoserights;

(c) theinterestofalessororbailorofgoodsunderaPPSlease

(d) the interest of a consignor who delivers goods to a consignee under a

commercialconsignment.

Althoughthisdefinitiondoesnotrefertotherelatedconceptofpurchase-money

collateralandpurchase-moneyobligation, ithasasimilareffect to theArticle9

definition.Specifically,itissimilartothedefinitionundertheformerUCCexcept

thattheformerUCCstipulatedthatasellerPMSIistheone“takenorretainedby

theseller”48.Theword“retained”doesnotappearintheAustralianversion.Thus,

itisquestionablethatthePPSAimpliedlyconsiderstitleretentionasthepassing

of property to a buyer together with the grant-back of a security interest in

favour of a seller. The PPSA lacks provisions corresponding to the UCC that

expresslyconsiderstitleretentionlimitedtoareservationofasecurityinterest49,

and“titlepassestothebuyer...despiteanyreservationofsecurityinterest”50.

The concept of PMSI is classified as a seller and a lender PMSI. From the

Americanexperienceoftheapplicationofthisconcept,determinationofaPMSI

should respond to many issues. Among them is the scope of purchase-money

obligation concerning “purchase price” and “value for the purpose of enabling”

withregardtoasellerandalenderPMSIrespectively.ThePPSAexpresslystates47TheexactterminthePPSA2009iswithouthyphen:purchasemoneysecurityinterest,whiletheterminArticle9hashyphen:purchase-money.48FormerUCC§9-10749UCC§1-201(35)and2-401(1)50UCC§2-401(2)

134

thatpurchasepriceorvalue“includes…creditchargesandinterestpayableforthe

purchase or loan credit” 51 that is narrow relative to the corresponding

interpretation under Article 9 that generally covers “expenses incurred in

connectionwithacquiringrightsinthecollateral”52.

ThePPSAhasthesamesolutiontoArticle9dealingwithsituationscalledmixed

security interests where the purchase-money collateral secures other

obligations,oranothercollateralsecuresthepurchase-moneyobligation53.They

are called mixed securities under Australian law. The purchase-money status

remains, but the PMSI is limited to the purchase-money obligation or the

purchase-moneycollateral54.

It changed the legal consequence of allmonies title retention clause under the

leadingAmourvThyssenEdelstahlwerkeAGcase55,asillustratedinthefollowing

example56.

Example:Allmoniesretentionoftitleclausepre-PPSAandpost-PPSA

D grants a security interest to SP1 in all present and after-acquired property.

Later,SP2sellsanitemofequipmenttoD.Thetitleretentionclausestatesthat

SP2 retains ownership of the goods until all debts owing to SP2 including the

purchasepricearepaidinfull.

Theallmonies retentionof title clause isupheld inpre-PPSAunder thesaleof

goods law and the Amour case. Generally, SP2 has priority over SP1 in the

equipmenteventhoughthepurchasepriceoftheequipmentispaidinfull.

UnderthePPSAs14(3),titleretentionistreatedasaPMSIanddebtsotherthan

thepurchasepriceoftheequipmentarenotapurchase-moneyobligation.IfSP1

51PPSA2009s14(8)52Comment3totheUCC§9-103,seeOfficialComment,atp.83053UCC§9-103(f)allowsthepurchase-moneycollateraltosecurenon-purchase-moneyobligationand the non-purchase-moneycollateral to secure purchase-money obligation in non-consumergoodstransactions.54 PPSA 2009 s 14(3), (4). Unlike Article 9, the PPSA 2009 only defines purchase-moneyobligationcorrespondingtoitsdefinitionofPMSI.55[1991]2AC339;[1990]3WLR81056ThisexampleanditsfollowingdiscussionareadaptedfromDugganA,seen.3,atpp.656-7

135

andSP2perfecttheirsecurityinterestproperly,SP2haspriorityoverSP1inthe

equipmenttoenforcethepaymentofit.Withregardtootherdebts,thepriority

between SP1 and SP2’s security interest in the equipment depends on who

perfectstheconcernedsecurityinterestfirst.

The PPSA PMSI embraces a PPS lease and a commercial consignment in the

ambit. This treatment of PPS lease as a PMSI is not found in Article 9, but it

expressly considers the consignor’s interest in goods as a PMSI in inventory.

Generally, a lease can be categorized into two types: one in substance secures

payment or performance of an obligation, and the other is not in substance a

securityinterestbutqualifiestobeaPPSlease57.APPSleasehasatermofmore

than one year, and the lessor or bailor engages in the business of leasing or

bailinggoodsrespectively.Itshouldbenoticedthatasaleandleasebacktothe

seller is excluded from the concept of PMSI. If a PPS leasewhich is a deemed

security interest for thepurposeof thePPSAhadnotbeentreatedasaPMSI,it

wouldhavegivenrisetoanundesirableoutcome58.Supposethatalessorleases

anitemofequipmentunderatwo-yearoperationleasethatmayfallwithinthe

scope of after-acquired property subject to an earlier-filed security interest

grantedtoanothercreditor59.ItisunexpectedthataPPSleaseinthegivencase

was subordinate to the earlier-filed after-acquired property security interest

withregardtotheitemofequipmentathand.

However, a security lease cannotbe itself aPMSIunder thePPSA. It raises the

question whether the like undesirable outcome occurs if the secured

party/lessordoesnothavethe firstpriority60.Thepoint is thatasecurity lease

shouldmeetallconditionsofaPMSItohaveapurchase-moneystatus.

Withregardtocommercialconsignments,thescopeexcludesanytransactionin

whichaconsigneeisanauctioneerorinthebusinessofsellingorleasinggoods

ofother61.Theexclusiondemonstratesthattheostensibleownershipproblemis

57PPSA2009s1358DugganAandBrownD,seen.36,atp.24659ibid60WhittakerB,seen.2,atpp.316-761PPSAs10

136

not serious to be solved, and registration is unnecessary if third parties has

generalknowledgeofit.

4.3 Establishmentofpurchase-moneysecurityinterest

A PMSI must comply with the general rule governing security interests to be

effectiveagainstthegrantorandthirdparties.Attachmentandperfectionaretwo

imported concepts referring to the enforceability and priority ranking

respectively.

4.3.1 Attachment

In general, “a security interestattaches to collateral” to be effective against the

grantorwhen(1)thegrantor“hasrightsinthecollateral,orthepowertotransfer

rightsinthecollateraltothesecuredparty”,and(2)“valueisgivenforthesecurity

interest”62.Asecurityagreement is implicitlyrequiredsincethePPSAapplies to

consensualsecurityinterests63.

Attachmentandawrittensecurityagreementwithadescriptionofthecollateral

arerequiredforasecurityinteresttobeenforceableagainstthirdparties64.The

slightdifferencefromArticle9isthatattachmentunderthePPSAisnotsufficient

to enforce a security interest against third parties, and it does not require an

authenticatedsecurityagreementwithadescriptionofthecollateral.Thegiven

requirementisseparatelyprovidedforenforceabilityagainstthirdparties.

Enforceability of a security interest under the PPSA can be said to have two

levels: (1) against the grantor, in other words, when “the security interest has

attached to the collateral”, and (2) against third parties. Despite the foregoing

difference, theenforceability against thirdpartiesunder thePPSAcorresponds

welltoArticle9.

Theabsolutepropertyismorethansufficienttograntasecurityinterest,butitis

uncertain when the grantor is not an owner but having possession of the

62PPSAs19(1),(2)63DugganAandBrownB,seen.36,atp.10664 PPSA s 20(1), (2). Alternatives for a written security agreement is the secured party’spossessionofcollateral,orperfectionbycontrol.

137

collateral. It expressly states that “when the grantor obtains possession of the

goods”underaconditionalsaleincludingarrangementsubjecttotitleretention,

aswellasunderaPPSlease,shehas“rightsinthecollateral”65.Inotherwords,it

isnotmerelyapossessoryrightbutamountingtotheproprietaryrighttogranta

securityinterest66.

The formalities requirement, for instance, a written security agreement, is

strictly essential to enforce a security interest against third parties and

constitutesaconditionfortheperfectionpurpose.Possessionandperfectionby

control are also alternatives tomeet the formalities requirement67. In the title

retentioncontext,thesealternativesarenotsuitablebecausethegoodssubjectto

titleretentionareexpectedtobereleasedtothebuyer/grantor.Theformalities

requirementcanbeexpressedasfollows:

(1) Asecurityagreementisevidencedinwriting;

(2) Thewritingissignedbythegrantororadoptedoracceptedbythegrantor

byherconductshowingherintentiontoadoptoracceptthewriting;

(3) Thewritingcontainsadescriptionofthecollateral68.

Writingisdefinedbroadlytoincludeanyrecordofwordordata69,andmethodof

signing includesbothhand-writingandencryptedsignature70.Therequirement

ofthesignedwritingbyagrantorevidencedasecurityagreementisconsidered

tofacilitatethepracticeofsaleandpurchasetransactionsthatpossiblyinvolves

the correspondence exchange between parties, and a buyer/grantor may sign

onlyapieceofcorrespondenceoracceptbyherconduct71.

Like American courts, Australian courts have adopted the collage doctrine to

decide that a combination of writings with adequate references showing a

description of the collateral and the grantor’s signature or other conduct of

65PPSAs19(5)66AlbarranandOthersvQueenslandExcavationServicesPtyLtd[2013]NSWSC852,atpara.2667PPSAs20(1)(b)68 PPSAs20(2). See CarrafavDokaFormworkPtyLtd,[2014]VSC570(2014),atpara.4369PPSAs1070PPSAs20(3)71WhittakerB,seen.2,atp.123;DugganAandBrownD,seen.36,atp.117

138

acceptance can fulfil the formalities requirement72. The writing evidencing a

securityagreementmustcontainadescriptionofthecollateral.Thewritingcan

describethecollateralasthegrantor’sallpresentorafter-acquiredpropertyor

all present or after-acquired property except specified items or classes of

personalproperty.Article9doesnotallowasimilardescriptionforthepurpose

ofattachment,butitisacceptableforadescriptionofthecollateralinafinancing

statement. Except for this, the PPSA adopts the Article 9’s approach that only

requires a description sufficient to “make possible the identification of the

collateraldescribed” rather thanan “exactanddetailed”one73.With regard toa

PMSI, the collateralmust be carefully identified. The priority status is granted

only to a security interest securing the purchase price of the collateral or the

valueenablingagrantortoacquirerightsinthecollateral.Insaleandpurchase

transactions subject to title retention, it is not likely to cause the problem of

descriptionbecausethegoodssubject-matterofthesaleagreementarealsothe

collateral subject to the relevant PMSI, and they must be identified to fulfil

requirementsofthesaleofgoodslaw.

4.3.2 Perfection

Perfection, like attachment, is a freshly-imported term introduced into the

Australianlegalsystem.Itreferstothevalidationofasecurityinterestinlightof

priority against other creditors and other third parties. Basically, a security

interestfulfillingtheformalitiesrequirementiseffectiveagainstthirdpartiesas

intheforegoingdiscussion,butitisnotaconditiontosetuppriorityoverother

competing claims in the same collateral. However, perfection does not mean

absolutepriorityenjoyedbyasecurityinterestoverotherinterestssincethereis

usuallyascenarioof twoormorecompetingperfectedsecurity interestsin the

samecollateral74.Itisalsonotessentialtohaveaperfectedsecurityinteresttobe

superiortootherinterests,forexample,isthecaseoftwocompetingunperfected

securityinterests75.

72CarrafavDokaFormworkPtyLtd,[2014]VSC570(2014),atpara.45-50,73Comment2totheUCC§9-108,seeOfficialComment,atp.83774DugganAandBrownD,seen.36,atpp.132-375ibid

139

Ingeneral,underthePPSA,perfectioncanbeclassifiedintothreemodes,namely

registration, possession and control, all of which carry the function of giving

public notice about the possibility of a security interest76 . There are also

additional modes of temporary or automatic perfection where the concerned

securityinterestisnotrevealedtothepublicduringthetimeofperfection77.

Registration,which isa termused inAustralian jurisdiction insteadof theterm

“filing”inArticle9,isapparentlythemainmethodofperfection,andinthetitle

retention context, it is the most suitable one since the goods/collateral are

expectedtobeinagrantor’spossession.

PriortothePPSA,theAustralianregistrationlawprovideddifferentregimesfor

differenttypesofcollateralortypesofsecurityinterestsortypesofdebtors,for

instancesarethebillofsaleregister,themotorvehiclessecuritiesregister,orthe

registerofcompanycharges78.Underthefunctionalapproach,securityinterests

byfunctionaresubjectedtothesametreatmentincludingauniqueregistration

system. TheAustralian PPSA adopts the concept of a notice filing register that

covers almost all security interests, but it also has its own developments and

achievements. The Australian registration is centralized, that is to say, the

registrationisatthefederallevelandsubjecttofederalstatutes.Registrationis

governed not only by the PPSA but also the Personal Property Securities

Regulations(hereinafter“PPSR”)supplementingthePPSA.Thepersonalsecurity

interest law in the United States and Canada is state-based; therefore,

registrationorfilingissubjecttodifferentstate-basedsystems.

The content of a financing statement under the Australian law reveals more

informationthanofArticle9,whichrequiresonlydetailsofthesecuredparty,of

thegrantorandadescriptionofthecollateral79.SearcherscanlearnfromaPPSA

76WhittakerB,seen.2,atp.12777ibid78SeemorediscussionontheAustralianpre-PPSAregistrationinDugganAandBrownD,seen.36,atpp.161-479PPSAs153(1),Item1,2,and4ofthetable

140

financingstatementtheendtimeofregistration,whetherthesecurityinterestis

subordinatetoanyothersecurityinterests,whetheritisaPMSI80.

Asecurityinterestisregisteredagainstthegrantor’sname,ortheserialnumber

of collateral if it is consumerproperty81. In the latter case, it isnot required to

include thegrantor’sdetails intoa financing statement82. Searchers relyon the

grantor’snameorserialnumbertodiscoveranypossiblesecurityinterestsupon

theirconcernedcollateral.Anymistakeinregisteringthegrantor’snameorserial

number that leads the search against the grantor’s name or serial number

respectively to an undisclosed security interest will invalidate the financing

statement83,thusmakingthesecurityinterestunperfectedunlessitisperfected

byothermodes.Article9doesnot combine thegrantor’snamesearchand the

serialnumbersearchinthenoticefilingsystem.Serialnumberedpropertymay

besubjecttonon-UCCfilingsystemslikeastatecertification-of-titleonewhere,

forexample,anautomobileisthecollateral.

Adescriptionofthecollateralissupposedtobeoneofthemostcrucialpartsofa

financing statement. It provides details of which asset of the grantor is

encumbered.Despiteitsexpectedfunction,theideaofanoticefilingsystemisto

providelimitedinformationthatdemandsfurtherinquiries.ThestudyonArticle

9financingstatementdemonstratesthatsearcherswillbegivennoticeaboutthe

possibility of a security interest upon the debtor’s asset, which is usually all

existing or after-acquired property or some categories of property. Except for

involving serial-numberedconsumerproperty, a financingstatementunder the

PPSAdoesnotdeviatemuchfromitsArticle9counterpart,eventhoughitcalls

for relatively comprehensive data. A description must meet all the following

requirements84:

- Indicatingthecollateralascommercialpropertyorconsumerproperty;

80PPSAs153(1),Item5,6,and7ofthetable81Serial-numberedpropertyisidentifiedas,aircrafts,motorvehicles,watercraft,someintangibleproperty like a design, a patent, a plant breeder’s right, a trade mark or a license over anyintangibleproperty.SeePPSRSchedule1Clause2.2.82PPSAs153(1),Item2ofthetable83PPSAs164(1)(b),165(a),(b)84PPSAs153(1),Item4ofthetable

141

- Indicating the serial number in case it is consumer property. Indicating

theserialnumberofcommercialpropertyisoptional;

- Indicating a single class prescribed by the PPSR, namely agriculture;

aircraft; all present and after-acquired property; all present and after-

acquiredproperty,except;financialproperty;intangibleproperty;motor

vehicles;othergoods;watercraft85;

- ProceedsmustbedescribedincompliancewiththePPSR,thatistosay,it

must be described as the present and after-acquired property, or

identified particular property by item, or by the class of personal

property86.

If therearetwoormoredifferentclassesof thecollateral, thesecurity interest

mustbe registeredseparately87. For instance, a cardealermaygranta security

interest in cars, tool and equipment, parts and accessories to seek financing

assistance.Thesecuredpartymustregisterafinancingstatementdescribingthe

collateral as “commercial property, motor vehicle”, and another financing

statementdescribingthecollateralas“commercialproperty,othergoods”.

Uncertainty occurs by the compulsory indication of commercial or consumer

property,andasingleclassprescribedbythePPSR.Forexample,asecuredparty

mustdistinguishbetweenmotorvehicle,aircraft,watercraft,andothergoods,or

between financialpropertyand intangibleproperty.A financing statementalso

hasafreetextfieldsothatasecuredpartycangiveamorespecificdescriptionof

collateral than foregoing compulsory identification. It is worth repeating that

Article9doesnotrequireanycompulsoryindicationofcategoryorclassofthe

collateral although it does define categories of goods, for example, equipment,

inventory,orchattelpaper.IntheArticle9financingstatement,thefilerisathis

discretiontodescribethecollateralathandbyfillinginafreetextfield.

ItcannotconcludethatanArticle9oraPPSAfinancingstatementcangivemore

information of the collateral to prospective secured parties or lenders. The

followingillustrationmayshedlightonthispoint.Assumingthatasecuredparty85PPSRSchedule1Clause2.386PPSRSchedule1Clause2.487PPSAs153(1),Item4ofthetable

142

supplies credit to a car dealer by taking a security interest in cars, trucks and

othermotorvehicles,accessoryandparts,toolandequipmenttooperatethecar

dealer’sservice.InanArticle9financingstatement,collateraldescribedinafree

textfieldas“allandafter-acquiredinventoryandequipment”sufficientlycovers

typesofassetswithintheparties’ intentionwithregardtocollateral. InaPPSA

financingstatement,thesecuredpartymustindicatethecollateralascommercial

property and a single class of collateral that requires at least two financing

statements to indicate “motor vehicles” and “other goods” separately. Both of

financingstatementsmayormaynotneedadescriptioninafreetextfieldlikean

“all and after-acquired” term, or details like accessory and parts, tool and

equipment. Inacontextthatagrantorisacardealer,itisexpectedthatmotor

vehicles on sale, accessory and parts, tool and equipment for the service are

collateral despite that they are described as inventory and equipment under

Article9ormotorvehiclesandothergoodsunderthePPSAfinancingstatement.

However,thefilerunderthePPSAandPPSRschemehasmoreburdentoprovide

compulsory information that may not satisfy the searcher’s demand for

information. In fact, a searcherwhoproposesa secured loan is ina strategy to

ask for further information, for instance, specific security agreements, after

lookingattheregistrationinbothjurisdictions.

The registeredsecurity interestmustbe indicatedasapurchase-moneyone to

enjoy the super-priority ranking. However, it is ambiguous about the legal

consequence of failing to tick the PMSI box. If itmakes a seriouslymisleading

defect, theregistration is ineffective,andasaresult, thesecurity interest isnot

perfected88. The PPSAdoes not define a “seriouslymisleadingdefect”. InFuture

Revelation Ltd v Medica Radiology & NuclearMedicine Pty Ltd, the New South

Wales Supreme Court relied on Canadian case law to find that a defect is

seriouslymisleadingifasearchdoesnotdiscloseaconcernedsecurityinterest89.

In other words, the purpose of registration is to reveal a possible security

interest granted by a grantor upon the collateral, so a defect that makes this

purpose impossiblemust be seriouslymisleading. Failing to tick the PMSI box

88PPSAs164(1)(a),s2189[2013]NSWSC1741

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doesnotleadtoanundisclosedsecurityinterestuntilandunlessthereferenceto

the collateral or the grantor is correct. The undisclosed information is the

expected purchase-money status. Thus, it is satisfactory to keep the financing

statement effective, but the secured party cannot claim the super-priority

ranking.

On the otherhand, thewrong indicationof a PMSI in the collateral is a defect

causing an ineffective registration 90 . The security interest is, therefore,

unperfected.Thevalidityofasecurityinterestagainstthirdpartiesischallenged

notonlyregardingthesuper-priorityrankingbutalsoageneralsecurityinterest

asawhole.

Article 9 does not require a PMSI notice in a financing statement.However, to

enforce a PMSI in inventory, the purchase-money secured party is expected to

send a notification to earlier secured parties holding a conflicting security

interest in the same collateral. Notification via a public registration is the best

wayof givingnotice to the extent that it constructively informs the restof the

worldabout theexistenceof aPMSI in the collateral. Surprisingly, anArticle9

financingstatementdoesnotcarrythis function.Thispolicy isexplainedthata

PMSI only has a severe impact on earlier after-acquired property security

interests, and the purchase-money status is meaningless to later security

interests.Generally,anearlier-filedcreditordoesnothaveanyrespondagainst

the interference of a PMSI, except for inventory financing. If an inventory

financierknowsaboutaPMSIfiledagainstthesamecollateral,shewillconsider

not to make the further advance to the debtor to finance the up-coming

inventory.ThisisthereasonwhyArticle9isonlyconcernedwithacompulsory

notification to earlier-filed creditors with regard to inventory collateral. The

Article 9 solution is likely efficient since the notice is sent directly to all

concernedcreditors,whereas,underthePPSA, theconcernedcreditorsneedto

searchtherecordwhenevermakinganadvanceforanyinterveningPMSI.

The indication of a PMSI does not bring much benefit to both existing and

potential creditors other than earlier-filed inventory financierwhomay prefer

90PPSAs164(1)(b),s165(c)

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privatenotificationaboutaPMSIasdemonstratedintheArticle9policy.Under

thePPSA, thesecuredparty,particularlyapurchase-money lendereven losesa

perfectedsecurity interestwhen it is turningoutanon-purchase-moneyone. It

is, therefore, recommended to abolish the requirement of purchase-money

indicationinafinancingstatement91.

In brief, description of collateral under Article 9 is at the filer’s discretion to

optimizethesecuredparty’sinterestswhereasunderthePPSA,itiscompulsory

togiverelativelydiscreteinformationthatcausesburdenratherthanthebenefit

tothesecuredparty.

ThephilosophyofthenoticefilingsysteminitiatedbyArticle9isasimplenotice

sayingthatasecurityinterestpossiblyencumberssomeorallthedebtor'sassets.

Follow-up inquiry with the debtor will give more information about any

outstanding security agreement covering the collateral. The PPSA notice filing

systemdoesnotfullysatisfywiththispolicy.Itexpressestheconcernaboutthe

likeness of “inappropriate or overreaching registration” where the grantor’s

asset appearsmoreheavilyencumbered than in fact it is92. It requires to some

degree a belief about a security interest. To register a financing statement, a

personmustbelieve“onreasonablegrounds”thatthesecuredpartydescribedin

a financing statement “is, or will become, a secured party in relation to the

collateral”,otherwiseacivilpenaltywillapply93.Therequirementofbeliefaims

atpreventingunnecessaryorharassingregistration94.

Unlike Article 9, the PPSA does not ask for the grantor’s consent when the

securedpartyregistersafinancingstatementbeforeasecurityagreementcomes

intoexistence.Thegrantor’sconsentisarguedtocauseanadministrativeburden

for advance registration95. However, the requirement of the grantor’s consent

discouragesannoyingorinappropriateregistration.Itisalsoeasiertoascertain

thegrantor’s consent than the securedparty’sbelief.ThePPSAalso requiresa

91WhittakerB,seen.2,atp.21392SeedetaileddiscussioninWhittakerB,seen.2,atpp.214-22193PPSAs151(1)94WhittakerB,seen.2,atp.21595WhittakerB,seen.2,atp.216

145

financing change statement to end the registration when a secured party

mentionedinafinancingstatementhasneverbeenasecuredpartyinrelationto

the collateral or no reasonable grounds exists to believe in a future security

agreement96. Ingeneral, the foregoing statementmustbe submittedwithin five

businessdaysafterthedayofregistrationifthereisnosecurityagreementorno

reasonablegrounds97.However,asecuredpartydoesnothaveanyobligationto

removeavalidfinancingstatementwhenallsecuredobligationsaredischarged,

andthereisnocommitmentoffutureadvance,orwhentheparticularcollateral

is free fromthesecurity interestuntilandunlessapersonwhohas interests in

the collateral sends a written amendment demand 98 . The secured party’s

obligationtoremoveafinancingstatementwhenthenegotiationisfailedunder

thePPSAdoesnot strengthen the certaintyofoutstanding security interests in

the collateral covered by a financing statement. Any prospective secured party

when discovering an effective financing statement is in a strategy to ask for

follow-upinformation,forexample,whetherthereisnocollateraldescribedina

financingstatementsecuredanyobligationowedbyaprospectivegrantor.Ifitis

thecase,agrantorshoulddemandafinancingamendmentstatementtoremove

an existing financing statement, thus ensuring that a prospective creditor will

havethefirstprioritybyregistration.

Advance filing or registration is a unique advantage of a notice filing system

whereasitisimpossibleinthetransaction-basedregistration.Itallowsnotonlya

candidate secured party to set up a date for priority purpose by registering a

financing statement before a security agreement comes into being but also

facilitates the possibility of one registration covering multiple continuing

security agreements that enjoy the same priority date. The PPSA places a

relatively heavy burden on a registrant at the applying stage, the underlying

policy of which is probably to avoid several unnecessary and annoying

registrations. Advance registration, therefore, should be applied in the light of

careful consideration. The PPSA is not likely to fully adopt the philosophy of

96PPSAs151(2)97PPSAs151(3)98PPSAs178(1)

146

Article 9’s notice filing system, that is a simple notice of possibility, not a

certaintyofasecurityinterest.

4.4 Purchase-moneysecurityinterestpriority

The priority regime imported from the Article 9 model is one of the novel

featuresofthePPSA.Basically,thefirst-to-fileruletakestheplaceoftheprevious

long-standingpriorityrulerelyingontheorderofsecurityinterestcreation.The

first priority of PMSI is recognized, constituting a turning point change in the

treatmentofRomalpaclause.

4.4.1 Purchase-moneysecuredcreditorvs.unsecuredcreditor

Generally,asecurityinterestisenforceableagainstthegrantorandthirdparties

when it attaches to the collateral and the formalities requirement is met.

Registrationasamodeofperfectionisnotrequiredtovalidateasecurityinterest

against third parties. Perfection is, first and foremost, a concept dealing with

priority matters. This default rule is corresponding to the Article 9 principle.

Likewise, in the bankruptcy or winding up context, an unperfected security

interestisneverthelesschallenged.

When a security interest is unperfected at the time some insolvent events

commence, thisunperfectedsecurity interest“vestsinthegrantor” immediately

before these events occur99 . These challenging circumstances are listed as

follows: (1) “anorder ismade, ora resolution ispassed, for thewindingupofa

company or a body corporate”, (2) “an administrator of a company or a body

corporateisappointed”, (3)“acompanyorabodycorporationexecutesadeedof

companyarrangement”,(4)“asequestrationorderismadeagainstaperson”,and

(5)apersonbecomesabankruptbyavoluntary filing forbankruptcy100.Other

insolvency-related events like debts agreements, personal insolvency

agreementsorreceivershipareexcluded101.

99PPSAs267(1),(2)100PPSAs267(1)(a)101DugganAandBrownD,seen.36,atpp.406-7

147

Theterm“vestsinthegrantor”isdebatablesinceothertermslikean“ineffective”

in the Canadian versions of PPSA or “void” under the previous Australian

CorporationActarerelativelyconventionalandunderstandable102.However,the

AustralianPPSA,theCanadianversions,andevenArticle9reachthesamelegal

consequenceinthiscontext,thatisthegrantorhasallrightsandinterestsinthe

collateralfreefromanysecurityinterestforthebenefitofgeneralcreditorswhen

asecurityinterestisnotperfectedattheinsolventevent.

TheCorporationActcomplementsthePPSAbyprovidingthatevenifthesecurity

interest isperfectedat thetimeof insolventevent, itstillvests in thecompany

grantor if it is registered after 20 business days of the date the security

agreement came into force or within six months before the trigger of the

insolvency proceeding103. In other words, any secured transaction between a

secured creditor and a company debtor is registered six months before the

commencement of the insolvency proceeding must be registered within 20

businessdaysrunningfromthedatewhenthesecurityagreementtakeseffectto

beeffectiveagainsttheliquidatororadministrator.Thisperiodcanbeextended

bythecourt’sorderrelyingonthreegrounds,thatisthedelayedregisteredwas

due to inadvertence, or “wasnotof suchanature toprejudiceotherpositionof

creditors or shareholders”, or that “on other grounds it is just and equitable to

grant a relief”104. Terms and conditions to make the extension are also at the

court’sdiscretion105.

Section 558FL of the CorporationAct to some extent spoils the policy ofunity

thatthePPSAiscarrying.Theabove-mentionedrequirementuniquelyappliesto

security interests granted by a company and perfected by registration. The

similarprovisions canbe found in section266of thepreviousCorporationAct

dealingwithcompanycharges.Thissectionpossiblyaimsatencouragingquick

registrationof a companycharge,but it is argued thatsection267of thePPSA

vesting in the grantorof the unperfected security interest at the time of some

102WhittakerB,seen.2,atp.407;DugganAandBrownD,seen.36,atp.407103CorporationActs588FL104CorporationActs588FM(1),(2)105CorporationActs588FM(3)

148

insolvency events sufficiently carries out this function 106 . The policy is

unsatisfactorybecauseitdoesnotapplytoallgrantors107.Section588FLisagood

demonstration of the enormous influence of the company law in the law of

securityinterestinAustralia.

TheabovediscussionisrelevanttoallsecurityinterestsincludingPMSIs.Inbrief,

an unperfected PMSI when attached and enforceable is effective against

unsecured creditors. It is only attacked in some insolvency events provided in

section 267 of the PPSA and possibly section 588FL of the Corporation Act. A

PMSI in the Australian law does not enjoy a grace period as in Article 9. The

Article9purchase-moneycreditorhas20daysrunningfromthedatethedebtor

receives delivery of the collateral to file a financing statement which is good

againsttheliencreditor’srighteventhoughthelaterarisesbeforetheperfection

ofthePMSI.

4.4.2 Purchase-moneysecuredcreditorvs.buyers

ThePPSAhasasetofrulescalledthetakingfreerulesapplyingtothecompeting

interestsbetweenasecuredpartyandatransferee.Transfereesinthetakingfree

rulesaremostlythebuyerorthelesseeofthecollateralunderacontractofsale

oraleaserespectively(calledcollectively“buyer”hereinafter)108.

Like Article 9, a security interest continues in the collateral even when the

collateral gives rise to proceeds109. In otherwords, a buyer takes the collateral

subjecttothesecurityinterest.However,thePPSAcertainlyhasaconcernabout

the free flowof commerce, so thatbona fide buyershavea chance toprevail a

securedpartyandobtainacleartitletothecollateral,leavingthesecuredpartya

claimfortheproceedsbutnotasecondbiteofthecollateral.

106WhittakerB,seen.2,atpp.438-9107ibid108 “Buyer”isnotadefinedterm,butitcanbeincommonsensetheonewhoacquirespersonalpropertyunderacontractofsale.SeeGedyeM,‘AHoaryChestnutResurrected:TheMeaningof“OrdinaryCourseofBusiness”inSecuredTransactionsLaw’(2013)37MelbourneUniversityLawReview1,atp.6109PPSAs32(1)(a)

149

ThetakingfreerulesintheAustralianPPSAarerelativelycomplicated.ThePPSA

has taking free rules governing an unperfected security interest, buyers in the

ordinary course of business, authorization of sale free and clear of a security

interestslightlythatiscorrespondingtosimilarprovisionsinArticle9.Italsohas

rules for particular cases like serial-numbered collateral, purchasing motor

vehiclesfromadealer,andlow-valueconsumergoodsforpersonalusewhichare

notdiscussedinthisthesis.

4.4.2.1 Unperfectedsecurityinterest

Subsection43(1)governingcompetinginterestsbetweenabuyerandasecured

partywhodoesnotperfecttheconcernedsecurityinteresthassimplewordings.

Abuyerofpersonalproperty“takesthepersonalpropertyfreeofanunperfected

security interest in the property”110. Article 9 does not have a corresponding

provisionalthoughitdoeshaveaprovisiongivingthesameconsequencewhenit

appliestoasecurityinterestthathasneverbeenperfected.ThevisionofArticle

9 drafters is that there is a time between the attachment and perfection of a

security interest atwhich a claim, for instance, a claim of a buyer, intervenes,

defeating the security interest at hand. A buyer giving value and receiving

deliverybeforeasecurityinterestisperfectedtakescleartitletotheconcerned

collateral111. It issuggestedthat thePPSAprovides forabuyerto take free ifat

the time “thebuyerbecomesabuyer”112or “onthedateofthesale”113, a security

interestisunperfected.TheExplanatoryMemorandumclarifiesthatitispersonal

propertysubject toanunperfectedsecurity interest,andtheexamplegivenfor

the conflicting interestof thiskindsetsup the fact that thesecuredpartydoes

not register the collateral on the PPS Register or perfect it by using other

perfectionmethods114.Itcanbeinferredthatthetakingfreeruleappliesatleast

whenthesecurityinterestiseventuallyunperfected.Eventhoughitissilenton

the situationwhere the security interest isperfectedat any timeafter the sale

110PPSAs43(1)111UCC§9-317(b)112 GedyeM,‘AHoaryChestnutResurrected:TheMeaningof“OrdinaryCourseofBusiness”inSecuredTransactionsLaw’(2013)37MelbourneUniversityLawReview1,atp.5113DugganAandBrownD,seen.36,atp.278114PersonalPropertySecuritiesBill2009ExplanatoryMemorandum,seen.14,atp.27

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occurs,itisgoodtoinferthatperfectionofthesecurityinterestdoesnotchange

the consequence since the buyer has already taken a clear title 115 . This

consequenceissatisfactorysinceaprudentbuyerotherthanabuyerinordinary

course of business strategically check the PPS Register before entering to a

contractofsale.Thesubsequenteventofperfection,therefore,cannotputherin

a disadvantageous position. However, subsection 43(1) is ambiguous about

which event of the sale occurs before the perfection of the concerned security

interest so that abuyer can takea clear title. Specifically, it is the timewhena

contract of sale is created, or a sale takes place, or, corresponding toArticle 9

when the buyer both gives value and receives delivery before the security

interestisperfected.Itshouldbenoticedthatsubsection43(1)doesnotrequire

“withoutknowledgeofthesecurityinterest”condition,butArticle9does.

4.4.2.2 Authoritytosell

Abuyercaninquireintotheauthorizationtosellorwhetherthedealingwillcut

off the security interest to takea clear title to thegoods subject toaperfected

securityinterest.UnderSection32(1)(a),intheeventofdealingsordispositions

givingrisetotheproceeds,asecurityinterestcontinuesinthecollateral.Onthe

other hand, it discontinueswhen the secured party expressly or impliedly (1)

authorisesthedispositionor(2)agreesthattheconcerneddealingextinguishes

the security interest on the other116. At first, not all dispositions except for

dispositionsgivingrisetotheproceedsarewithinthescopeofsection32(1)(a).

Adispositionasagiftor todischargeapre-existingdebtevenauthorizedbya

securedpartydoesnotcutoffasecurityinterest117.Whentwoeventsgenerating

thediscontinuanceofasecurityinterestarereadtogether,itcanbeinferredthat

the PPSA does not insist that the authority to sale must indicated that the

dispositionisfreeandclearofthesecurityinterest.Otherwise,section32(1)(a)

did not include the event of an agreement on the dealing giving rise to the

proceeds that extinguishes a security interest. The corresponding provision is

notfoundinArticle9.Therefore,whentheauthorizationissilentonwhetherthe

115DugganAandBrownD,seen.36,atp.278116PPSAs32(1)(a)117WhittakerB,seen.2,atp.269

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sale is still subject to a security interest, the secured party is considered to

authorize the disposition free of a security interest. In Lewis v LG Electronics

Australia Pty Ltd118, a retailer contracted with different suppliers on different

title retention terms that did notmentionwhether buyers take a clear title or

whether the disposition was subject to the supplier’s security interest or title

retention119. In different title retention terms, the condition of the authority to

disposeof thegoodsvaries, including thedisposition in theordinary courseof

business,and/orsellingasanagentorbaileeofthesupplier,and/orholdingthe

proceedsinaseparateaccountforthesupplier.TheLewiscourtconcludedthat

whenthesecuredpartyauthorizedthesaleofinventoryintheordinarycourseof

business under section 32(1), the authorization made the concerned PMSIs

equivalenttoafloatingchargewherethechargorcouldselltheinventoryinthe

ordinarycourseofbusinessfreeofachargeuntilcrystallization120.Thisargument

producesanunderstandingthatsection32(1)(a)doesnotallowasecuredparty

togiveaconsentforthegrantortodisposeofthecollateralsubjecttoasecurity

interest121.Also,theauthoritytosellinasupplyagreementitselfissufficientfor

sub-buyerstogainacleartitletothegoodsbuttheymustsatisfytherequirement

of buyers in the ordinary course of business122. However, a secured party can

expresslyforbidthegrantortodisposeofthecollateraluntilfullpayment.Inthis

respect,asecuredpartydoesnotauthorizeadisposition,andthebuyertakesthe

goodssubjecttothesecurityinterest123.

The Lewis case demonstrates that the requirement of a buyer in the ordinary

course of business play a crucial role in the PPSA’s taking free rules. This

requirementissubstantiallyrelevanttosection32(1)governingauthorizationto

saleandsection46governingatransactionintheordinarycourseofbusiness.It

isinterestingthatsection46doesnotlimittounauthorizedtransactions.Rather,

itsupplementstheconditionofatransactionintheordinarycourseofbusiness

118[2014]VSC644(2014) 119ibid,atpara.10and11120ibid,atpara.39121Mr.WhittakerdoesnotrefertheLewiscasebuthasthesameunderstanding.SeeWhittakerB,seen.2,atp.269122LewisvLGElectronicsAustraliaPtyLtd,seen.118,atpara.70and71123ibid,atpara.109

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tothetakingfreeruleundersection32(2).TheLewiscourtappliedbothsections

to conclude that the suppliersunder title retention termscutoff their security

interestsinthedisputedcollateralwhentheyweresoldtopurchasers124.Inother

words,itseemsthatabuyerrelyingontheauthoritytoselltoclaimacleartitle

shouldadditionallyprovethatthesaleisontheordinarycourseofbusiness.To

some extent, the requirement of selling in the ordinary course of business

underminesthestrengthofsection32(1)thatshouldhaveappliedregardlessof

thisrequirement.Itimposedarelativelyonerousburdenofproofonbuyerswho

claimthecleartitletothedisputedgoods.

4.4.2.3 Buyerinordinarycourseofbusiness

Section46ofthePPSAisthetakingfreeruleapplyingtosaleinordinarycourse

ofbusiness.Therequirementsaresummarizedasfollows:

- Thesalehastakenplace;

- Intheordinarycourseoftheseller’sbusinessofsellingpersonalproperty

ofthatkind;

- Asecurityinterestisgivenbytheseller;

- Thebuyerbuyspersonalpropertywithoutactualknowledgethatthesale

constitutesabreachofthesecurityagreement.

It is required that the sale between the grantor and the buyermust be taken

place.Thewordingofsection46makesitclearthatthegoodsmustbe“sold”in

theordinarycourseoftheseller’sbusinessofsellingofpersonalpropertyofthat

kind.Theterms“buyer”,“sold”or“sale”arenotdefinedinthePPSAbutarelong

understoodunderthesaleofgoods law.TheLewis courtappliedtheGoodsAct

1958 to clarify themeaningof relevant concepts125.Accordingly, there is a sale

whenthepropertyinthegoodsistransferredfromthesellertothebuyer126.The

propertyinthegoodsispassednotearlierthanwhenthegoodsareascertained,

andatsuchthetimetheparties intend127. InLewis,buyerswhoboughtundera124In Lewis, some suppliers require the sale to purchasers to be in the ordinary course ofbusiness,butsomedonot.125LewisvLGElectronicsAustraliaPtyLtd,seen.118,atpara.47,64and73126GoodsAct1958s6,citedinLewisvLGElectronicsAustraliaPtyLtd,atpara.48127GoodsAct1958s21,22,citedinLewisvLGElectronicsAustraliaPtyLtd,seen.118,atpara.48

153

layby contract of sale bearing a reservation of ownership clause and did not

makefullpaymentcouldnottakefreeofthesecurityinterests.Thelearnedcourt

concluded that there was no sale because the property in the goods was not

transferred until and unless payment was made in full128. This approach was

supportedbyadetaileddiscussionontheCanadiancaselawandcommentary.It

demonstrates that the concept of sale employed in the PPSA is determined in

light of the sale of goods law, and the PPSAdoes not displace the existing law

relating to the saleofgoods129.This approach seemscorrect at firstglance,but

notpersuasivewhenapplyingtotheconditionalsaleortitleretentionwhichare

now a security interest under the PPSA. Coming back to the Lewis case, non-

payment in full and the reservation of ownership clause were wrongfully

combinedtodeterminewhetherthesalewastakenplace,oratleastthecourt’s

argument was not fully supported by a thorough discussion on the interface

betweenthePPSAandthesaleofgoodactwithregardtoconditionalsales.

TheReHighwayFoods case inEnglish lawraises theproblemwith regard toa

chainoftransactions130.ThefactsinReHighwayFoodsaretosomeextentsimilar

totransactionsinLewistotheextentthatthesuppliershadaPMSIinthegoods,

andthebuyerdidnotpayinfulltothegrantorunderalaybycontractbearinga

reservation of ownership clause. Both cases have the same outcome that the

buyercouldnothaveacleartitletothegoodsdespitethedifferenttreatmentsof

titleretentioninthetwojurisdictions

Although the Australian law of secured transactions has changed dramatically

fromEnglishlawmodeltoArticle9model,itdoesnotgiveasatisfactoryanswer

tothematterdiscussedabove.Thelong-standinglawonthesaleofgoodshasnot

beenrenovatedsofartocatchupwiththePPSAbuthasasignificantimpacton

thePPSAoperation.TheAustralianapproachisentirelydifferentfromArticle9.

First,underArticle9, theauthorizationshouldbetheauthorizationofsale free

andclearof the security interest for thepurposeof taking free;otherwise, the

disposition is subject to the concerned security interest. Second, to invoke the

128LewisvLGElectronicsAustraliaPtyLtd,seen.118,atpara.60129ibid,atpara.65-72130Seesub-section2.2.3.1ofthisthesisdiscussingbuyersinpossessionandtheauthoritytosell

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authority tosellgrantedbyasecuredpartytoadebtortogaintheclear title,a

buyer is not required to be a buyer in ordinary courseof business. It isworth

mentioningthatthepre-codesecuredtransactionlawintheUnitedStatesdidnot

accepttheconceptoffloatingcharge.Furthermore,Article2onthesalesofgoods

was drafted compatible with Article 9 concerning conditional sales and title

retention.Article2andArticle1definitionofsecurityinterestexpresslyprovide

thattitleretentionhasalimitedeffectofreservationofsecurityinterest131.

Section46iscorrespondingtotheequivalentprovisionofArticle9atleastonits

face.However,likedeterminingwhatthesaleisasdiscussedabove,“theordinary

courseofbusiness”may have ameaning somewhat deviating from the original

model.TheExplanatoryMemorandumclarifiesthatthebuyercanonlyhavethe

shelteriftheinterestisacquiredintheordinarycourseoftheseller’sbusinessof

sellingpropertyofthatkind132.Inotherwords,sellingpropertyofthatkindmust

be the seller’s business to satisfy the requirement of “in theordinary courseof

business”.

UnderArticle9,themeaningofordinarycourseofbusinessisnotlimitedtothe

seller’sbusinessof sellinggoodsof thatkindas theAustralianPPSAseemingly

adopts.Thesalealso“comportswiththeusualorcustomarypracticesinthekind

of business in which the seller is engaged or with the seller’s own usual or

customarypractices”133. It further clarifies that the section applies primarily to

inventorycollateral134.Nothingsuggests thatsection9-320hasthescopeof the

applicationsolelytoinventorycollateralornarrowlyinventoryforsale.Thesale

ofsupersededequipmentorthegoodsassecondarybusinesshasachancetobe

intheordinarycourseoftheseller’sbusinessifitisanindustrynorm135ordone

onaregularbasis.

131UCC§2-401(1)and§1-201(35)132PersonalPropertySecuritiesBill2009ExplanatoryMemorandum,seen.14,atp.31133UCC§1-201(9)134Comment3totheUCC§9-320,seeOfficialComment,atp.906135TanborFabricsCorp.v.DeeringMilliken,Inc,350NE2d590,19UCCRep.(NY1976),citedinClarkBandClarkB,TheLawofSecuredTransactionsundertheUniformCode,volI(A.S.PrattandSons2010),atp.3-24

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TheAustralianPPSAdoesnothaveprovisionexcludingsometransactionsfrom

theordinarycourseoftheseller’sbusiness,likeatransferinbulk,orassecurity

for, or in the totalorpartialdischargeof apre-existingdebt likeArticle9.The

phrase“ordinarycourseofbusiness”isfamiliarintheinsolvencylawconcerning

voidabletransactionsandtheformerfloatingchargelaw.Itisrecommendedthat

not only Australian precedents are relevant, but also the PPSA experiences in

other jurisdictions should be taken into consideration 136 . The Explanatory

Memorandumexpresslyconsidersthatthetakingfreeruledoesnotapplywhen

the sale is made at the time of financial stress and for the sellers’ financial

stress137.

Thetakingfreeruleconcerningtheordinarycourseofbusinessappliessolelyto

the case where a buyer purchases from the seller who creates the security

interest.Thisrequirementcorrespondsprecisely to theArticle9.However, ina

relativelyadvantageousposition, abuyerofpre-encumberedgoods can invoke

otherprovisioninthePPSAtoprotectherinterestagainstthesecuredparty.The

followingexampledemonstratesthispoint138.

Example1:SP1hasaperfectedsecurityinterestinD’smanufacturingequipment.

D,amanufacturer,thensellstheequipmenttoDealer,whoisinthebusinessof

selling and purchasing used manufacturing equipment. Buyer buys the

equipmentathandfromDealer.

Like Article 9, the taking free rule does not apply to the transaction between

DealerandBuyerbecausetheDealerdidnotcreatethesecurityinterest.

Despitethatthesecurityinterestcontinuesinthecollateralafterthedisposition

under the ambit of section 32, it is temporarily perfected within 24 months

starting from the time of transfer or by the end time for the registration,

whichevercomesearlier139.Section52(1)providesthat thebuyer forvaluecan

take the goods free of the security interest perfected temporarily immediately136SeedetaileddiscussioninGedyeM,seen.112,atpp.19-30137PersonalPropertySecuritiesBill2009ExplanatoryMemorandum,seen.14,atp.31138This example is adapted from the example given in part 2.90 in the Personal PropertySecuritiesBill2009ExplanatoryMemorandum,seen.14,atp.31139PPSAs34(1)

156

before the time of the sale unless otherwise perfected, and subject to an

exception that thebuyerhasactualknowledgeat the timeof sale that the sale

constitutes a breach of a security agreement. Thus, in order to have a

continuously perfected security interest against Dealer, SP1 must perfect, for

instancebyregistration,thesecurityinterestagainstDealerwithintheforegoing

graceperiod,buttoprevailBuyer,theregistrationmustbedonebeforethesale

has taken place. SP1 strategically registers against Dealer as soon as she

discovers the unexpected transfer of the collateral to avoid the effect of

temporaryperfection.

Under Article 9, a secured party, regardless of the transfer of collateral, has a

continuousperfection rather thana temporaryone.Buyersofpre-encumbered

goodsonlyhaveachancewhentheyarelocatedinastateotherthantheseller’s

state,andthetransferistakenplacebeyondthegraceperiodofoneyearforthe

secured party to perfect the security interest in this state. Comparatively,

Australian law is a good shelter for buyers of pre-encumbered goods in the

ordinarycourseofbusiness.Section52(1)islikelytohaveanunderlyingpolicy

preferringbuyersinordinarycourseofbusinesswhoarenotabletodiscoverthe

securityinterestbysearchingthepublicrecord,andsecuredpartieswholosethe

security interest because of a transfer without their consent have a

disadvantagous position. However, the provision is less favourable to secured

partiessincethemodeoftemporaryperfectionislessfavourable.Inthecontext

of buyers of pre-encumbered goods, both secured parties and buyers of pre-

encumbered goods are innocent and meriting a shelter. An original debtor

transfersthecollateralwithoutasecuredparty’sconsent,andthetransactionis

usually invisible to thesecuredparty’seyes. It ispersuasivetoplaceasecurity

interest in thecollateral transferredwithoutconsent in themodeof temporary

perfection. It encourages the secured party to register the security interest

against a new debtor for public notice, and to some extent urges the secured

party to watch the collateral in the debtor’s hand actively. Nevertheless, the

secured party deserves a grace period to uncover the unexpected out-of-sight

transferof collateral.During thisperiod, a security interest shouldbeeffective

againstthirdpartiesincludingbuyersintheordinarycourseofbusiness.

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4.4.3 Purchase-moneysecuredcreditorvs.othersecuredcreditors

Basically,thePPSAadoptsthefirst–to–file(orregister,accordingtoAustralian

term) rule and has some variants to determine priority between conflicting

perfectedsecurityinterests.

4.4.3.1 Defaultpriorityrule

Section55providesforthedefaultpriorityrulebetweensecurityinterestsinthe

same collateral applying when there is no other rule determining priority140.

Priorities may be subject to a subordination agreement that may arrange an

earlier-registered to be subordinate to a latter-registered competing security

interest141.

Thedefaultpriorityrulecanbesummarizedasfollows:

- Betweenunperfectedsecurity interests in thesamecollateral,priority is

determinedbyorderofattachment142;

- Between a perfected and an unperfected security interest in the same

collateral,theformertakespriorityoverthelatter143;

- Betweenmanyperfectedsecurityinterestsinthesamecollateral,priority

is determined by order of priority time144, that is the earliest time of

registration time, the time the secured party “first perfects the security

interestbytakingpossessionorcontrolofthecollateral”,and“thetimethe

securityinterestistemporarilyperfected”145.

Basically, thePPSAdefault rule seemingly corresponds to theArticle9priority

rule. The first perfection day is the priority time in the case of continuous

perfection146, covering all advances including future advances secured by this

agreement147.

140PPSAs55(a)141PPSAs61142PPSAs55(2)143PPSAs55(3)144PPSAs55(4)145PPSAs55(5)146PPSAs55(6)ands56

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4.4.3.2 Priorityruleofpurchase-moneysecurityinterest

a. PMSIintheoriginalcollateral

Recognition of PMSI and its first rank in theAustralian PPSAhas changed the

status ofRomalpa agreements considerably. Registration of a PMSI is a public

notification about the first priority on the collateral indicated. Before the

enforcementof thePPSA,a title-retainingseller’sclaimdidnotcompetewitha

securedparty’sclaiminthegoodssuppliedbecausethegoodscanberecovered

under the title retention arrangement that prevents the goods at hand from

joining the buyer’s assets. The recognition of the PMSI does not lead to a

considerablechangeintheoutcome,buttheownerstatusisshiftedtothestatus

of a secured creditor that requires a good registration to establish the first

priorityagainstothercreditors.

The PPSA registration system requires timely registration148and an express

notice of a PMSI in the financing statement 149 . The requirement of PMSI

indication in the financing statement is uniquely Australian approach as

discussedelsewhereinthethesis150.ThePPSAdoesnotobligeapurchase-money

securedpartytosendnotificationabout thePMSI in timetocompetingearlier-

registeredsecuredparties.Asecuredparty inAustralian jurisdiction, therefore,

whenever makes an advance against the coming inventory as the collateral

earlierregistered,strategicallycheckthepublicrecordforanyinterveningPMSI

inthesamecollateral.

Although there are separate priority rules governing inventory PMSI and non-

inventory PMSI151, the only difference is the timeframe for the requirement of

timelyregistration.ForinventoryPMSI,therulefortimelyregistrationgenerally

providesfortwokindsofcollateral,namelygoodsandotherkindsofcollateral.

Goodsaredefinedas “personalpropertythat is tangibleproperty”not including

147PPSAs58148PPSAs62(2)(b)and(3)(b)149PPSAs62(2)(c)and(3)(c)150Seediscussioninsection4.3.2ofthisthesis151PPSAs62(2)and(3)

159

financialpropertyoran intermediatedsecurity152.Accordingly, thePMSIshould

be perfected by registration at the time “thegrantor, or another person at the

requestof thegrantor, obtainspossession of the inventory” for inventory that is

goods, and when “the PMSI attaches to the inventory for inventory of other

kind”153.Fornon-inventoryPMSI,thesecuredcreditorenjoysthegraceperiodof

15businessdaystriggeringbytheevent that thegrantor,oranotherpersonat

therequestof thegrantor,obtainspossessionof thecollateral for thecollateral

that is goods, andwhen thePMSIattaches to the collateral for the collateralof

otherkinds154.

Article9doesnothavetheseparateruleforcollateralthatisgoodsandthatisof

otherkinds.Itexpresslydefinespurchase-moneycollaterallimitingtogoodsand

softwarethatcanbephysicallypossessed.Article9alsograntsthegraceperiod

for filinga financing statement coveringnon-inventoryPMSI, and the20–day

length of time is slightly different from the PPSA corresponding provision.

However, Article 9 case law is split in determiningwhen and how the debtor

takes possession for the purpose of PMSI priority155. The Australian PPSA, like

Article9,doesnotgivethemeaningofpossession,eventhoughitdealswiththe

conceptofpossessioninsomesituationsthatcannotapplytothecontextofPMSI

priorityrules156.ItisrecommendedthatthePMSIpriorityruleshouldclarifythat

thegrantorobtainingpossessionreferstothetimewhenthegrantorobtainsthat

possession“initscapacityasgrantor”157.Thus,itwouldeliminatedebatesarising

from the situation where the grantor physically obtains possession of the

collateralbeforetheattachmentofrespectivesecurityinterest.

b. PMSIinproceeds

ThepriorityrankingforaPMSIinproceedsisgovernedbygeneralrulesapplying

fortheattachmentandperfectionoftheproceedsandspecificruleswithregard

152PPSAs10153PPSAs62(2)(b)154PPSAs62(3)(b)155Seediscussioninsub-section3.4.4.2ofthisthesis156PPSAs24157WhittakerB,seen.2,atpp.325-6

160

to a PMSI. The general priority rules for the proceeds can be summarized as

follows:

- A security interest attaches to the proceeds of the collateral unless

otherwiseagreed158;

- Thetimeofregistrationorperfectionoftheoriginalcollateralisthetime

of registration or perfection of the proceeds relating the original

collateral159;

- A security interest in the proceeds can be perfected by reference to the

perfection of security interest in the original collateral or temporarily

perfected160.

The priority rule of PMSI applies to both the original collateral and its

proceeds161.Inthisrespect,apurchase-moneysecuredpartyhasthefirstpriority

in theproceedsof theoriginal collateral if shehasgood registrationof aPMSI

againstthecollateralasdiscussedabove.Thisruledoesnotapplytoaccountas

proceedsofinventory162.However,asecuredpartyshouldtakeperfectionsteps

to enforce the first priority in the proceeds against other creditors. It isworth

repeatingthatthePPSAexpresslyrecognizetheattachmentofasecurityinterest

to the proceeds unless otherwise provided by the security agreement163. As

discussed later, theperfectionof theoriginal collateral toagreat extentmakes

the proceeds thereof perfected. Secured party’s entitlement to the proceeds is

crucial in any legislation following the Article 9 model. Nothing restrains a

grantor from transferring the collateral to third parties. The existence of

authorizationtotransferisoneofthefactorstodeterminewhethershestillhas

the first priority in the collateral possessed by a third party. Without the

attachmentof theproceeds toa security interest, it isprobablymeaningless to

holdasecurityinterestinpersonalproperty,particularlyinventory.

158PPSAs32(1)(b)159PPSAs32(5)160PPSAs33161PPSAs62(2),(3)162PPSAs64163PPSA32(1)(b)

161

The following examples illustrate the difference in the priority of a Romalpa

agreement relating to the proceeds under the pre-PPSA and post-PPSA law of

securityinterestinpersonalproperty164.

Example1:SP1selltoDaprintersubjecttoasimpletitleretentionclause.Ddoes

notpaythepurchasepriceinfullbutselltheprintertoanotherpurchaseron90-

daycredit term.Dalsograntasecurity interest toSP2 inallandafter-acquired

receivableaccount.BothSP1andSP2claimtheaccountarisingfromthesaleof

theprinter.

Thepre-PPSA lawenforcedtherightofSP1 intheprinterasanownerwithout

any requirement of registration, but SP1 could not claim the account as the

proceedoftheoriginalgoods.Thetitleretentionarrangementdidnotincludean

extensiontothesaleproceeds.

ThePPSAtreatsthetitleretentionclauseasapurchasesecurityinterestthatalso

attaches to the proceeds whether or not the security agreement includes the

proceeds. However, a PMSI should be registered in time, and a financing

statement should indicate that it is a PMSI. Also, the proceeds should be

perfected.Ifalltherequirementsofpriorityandperfectionarefulfilled,SP1has

thepriorityintheproceedsoverSP2withoutaprioragreement.

Example 2: All facts are the same as facts inExample 1, except that SP1 has a

proceedstitleretentionclause.

Pre-PPSAAustraliancase lawwassomewhatsplit inrecognitionof therightof

SP1 in the proceeds. Following English law, some cases treated the proceeds

clause as the creation of a registrable charge, accordingly void against other

creditorsifitwasnotregistered,assumingthatSP1isacompany165.Incontrast,

the Associated Alloy court upheld the effectiveness of the title retention trust

clause over the proceeds and denied construing the clause at hand as a

164Example1andExample2isadaptedfromExample1giveninDugganAandBrownD,seen.36,atp.231165DugganA,seen.3,atp.647;DugganAandBrownD,seen.36,atp.336

162

registrablecharge166.Thus,iftheproceedstitleretentionclausewasdraftedtoin

theformoftrustasintheAssociatedAlloycase,SP1waslikelytohaveaclaimin

theproceedsoverSP2withoutaregistration.

AccordingtothePPSA,SP1hasthesameconsequenceoffirstpriorityasitmay

haveinExample1.

Inbrief,thePPSAcreatesastatutorysecurityinterestintheproceedstoreplace

anequitablechargeora fiduciaryrelationshipestablishedbytheagreementor

thetitleretentionclause.

Asmentionedabove, theattachmentofasecurity interest to theproceedsdoes

notamounttoall-timeautomaticperfection.Theproceed isperfectedeitherby

reference to theperfectionof security interest in theoriginal collateral167orby

temporaryperfection168.Inallcases,asecurityinterestintheproceedscanenjoy

the time of registration or perfection of a security interest in the original

collateral as the priority time so long as it is continuously perfected169. With

regard toperfectionby reference to theperfectionof a security interest in the

originalcollateral,afinancingstatementcandescribetheproceedsforperfection

by a click on the proceeds option170. The register can choose to describe the

proceedsasallpresentandafter-acquiredproperty,orbyitem,orbyaclassof

personalproperty171.The firstchoice isdefaultwhenevertheregisterclicksthe

“proceeds”option172.Theproceedsoptionandthetechnicalsupportbyjustone-

click are really at a secured party’s convenience. It seemingly encourages and

remindsasecuredpartytoincludetheproceedsinafinancingstatement.

166AssociatedAlloy,seen.6,atpp.603-611;SeemorediscussioninDugganAandBrownD,seen.36,atpp.336-7167PPSAs33(1)168PPSAs33(2)169PPSAs33(5)170PPSAs33(1)(a)171PPSAs153(1),PPSRs.5.5andSchedule1,cl.2.4172DugganA,seen.3,atp.673

163

If the financingstatementdoesnotmentiontheproceeds,but theproceedsare

the kind of the collateral described, the security interest in the proceeds is

perfectedbyregistration173.

If the proceeds are currency, cheque, or deposit account, or a right to the

insurancepaymentorotherpaymentsasindemnityorcompensationforlossor

damage to the collateral or proceeds, and the security interest in the original

collateral is perfected, the security interest in the proceeds is automatically

perfected 174 . It is corresponding to Article 9 that provided for automatic

perfectionofcashproceeds.

Temporaryperfectionisappliedwhenthesecurityinterestintheproceedsisnot

perfected by reference to the perfection of a security interest in the original

collateral as described above. The time length of temporary perfection is five

businessdaysstartingfromthedaythesecurityinterestintheoriginalcollateral

attachesto theproceeds175.Asecuredcreditorcanperfectasecurity interest in

theproceedswithintheperiodoftemporaryperfectiontokeeptheperfectionto

runcontinuously176.TheperiodoftemporaryperfectioninthePPSAisrelatively

shortincomparisonwiththelikeperiodinArticle9thatisof20days.Asecured

party in Australian should response promptly against the attachment of the

proceeds,but itdependsmuchonthegrantorwhoknowsprecisely thetimeof

attachment.Thus, it is strategic to fill in the “proceeds”option in the financing

statementagainsttheoriginalcollateral.

Article9similarlyhastheunderlyingpolicytoencourageanexplicitdescription

of the proceeds in a financing statement. The “proceeds” one-click option is

absentintheformofanArticle9financingstatement.Article9merelyprovided

thatifthesecurityinterestintheproceedsisperfectedotherthanbytemporary

perfectionat the time the security interest attaches to theproceeds regardless

howitisperfected,itisnotsubjectthe20-dayperiodoftemporaryperfection177.

173PPSAs33(1)b)174PPSAs33(1)(c)175PPSAs33(2)176PPSAs33(3)177UCC§9-315(d)(3)

164

Thepurchase-moneypriorityoftheproceedsisnotalwaysgoodeventhoughthe

securityinterestintheproceedsiscontinuouslyperfected.Itisthecasethatthe

PMSI inaccountsas theproceedsof inventory is subordinate toanon-PMSI in

accounts(thePPSAcalls the latteras“priorityinterest”)178.Thepriority interest

mustbegrantedfornewvalue179,andtheaccountcollateralmustbetheoriginal

collateral180. The registration timeof thepriority interestmustbeearlier than

the time of registration or perfection of the PMSI in inventory181. Otherwise, a

timely notification should be sent to a purchase-money secured party182. The

PPSAprovisioniscorrespondingtoArticle9tosomeextentbuthasasubstantial

numberofderivations.

The PPSA and Article 9 carry out the similar underlying policy protecting an

accountfinancieragainstapurchase-moneyinventoryfinancier183.Nevertheless,

thetwoprovisionsinthePPSAandArticle9aredraftedindifferentapproaches.

The PPSA has a separate provision directly and expressly figuring out the

competing interest, that is the non-PMSI in accounts and limiting this priority

interest into the security interest granted fornewvalueand inaccountsas the

original collateral 184 . The priority interest is protected even though it is

registered later than the inventory PMSI, so long as a timely prescribed

notificationissenttotheholderofthePMSI.

Ontheotherhand,Article9simplyliststhekindofcollateralsubjecttothefirst

priorityof aPMSI in inventory,namely the inventoryas theoriginal collateral,

chattel paper or an instrument constituting proceeds of the inventory and

proceedsof the chattelpaper, identifiable cashproceeds receivedonorbefore

thedeliveryoftheinventorytothebuyer185.Itcanbeinferredthatthenon-cash

proceedsotherthanchattelpaperareexcludedfromthefirstpriority.Itcanalso

178PPSAs64179Newvalue is defined as “valueother thanprovided toreduceordischargeanearlierdebtorliabilityowedtothepersonprovidingthevalue”.PPSAs10.180PPSA64(1)181PPSAs64(1)(a)182PPSAs64(1)(b)183WhittakerB,seen.2,atp.330;Comment8totheUCC§9-324,seeOfficialComment,atp.921184PPSAs64185UCC§9-324(b)

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be inferred that the priority of an inventory PMSI in the non-cash proceeds

wouldfollowthegeneralruleofpriority.

Thefollowingexamplesillustratethedifferentapproachestocompetingsecurity

interestsinaccountsinthetwojurisdictions186.

Example3:Dgrantsasecurity interest toSP1 inallpresentandafter-acquired

inventory,andthesecurityinterestisregisteredonDay1againstinventory.On

Day3,Dpurchases fromSP2acertaintypeof inventorysubject toaPMSI,and

SP2filedafinancingstatementonthesamedayindicatingthePMSIininventory.

Later,Dsellstheinventoryathandproducinganaccount.DdefaultstobothSP1

and SP2 who claim the accounts. Assuming that both SP1 and SP2’s security

interest in the disputed accounts remain perfected, and the accounts are not

outstanding.

Under thePPSA, SP1hasa security interest in theaccountsas theproceedsof

inventory, inotherwords, it isnot theoriginal collateral.Therefore, section64

protectingnon-PMSI inaccountsdiscussedabovedoesnotapply.SP2’sPMSI in

accountsasproceedsofinventoryhaspriorityoverSP1’ssecurityinterestinthe

sameaccounts.

Under Article 9, the accounts at hand are non-cash proceeds of the inventory

collateral. SP2doesnothaveaPMSIpriorityoverSP1 in the sameaccountsas

proceeds of inventory. The general rule of priority applies to determine the

competitionbetweenthetwosecurityinterests.SP1’sandSP2’ssecurityinterest

in the account proceeds is perfected at the perfection time of the respective

securityinterestintheoriginalcollateral.Therefore,SP1haspriorityoverSP2as

totheaccounts.

Example4:All facts are the sameasExample3, except thatSP1hasa security

interestandarelatingfinancingstatementagainstD’spresentandafter-acquired

inventoryandaccountsonDay1.

186The following Example 3, 4 and 5 are created upon and adapted from examples given inComment9totheUCC§9-324,seeOfficialComment,atp.921-2

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ThePPSAsection64applies,soSP1haspriorityoverSP2astotheaccountson

thegroundthattheaccountsareregisteredastheoriginalcollateral.

ThelegalconsequenceremainsinExample3underArticle9.

ThetwoexamplesdemonstratethatArticle9doesnotrecognizethepurchase-

money priority of the non-cash proceeds concerning the inventory PMSI and

doesnotdistinguishtheaccountcollateralofthecompetingsecurityinterestas

the original collateral or the proceeds. Although the UCC Official Comment

addressesthepolicytoprotectanaccountfinancierfromthefirstpriorityofan

inventory purchase-money financier, it seems that a non-purchase-money

inventory financier canalsobenefit.Meanwhile, thePPSAstrictly requires that

onlyaccountfinanciershavepriorityoverpurchase-moneyinventoryfinanciers

withregardtotheproceedsgeneratingfromthesaleofinventory.

American law recognizes the characteristic of inventory in business operation.

Inventory is shifting assets that a rapidly and frequently put in the ordinary

courseofbusiness;therefore,aPMSIininventoryinpracticedoesnotlastfora

long time. A secured creditor cannot follow the inventory collateral that is

transferredtothirdpartiesintheordinarycourseofbusinesstoensuretheflow

of commerce.Thepurchase-moneyprioritydoesnotextend to theproceedsof

inventory collateral that isnot identifiable cashproceeds “receivedonorbefore

thedeliveryoftheinventorytoabuyer”toprotectotheraccountandreceivables

financiers187. Australian lawhas similar limitations to inventory PMSI but does

notrecognizePMSIcross-collateralizationininventorylikeArticle9.Therefore,

takingaPMSIininventoryisnotappealinganddesirableunderthePPSA.

c. PMSIinproductormassandaccession

Thecollateralasrawmaterialscanbeputintoamanufacturingprocess;thus,the

original identity is lost, and new end products are coming into existence. The

collateral can also be processed, assembled or attached to the extent that the

originalidentityremains,ortheyarecapableofbeingreconverted.

167

ThePre-PPSA title retention clause faced the sameproblemwhen the original

goodsareassembled,attached,processedormanufactured.TheEnglishcommon

lawhasdealtwithmanysituations:forinstances,likesteelsheetcutfromsteel

stripinArmourvThyssenEdelstahlwerkeAG188,enginesassembledingenerators

in Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd 189 , leather

processedintohandbagsinRePeachdartLtd190,orresinmanufacturedintowood

boards in Borden (UK) Ltd v Scottish Timber Products Ltd191. The very first

questioniswhetherthetitleoftheoriginalgoodsisdisappeared,orwhetherthey

are capable of being reconverted into the original state when they are

transformedintonewlymanufacturedproductsof thedifferent identity. In this

respect, simple title retention sufficiently covers the first two foregoing cases,

andthetitle-retainingsellerisentitledtothegoods,forinstances,steelsheetor

engines.

ThePPSAdistinguishestheproductormassfromaccession.Whenthecollateral

ismanufactured,processed,assembledorcommingledthattheoriginalidentity

is lost in theproductormass,orbecomeunidentifiablepartsof theproductor

mass,thequestionwouldbewhetherthesecuredpartyhasacontinuingsecurity

interestintheproductormass192.Whenthecollateralisinstalledin,oraffixedto,

theothergoods,theybecomeanaccessiontoothergoods193iftheiridentityisnot

lost in other goods194. The question in this situation would be whether the

securityinterestintheoriginalcollateralremainsintheaccession.

The PPSA has made considerable changes to recognize a continuing security

interest in the product ormass producing from the collateral, whether or not

theyaresubjecttotitleretention.Itisnoticeablethatthepriorityruleforgeneral

collateral and purchase-money collateral are separated to the extent that the

188[1991]2A.C.339;[1990]3W.L.R.810189[1984]1W.L.R.485190[1984]Ch.131191[1981]Ch.25192PPSAintroductorysectionofpart3.4193PPSAs10194Itisrecommendedthataccessionshouldbedefinedtotheextentthattheiridentityisnotlostto avoid the overlap between the product and mass, and the accession priority rules. SeeWhittakerB,seen.2,atp.346

168

former does not supplement the latter as in the case of a continuing security

interestinproceeds.

Theperfectionandpriorityrulesapplying toaPMSIwith regard toproductor

mass commingled, processed, ormanufactured from the original goods can be

summarizedasfollows:

- Generally, a security interest in goods continues tomass or product so

longastheidentityofthegoodsislost195intheproductormass196;

- Thesecurity interestcontinuing in theproductormass is“limitedtothe

valueofthegoodsonthedayonwhichtheybecamepartoftheproductor

mass”197;

- A perfected PMSI in the goods continuing in the product ormass takes

priority over a non-PMSI in the goods continuing in the product or

mass198;

- A perfected PMSI in the goods continuing in the product ormass takes

priority over a non-PMSI in the product or mass given by the same

grantor199.

The following examples illustrate how the PPSA changes title retention with

regardtothenewproductormass200.

Example 1: SP1 supplies leather to D, a company manufacturing handbags

subjecttoatitleretentionclause.Dalsograntsasecurityinterestinpresentand

after-acquiredaccountsandstocktoSP2whichisdulyregistered.Ddefaultsto

bothSP1andSP2whoclaimthehandbagsmadefromleathersuppliedbySP1.

The Pre-PPSA case law relying upon English law did not extend a simple title

retentionclausetothenewproduct.Forthemanufacturedtitleretentionclause,

itwasconsideredtocreatearegistrablechargeuponthenewproduct; thus, in

195Theidentityislostinaproductormassif“itisnotcommerciallypracticaltorestorethegoodstotheiroriginalstate”.PPSAs99(2)196PPSAs99(1)197PPSAs100198PPSAs103(a)199PPSAs103(b)200ThisexampleiscreateduponthefactoftheRePeachdartLtdcase

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mostcases,thetitle-retainingsellerhadavoidchargeagainstthirdpartiesdueto

lackofregistration201.SP1,whetherornothavingamanufacturedtitleretention

clause, could not assert the first priority over SP2 with regard to all the

handbags.

ThePPSAdoesnotrequireanarrangement toextenda security interest in the

goodstotheproductandmasscomingled,processedormanufacturedfromthe

goods. In other words, a security interest in the original goods continues

automaticallyintheproductandmass.Therefore,SP1hasasecurityinterestin

theproductormass if SP1hasa security interest in theoriginal goods. In this

example, if SP1 has a perfected PMSI in leather, SP1 has priority over SP2’ s

securityinterestinthehandbags.

UnderthePPSA,anautomaticallycontinuoussecurityinterestintheproductand

mass is unquestionable, and the priority thereof depends on nature and

perfectionstatusofthesecurityinterestintheoriginalgoods.

The PPSA provides a relatively desirable outcome for the purchase-money

inventory financierconcerningtheproductandmass.TheEnglishcommonlaw

governing manufactured title retention clause probably contributes valued

experiencesandlessonstothePPSAinthisrespect.IncomparisontoArticle9202,

thePPSAhascreatedanachievement.

Withregardtotheaccession,thePPSAmakessubstantialprogressincomparison

withthepre-PPSAcommonlaw203.Itdefinesaccession204.Itprovidesforasetof

rulestoestablishprioritybetweenasecurityinterestintheaccessionandother

interests not limiting to a security interest in the other goods in thewhole205.

Furthermore,ithasrulesgoverninghowtoremovetheaccessiontoenforcethe

201DugganAandBrownD,seen.36,atp.265-6202Seemore discussion onArticle 9 dealingwith commingled goods, the product andmass insub-section4.4.3.2ofthisthesis203DugganA,seen.3,atp.682204PPSAs10205PPSAs89-91

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securityinterestintheaccession206.ItisnoticeablethatthePPSAdoesnothave

separaterulesforPMSIinthisrespect.

Thesecurityinterestintheoriginalcollateral“continuesin”theaccession207.The

PPSAanticipatesthatat thetimeofaccessioncoming intoexisting, thesecurity

interestmayormay not attach to the original collateral. In the latter case, the

securityinterestintheaccessionissubordinatetoanyinterestintheothergoods

atthetimethecollateralbecomesanaccession,unlesstheholderofaninterestin

the other goods has consented or disclaimed the security interest in the

accessionoragreed to the removalof theaccession208. For instance, SP1hasa

security interest inD’s car. SP2 has a security interest inD’s tyreswhich have

alreadybeenfixedincars.SP2,therefore,hastheprioritysubordinatetoSP1.

The fact thatasecurity interestattachesto theoriginalcollateralat thetimeof

becoming theaccession is likely tohappenoccasionally, at leastwith regard to

titleretentioncase.Tothisextent,asecurityinterestinanaccessionhaspriority

overanyinterestholdbyapersonwithinterestinthegoodsasawhole209.This

default rule does notmention perfection against two competing interests as a

requirement.Attachmentofsecurity interestat thetimethecollateralbecomes

anaccessionmaysuffice.

Example2: SP1hasa security interest inD’sgenerators. SP2 sellsDakindof

engineusuallyinstalledingeneratorssubjecttotitleretention.Dlaterinstallsthe

enginessuppliedbySP2ingenerators.DdefaultsagainstSP1andSP2,andboth

claimengine210.

UndertheHendyLennox intheEnglishcommonlaw,SP2canasserttherightof

title retention in engines installed in generators. Under the PPSA, SP2 has a

security interest in enginespreceding SP1’s claim in the same collateralunder

the default rule other than a purchase-money security status, and without

consideringwhetherSP2perfectsitssecurityinterestornot.206PPSAs92-97207PPSAs88208PPSAs91209PPSAs89210ThisexampleiscreateduponthefactsoftheHendyLennoxcase

171

In this respect,with regard particularly to title retention, English common law

andthePPSAhasalmostthesameconsequence,thatisSP2hasthefirstpriority

in the accession even without registration. The position of SP2 is akin to a

purchase-money secured party, but there is no requirement of perfection. The

right toaccession issomewhatasecretlien,andtosomeextent, thePPSAdoes

notsolvetheproblemofthepre-PPSAlaw.

As a default rule, it has some exceptions that require perfection of security

interest in the accession. Those exceptions grant the first priority to other

secured party making advance after the accession is coming into existence,

execution creditor or bona fide purchaser whose interest arises after the

accession,butbeforethesecurityinterestisaccessionisperfected211.Itisargued

that those rules give the foregoing competing interest holders a chance to

discover the interest of an accession financier. To be exact, they establish a

counterweighttoasecretliencreatedbythedefaultrule.

It is a surprise that the PPSA rule of accession corresponds to old rather than

revised Article 9 promulgated in 1998. The revised Article 9 amends

considerablytheruleofasecurityinterestintheaccessiontoavoidasecretlien

andtheconflictwiththecertificate-of-titlestatute.Thegeneralrulesofpriority

apply to solve the conflict relating to accession. Therefore, if the accession

financierhasaPMSIintheaccession,shehasthefirstprioritysolongasshehas

agoodperfectionagainstthesecurityinterestathandregardlessofwhethershe

filesa financing statementearlieror later than theperfectionofother security

interest in thewhole.Article9successfullyclarifies the lawofaccession inthis

sense212.

4.5 Concludingremark

TheArticle9modelisanappealingofferofapackagedealtoanyjurisdictionto

reformthelawonsecuredtransactionsinpersonalproperty.Broadlyspeaking,

the Australian PPSA adopts the functional approach, unitary treatment and

211PPSAs90.SeemorediscussioninDugganAandBrownD,seen.36,atpp.259-262212ClarkBandClarkB,TheLawofSecuredTransactionsundertheUniformCode,volI(A.S.PrattandSons2010),atpp.9-90

172

noticefilingsystem,allofwhicharethemainideaofArticle9althoughitfollows

theSaskatchewanPPSAformat.TheArticle9andPPSA-typedmodelsprovidea

relativelycoherent,consistentandcost-savingsystemofsecuredtransactionlaw.

IncomparisonwithArticle9,theAustralianPPSAhasasignificantachievement

that is a uniform secured transaction law and a unified registration system

includingserial-numberedpropertyregistration.Therequirementofattachment

and perfection for priority purpose is established for all security interests by

function and further embraces other transactions called deemed security

interests that do not secure the performance of obligation but creates the

ostensibleownershipproblem.

Withregardtotitleretentiontreatment,thePPSAhasmadeasignificantchange

turning a contractual arrangement of title transfer condition into a statutory

security interest. A relatively simple, fast, and cost-saving notice filing system

supporttheregistrationofaPMSI.Theburdenoffilingisgenerallycompensated

bythefirstpriorityintheoriginalcollateralextendingtotheproceeds,accession

and the product and mass produced from the original collateral without an

agreement. The Australian notice filing system slightly departs from Article 9

schemetotheextentthatitrequiresapublicnoticeaboutthenatureofasecurity

interestbyacompulsoryindicationofaPMSIratherthanbeingapuremeansof

setting up priority against other competing security interests in the same

collateral. However, the information of this kind does not benefit much both

earlier-filed creditors, who prefer an individual notification to checking the

public recordwhenevermaking an advance, and later-filed creditors, who are

not interested in a purchase-money status of an earlier-filed security interest.

Therefore,itdoesnotoutweighthecostofthewrongindicationofaPMSIwhere

asecuredpartylosesaneffectivefinancingstatementagainstthecollateralasa

whole.

The firstpriorityofaPMSI is justifiedundersomestronglysupportivetheories

like the “new money” or “situational monopoly”. It does not raise serious

problemswhenthecollateralisequipmentorfixedassets.However,inpractice,

itisapolicyquestiononthebenefitofaccountorreceivablefinancierswhoare

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likely tocompetewithpurchase-money inventory financierswithregardtothe

proceeds. The PPSA recognizes the need to balance interests between account

financiers and purchase-money inventory financiers. An inventory purchase-

moneysecuredpartycanmaintainthefirstpriorityinthecashproceeds,butthe

security interest in theaccountthat isgenerated fromthesaleofthe inventory

collateralissubordinatetoanon-purchase-moneysecurityinterestinaccounts.

Therefore, aPMSI inmerchandise inventorydoesnotbringmanybenefits toa

securedcreditor.Itisrelativelydesirabletoacceptcross-collateralizationinthe

inventory,oratleastininventoryofthesamekind.

The inventory collateral problem and the old firmly-rooted concept of floating

charge have raisedmuch confusion and uncertainty, particularly in the taking

free rules with regard to a buyer in ordinary course of business and a buyer

relying on authority to sell to claim the priority in the goods. However, the

former concept of a floating charge which bases on the authority to sell has

interferedtorequirethesaleintheordinarycourseofbusinesstogetherwiththe

authoritytoselltoenableabuyertotakefreefromasecurityinterest.

Adoption of PMSI cannot be done successfully without changing the relevant

provisionsinthesaleofgoodslaw.Treatingtitleretentionasapurchase-money

securityinterestmeansthattheconcernedarrangementinacontractofsalehas

nolongerbeencontractualtransferofpropertywithinaframeworkofasaleand

purchasetransaction.Itrequiresaviolentinterferencetointerprettitleretention

limitedtoaconsensualsecuredtransactionandforcethetransferofpropertyto

follow thedefaultrule.Australian law lacks the correspondingprovision in the

law of sale. It results in the situation where title retention functioning as an

arrangementtotransferpropertystillplaysasignificantroleininterpretingthe

conceptofasale. In thisrespect, it isparticularly important toEnglishlawthat

currentlycopeswiththeBunkersruling.AlthoughAustralianadopttheArticle9

model,itfailstochangethecorrespondingprovisionsinthesaleofgoodslawto

treat title retention as a purchase-money security interest only. Therefore, the

problem arising from theBunkers ruling, and evenCaterpillar andReHighway

Foods,cannotbesatisfactorilysolvedunderthecurrentPPSA.

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CHAPTER5 RETENTION OF TITLE IN VIETNAMESELAW:ALIMBOSTATUS

5.1 OverviewofVietnameselawonsecuredtransactions

TheVietnameseCivilCodeisthemainsourceofthelawofsecuredtransactions.

TheCode isnotamirrorof theFrenchCivilCode. Itadoptedthespiritandthe

formatoftheRussianCivilCodewhenitwasenactedforthefirsttimein1995.

IntheCode,thelawofsecuredtransactionsistitledas“SecuringPerformanceof

Obligation” belonging to Book III on “Obligations and Contracts” because the

scope of application covers both personal and real security. However, this

approach is severely criticized because the drafters emphasize the sphere of

personal rights but fail to look security interests as property rights1. The Civil

Codeunderwenttworevisions in2005and2015,withmanyrecommendations

toreformthelawofsecuredtransactions.Thelatestrevisionstillplacesthisarea

inthepartof“ObligationsandContracts”ratherthanthepartof“Ownershipand

OtherPropertyRights”,oraseparatepartofsecurity interestsas in theFrench

CivilCode.DespitethepositionintheCode,someconsiderableachievementsare

attained.

AlthoughtheCivilCode2015stillallocatesthelawonsecuredtransactionsinthe

part of obligations and contracts, it acknowledges that security interests are

relating to property rights rather than personal rights. As a result, when a

securityinterestisenforceableagainstthirdparties,asecuredpartyhastheright

tofollowthecollateralandtherighttorealizethecollateraltodischargethedebt

subject topriority rules2. Prior to theCivilCode2015, these fundamentalrules

werenotprovidedofficially.

1NguyenX-TandNguyenBT,TransplantingSecuredTransactionsLaw:TrappedintheCivilCodeforEmergingEconomyCountries(2014)LegalStudiesResearchPaperNo.2014-39(RobertH.McKinneySchoolofLaw,IndianaUniversity),atp.232VietnameseCivilCodeArticle295.1

175

Security interests are categorized into nine types: pledge, charge, deposit,

securitycollateral,escrowaccount,titleretention,guarantee,pledgeoftrust,and

retentionofproperty3.Although thedraftersunderstand that security interests

can be categorized into personal and real securities, or security interests in

movables and immovables as in the French Civil Code, the distinctionof those

kinds is not clear since the Code simply provides a list of security interests

withoutidentifyingtheirnature.

Thelawrequiresasecurityinteresttobecreateduponassetsownedbyadebtor,

but it expressly acknowledges that title retention is an exception to the

formalism approach4. Furthermore, title retention is recognized as a security

interestforthefirsttime.

Vietnamese lawadopts the conceptofperfectionunder theVietnamesephrase

translated as “enforceability against third parties”, but it does notmention the

concept of attachment5. It lacks provisions for the enforceability against the

debtorwhenasecurityinterestattachestothecollateral.Therefore,thegeneral

contract rules apply to determine the enforceability between the two parties

subject to specific formalities requirement. Registration is the onlymethod of

perfectionunder the formerCode,but fromnowonperfection canbedoneby

registrationandpossession6.Therearefoursystemsofregistrationbasedonthe

category of the collateral: aircrafts; vessels; land-use right and fixtures; and

personalpropertyandothers7.ItcanbesaidthatVietnamhasaunitarysystemof

registration for security interests in personal property. The law of secured

transactions reaches the landmark when registration is recognized to be a

condition of enforceability against third parties and for the priority purpose.

UndertheformerCivilCode,registrationisaformalitiesrequirementtovalidate

asecurityagreement.

3VietnameseCivilCodeArticle2924VietnameseCivilCodeArticle295.15VietnameseCivilCodeArticle297.16ibid7Decree102/2017/NĐ-CPonRegistrationofSecuredTransactions

176

The Civil Code also maintains the general rules with regard to priority and

enforcementforallkindsofsecurityintereststhatinpracticeapplytoapledge

orachargeprimarily.The first-to-file-or-perfection isthemainruleofpriority:

thefirstperfectedsecurityinteresthasthefirstpriority,andaperfectedsecurity

interest has priority over an unperfected security interest 8 . Between two

unperfectedsecurityinterests,priorityisdeterminedbyorderofcreation9.Itis

correspondingtothegeneralruleofpriorityinArticle9.

Thelawofsecuredtransactions,particularlyinpersonalproperty,however,has

some significant shortcomings. The Civil Code fails to address the problem of

ostensible ownership creating by a secured transaction in personal property.

Although ithasaprovisionthat theproceedstaketheplaceof the inventoryas

collateralwhen the inventory collateral is sub-sold, it does not have a general

rule for attachment of a security interest to the proceeds and its perfection. It

lacksthepriorityruletosolvetheconflictbetweenasecuredpartyandabuyer

inthesameasset,eventhoughthereisaprovisionallowingthedebtortransfers

the non-inventory collateral to a third party under the secured party’s

authorization. The Civil Code has a provision to replace the consumable

inventorycollateralbytheinventoryofthesamekindandquantity,butitlacks

provisions for workable or raw material inventory. The question remains

whethera security interest in theoriginal collateral is extinguishedwhen they

areputintothemanufacturingprocess.

5.2 Retentionoftitleasasecurityinterest

TheVietnameseCivilCode2015iscloselytiedtotheJapaneseandGermanCivil

Code rather than a Romanistic spirit of the French Civil Code10. However, it

surprisinglyadoptstheFrenchtreatmentoftitleretentionasasecurityinterest,

whichdoesnotexistin theGermanCivilCode. It isworthabriefdiscussionon

titleretentioninFrenchlawbeforeproceedingonthecurrentVietnameselawin

thesamearea.

8VietnameseCivilCodeArticle308.19ibid10VietnamreceivedthelegaltechnicalassistantfromJapanfortheCivilCodedraftingprojectfortheCivilCode2005and2015.

177

5.2.1 TitleretentioninFrenchlaw

TheFrenchlawofsecurityinterestshasbeencodifiedintheCivilCodetocover

almost all kinds of security interests. This area underwent a reform in 2006

havingtheobjectiveofmodernizationandeconomicefficiency11.Titleretention

asasecurityinterestisanimportantoutcomeofthe2006reform.

Under the Civil Code, security interests are categorized into personal and real

security, and the real security is sub-categorized into security interests in

movables and immovables. With regard to security interests in movable

property, French law does not adopt a unitary approach that has the same

treatment and priority rules for all security devices. In other words, security

devices are distinguished to the extent that each security device has its own

rules. Therefore, it lacks the interaction between different security devices

particularly with regard to priority conflicts and, as a result, bears

inconsistency12 . A gage is probably the most important security device in

personalpropertywhich is defined as an agreement inwhich a debtor gives a

creditorapriority tobepaidoverothercreditorsoutof the former’smoveable

assets,currentorfuture13.Agagecanbepossessoryornon-possessory.Thelegal

regime for a gage is considered to achieve, to a certain extent, simplification,

clarification and economic efficacy since it adopts the first-to-file-or-perfection

rule and a unique system of enforcement for both possessory and non-

possessory gage14 . This approach is possibly shifted closer to the unitary

approach of Article 9 model. However, the scope of gage excludes a security

interest in incorporeal movables (nantisssement) and title retention, both of

whichhavetheirownrules.

Title retention treatmentwas codified and recognized as a security interest in

movables in the French Civil Code and Commercial Code for the first time in

11SeedetaileddiscussiononRenaudinM,‘TheModernisationofFrenchSecuredCreditLaw:LawAsaCompetitiveToolinGlobalMarkets’(2013)11InternationalCompanyandCommercialLawReview38512HaimoSH,‘APracticalGuidetoSecuredTransactionsinFrance’(1984)58TulaneLawReview1163,atp.116513FrenchCivilCodeArticle233314 RenaudinM,‘TheModernisationofFrenchSecuredCreditLaw:LawasaCompetitiveToolinGlobalMarkets’(2013)11InternationalCompanyandCommercialLawReview385,atp.387

178

2006,but this concepthasbeenaccepted since1980within the schemeof the

insolvencyproceeding15.Thesecurityinterestofthiskindiscalledas“retention

oftitleasasecurity”(laretenueàtitredegarantie).Thereareonlysixrelatively

concisearticlesforretentionoftitleasasecurity.Itcannotclassifycorrectlythe

French law of secured transactions on personal property into formalism or

functionalismfromtheAnglo-Americanperspective.Titleretentiontreatmentas

asecurityinterestcouldbeagoodillustrationforthispoint.UndertheCivilCode,

the title retention clause which postpones the transfer effect arising from a

contract of sale until full payment of purchase price creates a guarantee by

retainingtheownershipofathing16.Bydefault,thebuyeracquirestheownership

when the parties agree upon the thing and the price despite the fact that the

thinghasnotyetbeendeliveredor thepricehasnotpaid17.Ontheotherhand,

ownershipmay be retained to secure payment of purchase price. The security

interestofthiskindisnotcreatedbyadebtorupontheitemssheowned,butbya

creditorretainingtitle tothegoodstosecurepaymentunderacontractofsale.

Thisnotionsoundsunfamiliarandundesirableundertheformalismperspective.

ItisslightlyclosetothefunctionalapproachsincetheCivilCoderecognizestitle

retention as a security interest by its function. However, title retention is

exceptional since other devices like the assignment of book debts or hire-

purchaseagreementarenotclassifiedasasecurityinterestbyitsfunction.

It is worth noting that only a seller can be a title-retaining creditor. The Civil

Codesetsupthelinkbetweenasaleandpurchasetransactionwithtitleretention

asasecurityinterestbystressingonatitleretentionclauseinasalecontractasa

sourceofsecurityinterestofthiskind.Alenderwhoadvancesmoneytoacquire

thepropertycannothavea titleretentionasasecurityinterestasshedoesnot

havetheoriginaltitletotheconcernedproperty18.

15DorstAandGagnierAD,‘France’inWillemsMandInternationalBarAssociationib(eds),RetentionofTitleInandOutofInsolvency(GlobeLawandBusiness2015),atp.12516FrenchCivilCodeArticle236717FrenchCivilCodeArticle158318In practice, the sale of cars on credit is secured by title retention that is transferred to aprofessional lenderbywayofsubrogationunderanautoloanagreement.In2016,theCourtofCassationgaveanopinionconsidering thesubrogationof thiskindmaybeanunfair term,andunenforceable. Consequently, the auto loan secured by title retention becomes unsecured. See

179

Title retention must be in a writing agreement19, and it can be appeared in a

documentgoverninganumberofcommercialoperationsagreedbytheparties20.

It is required that thewordingmust be sufficiently clear and unequivocal21. In

practice,aseller’stermsandconditionsusuallycontainsatitleretentionclause.

A smallprintof title retentionclausemaynot suffice the formalrequirement22.

The Commercial Code provides that the title retention agreement must be

entered not later than the delivery timeso that the seller can have a recovery

claiminthebankruptcyproceeding23.Thepartiesmayagreeonthesale,andat

thattimetransferofpropertyhasoccurred,aseparatetitleretentionagreement

can be executed effectively later as long as it is at the latest at the time of

delivery. In this sense, title retention is not amounting to the conceptof PMSI,

which disqualifies the security of antecedent debt and requires the money

advanced to acquire the collateral. It is likely that the third party’s right

interferesinthegapbetweentheabove-mentionedpointsoftime.Thisprovision

showsaconfusioninFrenchlawregardingthetreatmentoftitleretention.

Title retention can be enforced against third parties without want of public

registration as long as it fulfils the formal requirement discussed above. The

absenceofregistrationrequirement isoneofmanypoints leadingtothedoubt

over the nature of title retention under French law since title retention is

apparentlyanon-possessorysecurityinterest.However,byinvokingtherightof

theowner,atitle-retainingsellercanchoosetopublishthecontracttoearnmore

benefits and protections in insolvency proceedings. In this respect, the owner

doesnotneedtoprovidetheproofofownership,andshecaninitiateaclaimto

restore the goods without the limitation of time24. Otherwise, other recovery

PressRelease:S&PGR:TitleRetentionOpinionCouldAffectFrenchABS.(2017,March30).DowJonesInstitutionalNews,p.DowJonesInstitutionalNews,Mar30,201719FrenchCivilCodeArticle2368,FrenchCommercialCodeArticleL624-1620FrenchCommercialCodeArticleL624-1621DorstAandGagnierAD,seen.15,atp.12722ibid23FrenchCommercialCodeArticleL624-1624FrenchCommercialCodeArticleL624-10

180

claim must be submitted within three months starting from the date of

publicationoftheordercommencingtheproceedings25.

Although title retention is located in thepartof security interests inmovables,

the wording treats it as the owner’s absolute interest rather than a security

interest. Itdoesnotmention theprioritybetween the title retentionclaimand

the competing security interest in the same items. It simply provides that a

creditor can request the returnof theproperty inorder torecover theright to

disposeof it26.A creditor can invoke self-helpbyaskingadebtor to return the

property;otherwise, shemustgo to court toobtainawritof execution27. Even

though the creditor owes the debtor the surplus if the value of the property

exceedstheamountofthesecureddebt,thewordingshowsthattheenforcement

of title retention as a security interest is equivalent to the enforcement of

ownershipright.Comparatively,agagecanbeenforcedbyapetitionincourtfor

anorderofsale.Thesecuredcreditorcanalternativelypetitionthecourtforan

ordertokeepthecollateralforpaymentandpaythebalancetothedebtorifthe

valueofthepropertyexceedstheamountofsecureddebt.Atthetimeofcreation

ofagage,thepartiescanagreeuponthatthesecuredcreditorwouldbecomethe

ownerofthecollateralandenforcethisrightwithoutthecourt’sorder.Thelegal

consequenceofenforcementwheretheproperty isseizedbyacreditormaybe

thesamebetweentitleretentionandagage,but theFrenchCivilCodedrafters

haveborninmindthattherightsofatitle-retainingcreditorisabsoluteasofan

owneroftheproperty.TheFrenchorthodoxperspectivedoesnotconsidertitle

retentionasa sourceofprioritybecause it is contradictory to the fact that the

titleremainswithasellerratherthanbelongingtoabuyer28.This thinkinghas

framedthetreatmentoftitleretentionevenasasecurityinterestbutlackingthe

respectivepriorityrule.Therefore, theonlypoint topossiblyseetitleretention

as a security interest is the debtor’s right to redeem the surplus between the

valueofthepropertyandtheamountofthesecureddebt.

25FrenchCommercialCodeArticleL624-926FrenchCivilCodeArticle237127DorstAandGagnierAD,seen.15,atp.13328vanErpJHMandAkkermansB,Cases,MaterialsandTextonNational,SupranationalandInternationalPropertyLaw(Oxford:Hart2012),atp.476

181

It is clear that anunpaid seller canenforce the recoveryof thepropertyunder

thetitleretentionclauseas longas thepropertyremains inkind inthebuyer’s

possession.However,whenabuyercreatesapossessorygageontheconcerned

goods in favourof a third party, the latter isnotobliged to checkwhether the

propertyissubjecttoatitleretention29.Therefore,athirdpartywithpossessory

rights has priority over a title-retaining creditor30. The priority of possessory

gageovertitleretentiondoesnotmirrorthesubordinaterankingoftheformer

securitydeviceinacompetitionwithanearlierregisterednon-possessorygage.

The law of gage adopts the first-to-file-or-perfection rule, whereas, it can be

assumed that the subordinate priority of title retention in competition with a

possessory gage is justified by the lack of registration with regard to title

retentionandthefactthattheholderofpossessorygagepossessestheproperty.

In competition with a secured party having a turning gage with substitution

goods (gage tournant avec substitution de merchandise), that is a cross-

collateralization, a title retention claim has priority subordinate to the given

securedpartyifaturninggagehasbeenagreeduponbeforethedeliveryofthe

property31.TheCourtofCassationwas likelynot to take into consideration the

nature of purchase-money credit and the newmoney theory to grant the first

prioritytothetitle-retainingseller.

Thelawoftitleretentionasasecurityinterestdoesnothavepriorityruleswith

regardtotheconflictbetweenatitle-retainingcreditorandasub-purchaser.The

FrenchCivilCodehastwoimportantrulesconcerningpersonalpropertyinthis

sense.Article1599invalidatesasaleofathingbelongingtoanother,andArticle

2276 provides that possession is amounting to a title. Under the French law

perspective, although title retention is recognized as a security interest in

personalproperty, titleremainswiththeselleruntilandunless thebuyerpays

thefullpurchaseprice.DespiteArticle1599,Article2276asanexceptionallows

a transferof good title toa sub-purchaserwho relieson the initialpurchaser’s

29CourtofCassation,September11,201211-22.240citedinDorstAandGagnierAD,seen.15,atp.13130DorstAandGagnierAD,seen.15,atp.13131CourtofCassation,May2621010,09-65-812citedinDorstAandGagnierAD,seen.15,atp.131

182

possessioningoodfaith32.TheoutcomeisdesirabletotheextentthatFrenchlaw

doesnotrequirearegistrationtovalidatetitleretentionagainstthirdparties.

Title retention is not statutorily recognized to be extended to the proceeds of

sub-sale and manufactured/combined goods, even though the parties agreed

upon.However, therearesomeexceptions.Whenthepropertyissoldtoasub-

purchaser,withoutconsensualagreement,anunpaidsellerhasapersonalaction

forthepurchasepriceagainstasub-purchaseronlyifthelatterhasnotyetpaid

her ownseller33.When the subject of title retention is the fungible goods, title

retention attaches to property of the same kind and quality in the debtor’s

possessionuptotheamountofthedebtremainingdue34.Whenthegoodssubject

totitleretentionareincorporatedintoothergoodsbutremaininkindandcanbe

recoveredwithout causing damage to other goods, the incorporation does not

extinguishtitleretention35.

French lawrecognizes title retentionasa security interest,but ithasa limited

scope.Itdoesnotfullyanticipateandgivesolutionsforextinguishmentdisputes

whentheconcernedproperty issub-soldorundergonemanufacturingprocess.

In other words, even though title retention has a close nexus with personal

propertythatsubstantiallyincludesshiftingorcirculatingassets,theFrenchlaw

oftitleretentionasasecurityinterestonlyfacilitatesthefixedstatusoftheasset.

Furthermore, the treatmentof title retentiondoesnotmanifest thenatureand

thecontentofasecurityinterest.Rather,itissimilartothetreatmentofabsolute

propertyrightsconferreduponatrueowner.Thesubjectofasecurityinterestof

this kind is the title to the goods or ownership rights, rather than the goods

themselvesas the collateral.Theonlymethod toenforce title retention, that is

the recovery of the property, shows the super-priority of title retention on its

facebut theunderlyingpolicy is theenforcementofownershipright insteadof

the“newmoney”and“situationalmonopoly”theoryrelatingtheconceptofPMSI.

It can be said that title retention as a security interest in French lawdoes not

adopttheconceptofPMSI.32DorstAandGagnierAD,seen.15,atp.12833DorstAandGagnierAD,seen.15,atp.130;FrenchCivilCodeArticle237234FrenchCivilCodeArticle236935FrenchCivilCodeArticle2370

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5.2.2 TitleretentioninVietnameselaw

Title retention is categorized as a security interest for the first time in the

VietnameseCivilCode2015. Itmirrors theFrenchCivilCodeapproachtotitle

retentionwithsomesignificantvariants.CorrespondingtotheFrenchtreatment

oftitleretentionasasecurityinterest,thetitletothegoodsisthesubjectofthe

security interest of this kind. The onlymethod of enforcement is the recovery

claimsothatanunpaidsellerrepossessesthepropertyinkind36.TheVietnamese

law treats the seller as an ownermore strictly in comparisonwith the French

law.Inthissense,anunpaidsellerdoesnotowethebalancetoadebtorwhenthe

value of property exceeds the amount of unpaid debt. On the other hand, the

former does not have an unsecured debt when the value of the property is

diminishing below the amount of unpaid debt. A seller must refund a debtor

subjecttoanydepreciationcausedbytheexploitationofthegoodsinthenormal

courseofbusiness if the latterpays thepurchasepricepartly37.A seller is also

entitledtodamageswhenthepropertyislostordamaged38.Itiscorresponding

to the provision that the risk is transferred to the buyer notwithstanding title

retention,unlessotherwiseagreed39.Furthermore,thewordingemphasizesthat

even though the law of title retention is located in the part of secured

transactionsintheCivilCode,atitleretentiontransactionisdescribedundersale

and purchase terms. “Buyer” and “seller” are used instead of other terms

referring to a secured transaction, such as secured party/debtor,

pledger/pledgee,orchargor/chargee.

UndertheCivilCode,abuyerhasrightstouse,enjoyfruitsandprofitsgenerating

fromtheproperty40.However,itdoesnotmentionsolutionsforextinguishment

disputeswhentheproperty isresold,consumed,orput intothemanufacturing

process.

36VietnameseCivilCodeArticle33237VietnameseCivilCodeArticle33238VietnameseCivilCodeArticle33239VietnameseCivilCodeArticle333.240VietnameseCivilCodeArticle333.1

184

Thetitleretentionarrangementmustbe inwriting. Itcanbeestablished inthe

sale contract or separately. The Vietnamese Civil Code has a unique provision

withregardtoasaleoncredit.Accordingly,titleretentionisanimpliedtermina

contract of sale on credit41. Parties can expressly agree otherwise to avoid a

defaulttitleretentionarrangement42.Acontractofsaleoncreditisrequiredtobe

inwriting43. It can be inferred thatwithouta title retentionclause, a seller can

enjoythebenefitof titleretentionasasecurity interestundertheCivilCodeas

longasshehasawrittencontractofsaleoncreditandregistersit44.Itisargued

that this provision aims at protecting a seller engaging in a sale on credit

transactionagainst theriskofnon-payment.However,althoughthepartiescan

contractout,theprovisionofimpliedtitleretentionviolentlyinterfereswiththe

rightsofbuyersbuyingoncredit.Withoutanagreementontransferofproperty,

property is transferred at the time of delivery45. However, a sale on credit

extinguishes this implied term and replaces it by another implied termof title

retention.Ifthesellersellingoncreditmakesuseoftitleretentionasanimplied

termtoregisteritagainstnotonlythebuyerbutalsoothercreditors,itwilllead

tounexpectedoutcomeswithregardtothedebt financingmarket. Institutional

financiersmayraisetheinterestofsecuredcreditordependonrealpropertyas

the collateral to advance credit because it is not easy to compete with title-

retainingsellerswithregardtopersonalproperty.Theabovediscussionisonlya

presumption mainly relying on the Civil Code provisions. In practice, title

retentionhasneverbeenaseriousthreat to institutional financiersinVietnam.

Sellers do not probably have any idea of security function arising from title

retentionarrangement.Itiswitnessedthattitleretentionarrangementexistsina

salecontractforalongtime,particularinsalesbetweenVietnameseandforeign

party, but disputes relating to or arising from the sale of this kind are rarely

reported. It isremarkablethatalthoughtheVietnameseCivilCoderecognizesa

security interest created upon after-acquired property, but it requires

41VietnameseCivilCodeArticle453.142ibid43VietnameseCivilCodeArticle453.244Do VAT, 'Seller’s Title Retention to the Goods Under the Civil Code 2005' (2016) 9 State and Law 18 (Vietnamese), at p. 2245VietnameseCivilCodeArticle161

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registration of amendment whenever after-acquired property comes into

existenceexceptforafter-acquiredinventorycollateral.Thus,ablanketliencan

becreatedoninventorybutnotonnon-inventorycollateral.Recognitionoftitle

retentionasasecurityinterestisnotademandofsettingupacounter-weightto

ablanketlienoravoidingasituationalmonopolycreatingbyablanketlien.

The significantpointmaking the treatmentof title retention in theVietnamese

CivilCodedepartingfromtheFrenchapproachistherequirementofregistration

forthepurposeofenforcementagainstthirdparties46.Theregistrationsystemin

Vietnam is a transaction – based one where an agreement creating a security

interest must be submitted for registration. Before the enactment of the Civil

Code 2015, without formal recognition of title retention as security interest,

registrationwasrequiredtoenforcethetitleretentionclausetotheextentthata

title-retainingsellerhaspriorityoverothersecuredcreditorsiftheregistration

wasmadewithinfifteendaysstartingatthedateofcreationofthesalecontract47.

ThisrulewascorrespondingtotheArticle9requirementoftimelyperfectionfor

the first priority of a PMSI in non-inventory collateral. However, timely

registration as in the previous law discontinues in the new Civil Code. It is

ambiguousabouttherelationshipbetweenthepriorityruleoftitleretentionand

registration. Thegeneral priority rule is the first-to-file onewith regard to the

conflict betweenmany registered security interests in the same collateral. The

CivilCodelacksaseparatepriorityrulefortitleretention.Itcanbeinferredfrom

fourextremelybriefarticleswithregardtotitleretentionthatatitle-retaining

sellerhasthefirstpriorityundertherighttorecoverthepropertyaslongasshe

fulfils the requirement of registration. The order of registration and timely

registration do not play any role in setting up the priority of title retention

againstothersecurityinterests.

Thereisnopriorityruleforthecompetitionbetweenatitle-retainingselleranda

buyer, but a true owner of the goods has a shelter against a third party who

possesses the goods in good faith to recover to the goods, except that a third

party in good faith gives value and receives the delivery from a person who

46VietnameseCivilCodeArticle331.347Decree163/2006/NĐ-CPOnSecuredTransactionArticle13.2

186

possesses the property under the owner’s consent48. It is problematic that the

lawof title retentionhasablurreddistinctionbetweena securedpartyandan

owner to determine the status of a title-retaining seller when it accepts title

retentionasasecurityinterest.

The same problem occurs when the original goods undergo a manufacturing

process.TheCivilCodelacksprovisionsforattachment,perfection,priorityand

enforcement in this context for all kind of security interests including title

retention.Withoutatitleretentionagreementextendingtonewly-manufactured

products, the question iswhether a title-retaining seller is still qualified as an

owneroftheoriginalgoodstosetupco-ownershipintheproducts49.

Before the enactment of the Civil Code 2015, title retentionwas enforced as a

contractualarrangementinacontractofsaleoncredit50.Thepartiescouldagree

upon the condition of transferring the title to the goods51, including that the

propertywasnottransferreduntilandunlessthefullpurchasepricewaspaid.A

sellerasanownerofthegoodscouldreclaimthegoodswhenabuyer failedto

make payment under an agreement or in theabsence of agreement, under the

statutoryrighttorecoverthegoods.Inthissense,thegoodswerenotsubjectto

thebuyer’sassetuponwhichthebuyercouldcreateasecurityinterestinfavour

ofothercreditors.Asdiscussedabove,withoutrecognitionoftitleretentionasa

securityinterest,anunpaidtitle-retainingsellercaninvokeprovisionsprotecting

a true owner against third parties who possesses the goods in good faith or

claimingco-ownershipincaseofmixing,incorporatingorprocessingtheoriginal

goodstoformnewproducts.

The new treatment of title retention as a registrable security interest has an

unsatisfactory legal consequence to a seller selling on credit. To enforce title

retentionagainstthirdparties,asellermustconductaregistration.Theimplied

term of title retention in a sale on credit does not support much a seller in48VietnameseCivilCodeArticle16749Ifthegoodsaremixed,incorporatedorprocessedwithothergoodstoproducenewproducts,allownersoforiginalgoodsco-ownthenewproducts.VietnameseCivilCode2005Article236,237,238.50VietnameseCivilCode2005Article46151VietnameseCivilCode2005Article439.1

187

practice because its enforceability against third parties still depends on

registration.BeforetheCode2015,anunpaidsellersubjecttotitleretentioncan

claimfortherecoveryofthegoodsasanownerwithoutwantofregistration.To

some extent, registrationhas a function of giving public notice that provides a

proof for the latter recovery claim if any, particularly in an insolvency

proceeding. The Insolvency Law enacted in 2014does not have any particular

provision for title retention, but the enforceability of the Civil Code 2015 has

changed the position of a title-retaining seller significantly. Having registered

title retention, thesellerof thiskind is treatedasa securedcreditor.However,

theruleenforcingasecurityinterestundertheInsolvencyLawdoesnotsupport

theenforcementoftitleretentionclaim.UndertheInsolvencyLaw,thecollateral

isrealizedtodischargethesecureddebt.The surplusbetweenthevalueof the

collateralandtheamountofdebtwilljointhedebtor’sasset;ontheotherhand,

thedeficiencythereofwillmakethesecuredcreditorathandtobeanunsecured

creditorwithregardtheunpaidamountofdebt52.TheCivilCode2015doesnot

treatthegoods,buttitleretentionasthecollateral,andtheenforcementoftitle

retentionasasecurityinterestissimplytherecoveryofthegoods.

The lawof titleretentionundoubtedly imports theFrenchapproachwithsome

modifications,especiallytherequirementofregistration.However,theCivilCode

2015 does not make any improvement in this area except for the formal

acceptanceofasecurityinterestbyitsfunction.

5.3 Title retention treatment from the perspective of legaltransplant:ThecaseofVietnam

Globalization has urged nations tohave harmonized and uniform standards to

promote the international trade. For a developing country having a transition

economy likeVietnam, legal transplant is a convenient, fast and to some lesser

extent effectivemeans to have a legal framework facilitating the international

economicintegration.Legaltransplantcouldbecausedbyimposition,prestigeor

economicperformance53.The impositionoccursasaresultofmilitaryconquest

52InsolvencyLaw2014Article53.353Graziadei M, ‘Comparative Law as the Study of Mixed Legal System’ in Reimann M andZimmermannR(eds),TheOxfordHandbookofComparativeLaw(OxfordUniversityPress2008),

188

orcolonization.Meanwhile,aforeignsystemofrulescanbevoluntarilyreceived

becauseithasprovedtobeagoodmodel.Thedemandofeconomicperformance

intheeraofglobalization,internationalintegrationandeconomictransitionhas

furthermore initiated the legal reform in many countries. Many international

organizationsorinstitutionsliketheWorldBank,UNIDROITorUNCITRAL,have

actively engaged and supported this process by recommendingmodel laws or

funding law reform projects. These actions involve to some extent legal

transplantandreceptioninmanyrecipientcountries.TheUNCITRALLegislative

GuideonSecuredTransactionsisanexamplethatprovidesrecommendationsto

any country that needs a reform for the law of secured transactions. This

documentanalysesandsuggestsmultiplechoicesfortitleretentiontreatment.

Vietnamhaswitnessedallcausesof legal transplant intothe legalsystemsince

the ancient time. Due to the close and sensitive relationship between Vietnam

andChinabeforetheconquestoftheFrenchcolonizerinthenineteenthcentury,

Vietnamese formal law and order were borrowed from feudal China, whereas

somelocalcustomarylawremained54.IntheFrenchcolonialperiod,Frenchcivil

and commercial law were imported and received, but their application was

limited toFrenchcitizensandEuropeanor to the relationshipbetweenFrench

andindigenousVietnamese.Inthenorth(Tonkin)andcentralVietnam(Annam),

two separate civil codes, along with the criminal procedure codes and penal

codeswere enacted, all of whichwere drafted by French lawyers55. Although

being received cautiously and even hostilely at first, French concepts and

ideologyhaveplayedavitalroleintheVietnamesemodernlegalsystem,atleast

that Vietnam today insists on code – formulated law. Noticeably, Vietnam

belongedtothefamilyofsocialistlawafteritgainedindependencefromFrance.

Today, Vietnamese law has changed much to meet the demand of economic

transitionandinternationalintegration,butthesocialistideawhichhasastrong

atpp.455-46154HookerMB,AConciseLegalHistoryofSouth-EastAsia(ClarendonPress1978),atpp.93-455Vietnam in French colonial period did not have a single legal system due to the Frenchadministration.TheSouthVietnam(Cochin-China) isaFrenchcolonydirectlyadministeredbyFrench civil service. The North (Tonkin) and Central Vietnam (Annam) are two FrenchprotectoratesthatFrenchmadesomeconcessiontothenativeautonomy.SeemorediscussioninHookerMB,AConciseLegalHistoryofSouth-EastAsia(ClarendonPress1978),atpp.153-166

189

resistanceagainstjudge-madelawcanbetraced.Inrecentyears,theVietnamese

SupremeCourthaspublishedreportsofitsselecteddecisionsthathasaneffect

ofcaselawwithintheschemeofthejudicialreform.

Tohavealegalframeworkforamarketeconomy,Vietnamhastransplantedand

receivedmanyforeignlawsormodellaws.Therearetwotypicalexamples:rules

on publicly-held corporation are drafted following the United Stated unitary

board model and arbitration law incorporates the UNCITRAL Model Law on

InternationalCommercialArbitration.TheCivilCode is alsoagoodexampleof

legaltransplantinVietnam.ThefirstCivilCodeenactedin1995wasdraftedafter

theRussianCivilCode,andaccidentallyadoptedtheGermanicschemeinsteadof

Romanistic spirit of the French Civil Code. However, the treatment of title

retention as a security interest is the productof legal transplant of the French

approach.

5.3.1 ImportoftheFrenchapproach

TheFrenchapproachtotitleretentionasasecurityinterestisflawed.Itfailsto

conceptualize a new statutory security device and get stuck. It does not

successfully and effectively figure outwhat kind of rights the seller has in the

goods:anabsoluteownershiporanaccessorysecurityright.Acurrentreportof

TheCourtofCassation’sopinionshowstheundesirablestatusof titleretention

as a security interest in French law that treats the title to the goods as the

collateral56.TheCourtofCassationviewedthesubrogationclausethattransfers

theseller’stitleretentionrightstoaprofessionalfinancierasanunfairterm,and

thusunenforceable57.TheFrenchlawfailstolookattheconceptoftitleretention

to have a link with the concept of a PMSI, which considers the seller’s title

retentionisequivalenttothesecurityrightinthegoodsarisingfromadvancing

thefundforthebuyertoacquirethegoodsathand.Thetitletothegoods,notthe

goodsthemselves,arethecollateralundertheFrenchapproach.Therefore,thata

financiersubrogatesatitle-retainingsellertotitleretentionrights,notthetitleto

thegoods,isajustificationfortreatingthesubrogateclauseasanunfairterm.As

56PressRelease:S&PGR:TitleRetentionOpinionCouldAffectFrenchABS.(2017,March30).DowJonesInstitutionalNews,p.DowJonesInstitutionalNews,Mar30,201757ibid

190

aresult,itturnsasecureddebtintoanunsecuredone.Inpractice,thepurchase

of cars in France is usually funded by professional financiers under the

subrogation arrangement in order to take advantage of title retention as a

securityinterest58.TheCourtofCassation’sopinionhasanegativeimpactonthe

debtfinancingmarketwithregardtoconsumerloantransactions59.Theopinion

does not contribute to the development of the law of title retention in

comparison with the same court’s ruling in the past. In 1988, the Court of

Cassationreversed theCourtofAppeal ruling, considering title retention is the

accessoryrighttotheclaimforthepurchaseprice.Therefore,whenthevendor

endorsedthebillofexchangeinfavourofthebank,thevendorconveyedboththe

receivablesagainstthebuyerandtherightancillarytoit60.

Considering title retention as a unique security device accessible to a seller,

FrenchandVietnameselawdoesnottakeintoaccounttheideaofasset-acquiring

financing proposed under the concept of PMSI. It is a transaction in which a

personclaimsaproperty right in thegoods to secure thebuyer’sobligation to

paythepurchaseprice61.Notonlyasellerbutalsoalendercouldprovidecredit

to a buyer to acquire assets. In practice, sellers in general possibly have a

demand for cashandarenotprofessional financierswhoarewilling toextend

thecreditterm.Thetheoryof“newmoney”supportingthefirstpriorityofPMSIs

suggeststhatasset-acquiringfinancingcanbedonebybothasellerandalender

aslongasthefundisprovidedtoacquirenewassets.Inotherwords,apurchase-

money loan issecuredby theasset that isnotpreviouslyownedby thedebtor

before, and as a result, does not touch or shrink the debtor’s pool of assets

reserved to secure other creditors’ loans. In many jurisdictions like Vietnam,

wheretheblanketlienisrecognized,atleastwithregardtoinventoryorshifting

asset, the first priority of asset-acquiring financing ismeaningful to break the

situationalmonopolythatrestrainsthedebtor fromobtainingsecuredcreditat58ibid59ibid60CourttheCassation,11July1988,D1988,IR,240,citedinErpJHMvandAkkermansB,Cases,Materials and Text on National, Supranational and International Property Law (Oxford: Hart2012),atpp.477-861UNCITRAL,LegislativeGuideonSecuredTransactions,UnitedNationsPublicationSalesNo.E.09. V. 12 (2010) (hereinafter Legislative Guide), at p. 320. The Legislative Guide calls it anacquisitionfinancingtransaction.

191

competitive terms from other creditors. Under Article 9, a PMSI is defined to

covertitleretentioninsalecontractsandlendingtransactionsinwhichthevalue

is given to acquire the collateral. A title retention sale is considered to be

equivalent to a loan advancing for this purpose. Both are PMSIs because they

sharethesamecorecharacteristic,namelythecreditextendedandsecurednot

by the pre-existing but new collateral. It is a good justification for the super-

priority ranking enjoyed by the purchase-money creditor and that a PMSI is

limited to thepurchasepriceof the collateral.Title retention, in thenameof a

PMSI, should comply with the law of secured credit in order to grant the

seller/creditor a favoured treatment in comparison with other creditors

includingsecuredcreditorsandevendebtorsinthepersonalbankruptcycontext.

ThePMSIapproachisconsideredtobeafullyintegratedconceptwherethereis

no distinction between secured credit supplied by the seller and the lender to

purchase the asset, and a PMSI is at first a security interest to comply with

generalrulesofthelawonsecuredtransactions62.

Theseller-basedapproachandtheowner-basedenforcementmethodinvolving

titleretentionasasecurityinterestalsopreventthedebtorfromgrantinglower-

rankingsecurityinteresttoothercreditors.Frenchlawdoesnothavethepriority

rule for thecompetitionbetweentitleretentionandothersecuritydevices,but

having a provision requiring a seller accountable for the surplus between the

valueofthepropertyandtheamountofoutstandingdebttothebuyer.Inother

words, the surplus will join the buyer’s assets for the enjoyment of general

creditors rather than any secured creditor. Under Vietnamese law, a title-

retainingsellertakesthegoodsallirrespectiveofwhetherthereisdeficiencyor

surplusbetweenthepresentvalueof theconcernedgoodsandtheoutstanding

debt. Therefore, the goods subject to title retention cannot be realized for the

benefitofthebuyer’sunsecuredcreditors.

Under theArticle 9model, a PMSI is at first a security interest that follow the

generalpriorityrules.Inthisrespect,itisthecompetitionamongseveralsecured

creditors in which a purchase-money creditor has the first priority. In other

62ibid,atp.332

192

words,treatingtitleretentionasatruesecurityinterestgivesadebtorachance

tocreatelower-rankingsecurityinterestsinfavourofothercreditors.Therefore,

it does not prevent a debtor from accessing secured loan bidden by other

creditorswhenaPMSIiscreateduponthesameassets.

In comparisonwithEnglish law, theFrench lawof title retention results in the

same legal consequenceswith regard to simple title retention despite the fact

thatbothjurisdictionsemploydifferentconcepts.Inbothjurisdictions,anunpaid

seller is entitled to recover the goods that is still identified in the debtor’s

possessioninandoutoftheinsolvencyproceedingswithoutwantofregistration.

With regard to the proceeds and new products, other creditors who has a

security interest inaccountsandafter-acquiredpropertyrespectivelygenerally

havethefirstpriority.ItshouldbenoticedthatinEnglishlaw,asellerisfoundin

practice to have a void charge in the proceeds or newproductsdue to lack of

registration. Despite the fact that both English and French lawmay reach the

samelegalconsequences,theEnglishlogicissatisfactorybecauseitrecommends

a clear distinction between two different kinds of property rights, namely the

ownershiprightandtherealsecurityright.

Vietnamese lawunfortunately imports theFrenchapproach tobuildthe lawof

title retention with some modifications that does not contribute any

improvementtotheapproachofthiskind.Therequirementofregistrationmay,

on its face,bringthetreatmentof titleretentionasasecurity interestcloser to

theconceptofasecurityrightinpersonalproperty.However,therequirementof

registration under the security interest treatment is not compensated by the

priorityextendedtotheproceedsandnewproducts.

During the process of drafting the Civil Code 2015, drafters addressed the

problemof title retention by conductingmany researches on the treatment of

titleretentioninmanyjurisdictions.AlthoughtheCivilCodeimportsthescheme

of German Civil Code which does not recognize title retention as a security

interest, it insists on treating title retention as a security interest. In practice,

before the enactment of the Civil Code 2015, title retention is introduced in

Vietnamthroughinternationalsalecontractsthatisusuallydraftedbyaforeign

193

partyortermsandconditionsofferedbyaforeignparty.Thisthesiswasinfact

initiatedby an inquiry fromadomestic companywho received a request from

oversea company asking it not to take delivery of a consignment that was

allegedly subject to the title reserved by the original seller. Title retention is

widely known in Vietnam in the simple form. However, disputes over title

retention are rarely brought to court. It could be said that the law of title

retentionwasnotunderapressuretohaveareform.TheCivilCodehasaroleto

introduceanewsecuritydeviceto thesecuredcreditmarket.Accordingly, title

retention is a security device uniquely reserved for a seller whereas other

financierswhoarewillingtobidforloancannotdeployit.Fromtheviewpointof

aseller,titleretentionasasecurityinterestintheCivilCodeisnotdesirableand

appealing since it requires registration but does not protect a title-retaining

seller inextinguishmentdisputeswhere thegoodsare sub-soldorput intothe

manufacturingprocess.

The law of title retention in particular and secured transactions in general in

VietnamdoesnotlearnalessonfromArticle9.Aminorinfluenceofthismodel

couldbe traced in thepre-Code2015requirementof timely registration. Some

versionsoftheCivilCode2015draftkeptthetimelyregistrationasaconditionto

grant the first priority to an unpaid title-retaining seller. The draft also had a

priorityrulefortitleretentionasasecurityinterestwhichcannotbeseeninthe

FrenchCivilCodeandtheCivilCode2015.

TreatingtitleretentionasasecurityinterestinVietnamtodayisunquestionable

ordebatableeventhoughitwasreceivedslowlyanddoubtfullybothinpractice

and theory. The further question should be which approach is suitable and

economicallyeffectiveintheVietnamesecontext.TheVietnameselegalsystemis

acivil lawonewheretheCivilCode isconsideredacornerstoneofprivate law,

and the diversity of security devices accompanied by respective different

treatments has a deep root that places a strong barrier to the import of the

unitaryapproach.

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5.3.2 TransplantingPMSIconceptintotheschemeofCivilCode

ThediscussionaboverevealsanefforttotransplantsomeprovisionsofArticle9

into the lawof title retention. It is not necessary to be a project to reform the

wholelawofsecuredtransactions,changingitfromamulti-devicesystemintoa

unitaryonebyadopting the functionalismapproach.Article9 is a combination

and interactionof functionalism,aunitaryapproachandanotice filingsystem.

TheVietnamese lawof secured transactions in personalproperty law lacks all

above featuresbuthasadesire to treat title retentionasa security interestby

function.TheFrenchapproachisprovedthatthenewtitle-basedsecuritydevice

does not accommodate the credit availability from both the financier and the

buyer’s side. However, it is questionable whether the concept of PMSI can

surviveinthebodyofthemulti-device-basedlawofsecuredtransactionswithin

themassiveschemeofaCivilCode.

Theunitaryapproach isnotamounting toanabsolute concept that rejectsany

distinction. The Article 9 and the PPSA model do not maintain a diversity of

security devices, but it classifies the types of collateral and provides different

treatments.Moreimportantly,althoughaPMSIissubjecttothegeneralrules,it

has its own label and a separate status from general security interests. The

UNCITRAL recommends that asset-acquiring financing can be governed under

the scheme of unitary approach or non-unitary approach to achieave

equivalentlyfunctionaloutcomes,eventhoughtheformerisabettersolution63.

ThecrucialpointisthatthelawofPMSIsshouldbebuiltupontheinteractionand

dependence with the general law of security interests. Under the Vietnamese

CivilCode,aconsensualsecurityinterestinpersonalpropertymayhavetheform

of a pledge, a charge or title retention. Although the law of secured credit

basically does not adopt the unitary approach, a pledge and a charge share a

greatnumberofgeneralrulesofferingtheuniquetreatmentwithregardtothe

collateral, the enforceability against third parties (perfection), the priority and

the enforcement. Vietnam also has a unique registration system for security

63SeeLegislativeGuide,atpp.377-381forRecommendations187-202withregardtothenon-unitaryapproach

195

interestsinpersonalpropertyforsecuredpartiesofallkinds.Theimportofthe

wholeconceptofPMSIasaseparatesecuritydeviceispossibleinthiscontext.A

PMSIwould be governed by the general rules subject to some exceptions. The

advantageofaPMSIisthatgenerallenders,notonlysellers,canusethisdevice

to advance secured credit to a buyer who needs fund to acquire new assets.

Subject to the general rules of security interest in personal property, the

purchase-money collateral which is usually the goods in a sale contract is

availableforthebuyertocreateotherlower-rankingsecurityinterestinfavour

ofothercreditors.Itcanbesaidthattheschemeofacivilcodeisanadvantageto

importtheconceptofPMSIwithouttheneedtoreformthewholelawofsecured

transactions in personal property to formally accept the unitary approach. In

contrast,theEnglishlawofsecuredtransactionswheredifferentsecuritydevices

accompaniedbydifferentlogicandtreatmentscontainedindifferentlegaltexts

or incommonlawisunderthepressureofreform,andthequestionofunitary

approachshouldbeconsideredthoroughlyandseriously toachieveadesirable

outcome.ThecontextofEnglishlawinthisareaisclosetothepre-Codesituation

intheUnitedStatesandobviouslythesameasinothercommonlawjurisdictions

likeCanada,NewZealandandAustralia.Thediversityofsecuritydevices isnot

onlyduetotheformoftransactionbutalsothekindofdebtor.Therefore,thelaw

of PMSI would contribute to the fragment and complication with regard to

securedtransactionsinpersonalproperty.

However, it cannot be said that the law of secured transactions in civil law

jurisdictions,particularlyinpersonalpropertyisnoturgenttobereformed.The

shortcoming of Vietnamese law in this area is that it does not look personal

propertyinitsactivestatus,namelyintheformofshiftingorcirculatingassets,

orunderthepossibilitytobetransferredwhenitbecomesobsolete.Itdoesnot

takeintoaccounttheostensibleownershipproblemcreatedbythecharacteristic

of personal property where possession manifests ownership on its face.

Therefore, itdoesnotdealwithextinguishmentdisputeswhen the collateral is

sub-soldorputintothemanufacturingprocess.ThelegaltransplantofPMSIwill

not be satisfactory if the Civil Code does not provide rules relating to the

proceedsornewproductsderivingfromtheoriginalcollateral.

196

Anotice filingsystemisnotapre-requisite tointroduceandoperatethelawof

PMSIs.Registrationdoesnotdetermine thenatureof aPMSI.Rather, it carries

the function of giving public notice about the possible existence of a security

interestinparticularitemsorclassofassetsthatismeaningfultoanypotential

secured creditors, or an earlier-registered secured party who is holding a

security interest in the after-acquired inventory collateral when the debtor

applies for credit to acquire inventory. On the other hand, the first-to-file-or-

perfectruleisessentialforasecurityinterestintheproceedsandanewproduct

inextinguishmentdisputes inwhichthegivenpriority isantedatedbacktothe

timewhen the security interest in the original collateral is registered. Priority

rankingrelyingontheorderofcreationpossiblyresultsinthedebateonthetime

when a security interest in the proceeds or in new products is created. For

example,itwouldbethedaywhentheoriginalagreementisconcludedorwhen

theproceedsornewproductscomeintoexistence. Inanycase, it isapparently

moredifficult todeterminethan thedayof filingor registration.Anotice filing

systemandthefirst-to-file-or-perfectruleisalsoagoodcombinationtoenhance

apromptnotificationofasecurityinterestforthepurposeofpriorityranking.

Priority ranking inVietnamese law isbasedon theorderof registration rather

thancreation.Inthisrespect,itiscrucialtoregisterasecurityinterestassoonas

possiblewhen the security agreement is formed to gain the expected priority.

Althoughasecuredpartycannotpre-registeraprospectivesecurityinterestasin

ajurisdictionfullyadoptingtheArticle9model,thefirst-to-registerruleisagood

conditiontobuildtherulesfortheproceedsandnewproductsinextinguishment

disputes.Itallowsthesecurityinterestintheproceedsandnewproductstohave

theprioritydayoftheoriginalcollateralsubjecttocontinuanceofperfection.

It isunquestionablethatanotice filingsystemfacilitates themarketofsecured

credit in the sense of a convenient, fast, easily-determined and cost-saving

system. Even though Vietnam has a unique registration system for security

interests in personal property and maintains electronic registration, it is a

transaction-basedone. Registration is burdensome and costly to any inventory

financiers including purchase-money secured creditors because registration is

required routinely and regularly whenever credit is advanced. In brief, the

197

reformquestion to replacea transaction-based systembyanotice filingone is

usually considered from the viewpoint of economically effective secured

transactionlaw.

Functionalism is a prerequisite to adopt the concept of PMSI. The French

approachdoesrecognize the functionof titleretentionarrangement that isnot

limited to the transfer of title but also provide a device to secure payment of

purchase price. However, functionalism has the broader scope to cover any

devicecarryingthesamesecurity function,suchasahire-purchasetransaction.

The import of PMSI in the scheme of a civil code is the acceptance of

functionalisminspecificcasesratherthantakingitasabackboneofthesecured

transaction law. Again, the question of functionalism is particularly important

beyondtheambitofaPMSI.Functionalismisasignificantconditiontobuildthe

secured transaction law under the unitary approach inwhich any transaction

functioning as to secure the payment or performance of other obligations is

treated unitarily without distinction of forms and types of secured creditors.

However, resist against adoptionof functionalismasawholepackagedoesnot

restrainthelegaltransplantofPMSIintoasystemofmultiplesecuritydevices.

Acivilcodeplaysavitalroleandmanifestsaproudachievementoflegislationin

any civil law jurisdiction. It is argued that a code-formulated system is an

obstructiontoadoptagoodlawofsecuredtransactionslikeArticle9inmodern

times64. The developement of social and economic relationships today makes

themmorecomplicatedthantheywereatthetimeofthefirstenactmentofthe

NapoleonCodewheretheeconomywasmainlybasedonagriculture.Anall-in-

one code covering from the law of persons, property, torts to contracts and

obligations is unfit for an everyday growing-up body. This argument seems

persuasivesinceacomprehensiveandmassivelegaltextlikeacivilcodemustbe

built upon a logic or a legal science that connects all parts together. The

Vietnamese Civil Code is a good example in law-making demonstrating a

confusedanddoubtfulchoicebetweenthemodeloftheFrenchCivilCodeandthe

GermanBugerlichesGesetzbuch.Furthermore,thedebateonthepositionofthe

64NguyenX-TandNguyenBT,seen.1,atp.21

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lawonsecuredtransactions inacivilcode ison-goingsincetherelationshipof

this kind is at the intersection of personal and property rights. The

recommendationtoplacethelawofsecuredtransactionsinaseparatepartand

at the same level with the law of contracts and obligations and tort law as

demonstratedintheFrenchCivilCodehasnotreceivedfullsupportuntilnow.In

the Vietnamese context, it is an obstacle to update the law of secured

transactions to respond to a dynamic secured credit market in a developing

economy because the revision or reform of this area must be put within the

wholeproject,namelytherevisionofthecivilcodeoratleastthelawofcontracts

and obligations. It is recommended to have separate legal texts rather than a

massive code like a civil code to avoid the rigid status andmake it flexible to

changethe law.However, therecommendationof thiskindattackstheheartof

the civil law tradition in which a civil code is considered as a constitution in

private law65. The existence of a civil code in a civil law jurisdiction has been

never questioned or doubted in the perspective of civil law lawyers. From the

presentauthor’sviewpoint, thedemandforagood lawonsecuredtransactions

in general and title retention in particular even though it is parallel with the

demand for a good law inmanyother areas is not a pre-requisite to replace a

civil codebymanyseparate legal texts.Thisquestionmainly involves the law-

making technique. Vietnam, like other civil law jurisdictions, must change the

legislativepracticeofinitiatingabigprojectfortherevisionofthecivilcodeasa

whole.Acivilcodecanbedividedintomanybooksorchaptersorsectionsthat

canbe revisedor changed inan independentproject. It ispossible tokeep the

lawof secured transactionswithin the schemeof a civil code, and in theother

handimporttheArticle9approach.VietnamcanlearnthelessonoftheFrench

CivilCodetotakethelawofsecuredtransactionsoutofthepart“Contractsand

Obligations” and divide it into sub-categories for real property and personal

property. In a long-termproject of reform, the lawof secured transactions in

personalpropertycanadopttheunitaryapproach,functionalismandthenotice

filingsystem.

65Seethediscussionontheimportantroleofthecivillawandtheneedtoreformthecivilcodeatmodern times when commercial law, labour law and administrative law have increasinglydevelopedinRenaudinM,seen.14.

199

However,iftheunitaryapproachcannotbeadopted,theconceptofPMSIcanbe

transplanted into the body of the secured transaction law that maintains the

diversityofsecuritydevicesasthecurrentstatusofVietnameselaw.Itservesas

a security device next to other devices like a pledge or a charge that can be

granteduponpersonalproperty.Itisnecessarytoexpandthefirstprioritytoany

securedcreditadvancedtoacquirethenewassetregardlessofwhosuppliesthe

fund, a seller or a lender. Treating title retention as a security interest and

adoptionof thePMSImustbeaccompaniedby the requirementofregistration.

ThecurrentVietnameseexperiencedemonstratesanundesirable lawwhenthe

requirement of registration is not amounting to expanding the first priority of

title retention to the proceeds and new products. In this respect, the legal

transplantofPMSIconceptmustbedonewiththelegaltransplantofthepriority

rules tocoverthesituationwheretheoriginalcollateral issub-soldorput into

manufacturingprocess.AdoptingthePMSIwithoutadoptingthewholepackage

of unitary approach, functionalism and notice filing system is not the best

alternative,butintheVietnamesecontextwherethefunctionoftitleretentionis

stillunfamiliar,itoffersanewsecuritydevicetothesecuredcreditmarketthatis

onincreasingdemandofcreditfortradingandmanufacturing.Furthermore,the

legal transplantof thePMSI isagood introductionof functionalismandagood

preparation for the unitary approach in a bigger project to reform the law of

securedtransactionsasawhole.

The Australian experience with regard to the enactment of the PPSA

demonstratesthatdespitethelawofsecuredtransactioninpersonalpropertyis

containedinalegaltext,otherrelatinglaw,particularthelawofsaleshouldbe

correspondinglyrevisedtohaveadesirableoutcome.Thecrossexaminationor

reviewbetweendifferentlawswithregardtothereformofaspecificareaoflaw

isnecessaryinanyjurisdiction.

Vietnamese law demonstrates some interactions between the law of title

retentionandthesaleofgoodslaw.Thelattertreatsasaleoncreditasimplyinga

titleretentionagreement.However,thisprovisionisnotsatisfactoryasdiscussed

indetailaboveandshouldbeabolishedcompletely.

200

TheBunkersrulinginEnglishlawisworthathroughoutconsiderationbecauseit

proves an unexpected impact of title retention on the sale of goods law. The

VietnameseCivilCodedefinesacontractofsaleasanagreementinwhichaseller

transfersthepropertyinthegoodstoabuyer,andthebuyermakespaymentto

the seller. The property in the goods is possibly not transferred to the buyer

whenthegoodsaredestroyedduetotheconsumptionormanufacturingprocess

during the effective period of title retention. Vietnamese lawwould encounter

the sameproblem as experienced in English law if theBunkers ruling is learnt

andimported.

The English law experience inReHighwayFoods also shows that in a chain of

transactions, each ofwhich contains title retention, a bona fide sub-purchaser

maylosetherighttotakethegoodsfreeandclearbecauseshehasnotpaidthe

full purchase price. The legal consequence of title retention in this context

attacks the free flow of commerce and raises the substantial cost due to the

recoveryofthegoods.TheVietnameselawwithregardtotakingfreerequiresa

bona fidepurchasertohavea contract inwhich shegivesvalue inexchangeof

thepossessionofthegoods.Itremainssilentonwhetherabonafidepurchaser

haspaidforthegoodsorallsheneedsisacontractofthiskind.Vietnameselaw

doesnothaveadistinctionbetweenasaleandanagreementtosale.However,

whentitleretentionistreatedamethodtoreservethetitleuntilandunlessthe

fullpurchasepriceismade,abonafidepurchasersubjecttotitleretentionmay

losetherighttotakethegoodsfreeandclear.

TheFrenchapproachcannotgiveadesirableanswerfortheproblemsdiscussed

aboveregardlessoftherecognitionoftitleretentionasasecurityinterest.Title

retention as a security interest is severely based on the ownership right to

establishthepriorityandenforcement.Inotherwords,thetitlestillremainswith

aselleruntilandunlessthepurchasepriceispaidinfull.Itpreventsthetransfer

ofpropertytoabuyeraftertheconsumableorworkablegoodsareextinguished

inthebuyer’sordinarycourseofbusiness.Thispoint,again,provestheneedto

treattitleretentionasanormalsecurityinterestatfirstwiththefullmeaninglike

theArticle9model’srecommendation.Therefore, it iscritical to transplant the

provisioninArticle2oftheUCCcomplementingthedefinitionofasalecontract.

201

Accordingly, title retentionmusthave the effect limited to reserving a security

interest in the goods supplied, and the law should violently provide that the

transferofproperty followsthedefaultruleratherthantheparties’ agreement

on title retention. This treatment, even though interfering and ignoring party’s

autonomytoacertainextent,wouldavoidthepossibilityofrethinkingthesaleof

goods law in terms of title retention with regard to consumable or workable

goods.

5.4 Concludingremark

The code-formulated legal system as of France and Vietnam has shown a

willingnesstoadoptfunctionalismthroughtherecognitionoftitleretentionasa

security device. However, the law of title retention in these jurisdictions is

unsatisfactory.Theapproachtotitleretentionasasecurity interest isdifferent

from the concept of PMSI initiatedunderArticle 9. It is a seller-based security

interest that excludes theparticipationofother lenders intoproviding secured

credit to acquire new assets relying on the first priority. Title retention as a

security device is depending on the concept of ownership rights to build the

prioritystatusandthemethodofenforcement.Inthisrespect,itdoesnotshare

muchsimilaritieswithothersecuritydevicesinthesenseofaccessoryproperty

rights.RecognitionoftitleretentionasasecurityinterestintheVietnameseand

Frenchjurisdiction,therefore,doesnotfacilitatetheavailabilityofsecuredcredit

toacquirenewassets.

On the other hand, a PMSI can be brought into a system of multiple security

devices like the Vietnamese or French lawof secured transactions in personal

property.UnderArticle9andotherlawsfollowingtheunitaryapproach,aPMSI

has itsownnameand itsowntreatmentwithregardtoperfectionandpriority

becauseitisanexceptiontogeneralsecurityinterests.Thecrucialpointtomake

agoodlawinthisrespectistobuildcomprehensivepriorityruleswhichgovern

not only the conflict interests between secured creditors including purchase-

moneycreditorsbutalsotheconflictbetweenapurchase-moneycreditoranda

buyer,theconflictarisingwhentheoriginalcollateralisputintomanufacturing

process.

202

Furthermore, it is critical to change the saleof goods lawcorrespondingto the

introduction of PMSI into the law of secured transactions. As a result, title

retention is treated consistently among various areas of law to avoid an

unexpectedoutcomeoftheBunkersrulingaslearntfromEnglishlaw.

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CHAPTER6 CONCLUSION

6.1 Treatment of title retention in Vietnam and comparedjurisdictions: England, the United States, Australia andFrance

Titleretentionhasthefunctionthatisnotlimitedtoacontractualarrangement

to transfer the title in the goods in a contract of sale, but importantly it is a

securitydevicetosavethefirstpriorityinthegoodssuppliedtoanunpaidseller

intheinsolvencyproceedingortheextinguishmentdisputewherethegoodsare

sub-soldorputintothemanufacturingprocess.However, thetreatmentof title

retentionisdiverseamongjurisdictions.

Formalism,bearingonthesharpdistinctionbetweentheownershiprightandthe

possessionright is thedominantapproach inEnglandthatdoesnotaccept that

titleretention isa fullbutratheraquasi-security interest66.Thegeneralruleof

propertyrightsandtheSaleofGoodsAct1979aretoprotectanunpaidselleras

theownerofthegoodssothatothercreditorscannotclaimtheconcernedgoods

todischargedebtsowedbythebuyer.Theobstacletorecognizingtitleretention

asasecurity interest is that thisarrangementiscreatedunderthe formofsale

andpurchasetransactionwherethesellerstillhasabsoluteownershippending

full payment of purchase price. The formalism approach strictly requires the

collateraltobethedebtor’sasset67.Thesuper-rankingoftitleretention,speaking

intermsofpriority,withregardtotheoriginalgoodswithoutregistrationcould

bejustifiedbytheunderlyingpolicytoencouragesaleoncreditandsmall-scaled

creditmarket or to dilute themonopoly of blanket security or the newmoney

theory68.However,whentitleretentioninthegoodssuppliedcoversnotonlythe

purchase price but also all indebtedness owed to the seller, the new money

theory is failed to justify the Amour69ruling that upheld the current super-

ranking with regard to other debts. However, the super-ranking of the title-

66GulliferL (ed),GoodeonLegalProblemsofCreditandSecurity (4th edn, first published2008,Sweet&Maxwell2012)atp.367ibid,atp.1168 GulliferL,‘RetentionofTitleClauses:AQuestionofBalance’inBurrowsASandPeelE(eds),ContractTerms(OxfordUniversityPress2007),atpp.287-969ArmourvThyssenEdelstahlwerkeAG[1991]2AC339

204

retentiondoesnotinpracticecauseaseriousthreattoothersecuredcreditorsas

itissupposedtobe,bothpreviouslyandsubsequentlytakingasecurityinterest

in thesameasset,particularlywhenthegoodsare inventory,whichremains in

thebuyer’spossession forashort time. In this respect, the super-rankingdoes

notautomaticallyexpandtoderivativeassetsastheproductsorproceedsofthe

originalgoods,andtheproceedormanufacturingtitleretentionclauseisheldto

createaregistrablecharge70.

UndertheArticle9andtheAustralianPPSAschemeofaPMSI,a title-retaining

sellerhasthepriorityoverothercreditors includingoneswhofileda financing

statementcoveringthesamecollateralearlier.FunctionalisminitiatedbyArticle

9andfollowedbymanyPPSAjurisdictionsaimsatpromotingtheavailabilityof

securedcreditsthroughthecompetitionamongvariouscreditproviders71.Under

this approach, regardless of form, an arrangement is treated as a secured

transaction if it has the function to secure payment or performance of other

obligations. Title retention is an arrangement of this kind. Article 9 and the

AustralianPPSAintroduceanewconceptofPMSIthathasthenatureofanasset-

acquiringsecuritydevice.Inspiredbytheideaoftitleretention,aPMSIpreserves

thefirstpriorityinthecollateraltothesecuredpartydespitetheorderoffiling

orperfection.APMSIdoesnotuniquelyservethesellerbutalsoanylenderwho

advancesmoneytothedebtortoacquirenewassets.APMSIisacounterweight

toablanketlienwhichissupposedtoestablishamonopolysituationpreventing

thedebtorfromaccessingcreditfromothersources72.

The French and the Vietnamese jurisdictions recognize title retention as a

securityinterestrelyingontheseller’srighttoreservethetitletothegoodsuntil

andunlessthepurchasepriceispaidinfull.Thesecurityinterestofthiskindis70ReAndrabell [1984]BCLC 522;HendyLennox (IndustrialEngines)LtdvGrahamePuttickLtd[1984]1WLR485E;PfeifferWeinkellerei-WeineinkaufGmbH&CovArbuthnotFactorsLtd[1988]1WLR 150;Tatung (UK) Ltd v Galex Telesure Ltd (1989) 5 BCC 325;CompaqComputerLtd vAbercornGroupLtd&Ors[1991]BCC484;Borden(UK)LtdvScottishTimberProductsLtd[1981]Ch25;RePeachdartLtd[1984]Ch13171UNCITRAL,LegislativeGuideonSecuredTransactions,UnitedNationsPublicationSalesNo.E.09.V.12(2010)(hereinafterLegislativeGuide),atp.33472JacksonTH andKronmanAT, ‘Secured Financing andPriorities amongCreditors’ (1979) 88TheYaleLawJournal1143,atp.1172

205

farfromtheconceptofaPMSItotheextentthatitcannotbegrantedtoageneral

lender. Instead of relying on the “new money” theory, the first priority is

supported by the absolute ownership right which remains with the seller. In

otherwords,thecollateralsubjecttothesecurityinterestofthiskindisthetitle

tothegoods.Theenforcementisheavilybasedontheenforcementofownership

rightsratherthanthegeneralrulesappliedtoasecurityinterest.Thisapproach

isdebatableandundesirablefromboththeoreticalandpracticalviewpoints.Title

retentionasa security interest inFrench lawandVietnamese law is a security

interestonitsface,butthenatureofownershiprighthasneverchanged,evenin

the Vietnamese context, title retention must be registered to validate against

thirdparties.Thepositionoftitle-retainingsellersisnotimprovedincomparison

with what they used to be in the past where title retention was merely a

contractual arrangement to transfer property in a sale contract. A lenderwho

subrogatesthesellertotitleretentionmaylosenotonlythefirstprioritybutalso

asecurityinterestasawholeaccordingtotherecentFrenchcourtofcassation’s

opinion73.

Personal property, which is the primary subject matter of title retention or a

PMSI,israpidlyandfrequentlychangeditsstatusthroughtheordinarycourseof

business conducted by the person who possesses them. They can be the

consumableorworkablegoods,rawmaterialsormerchandisethatshouldbeput

intoconsumptionortheprocessofmanufacturingorsub-soldtogeneratemoney

fordischargeofindebtedness.Inthisrespect,titleretentionorthefirstpriority

to the original goods is not sufficient to secure the payment if they are

extinguishedor sub-sold. Both English law andArticle 9 recommend solutions

forextinguishmentdisputes.

In England, lawyers have made a great effort to draft various types of title

retentionclausetoextendtitleretentiontotheproceedsofsaleornewproducts

manufacturedfromorincorporatedinthesuppliedgoods.Thesuper-rankingin

thiscontext,unliketitleretentiontotheoriginalgoods,isamatterofconcernto

other creditors, particularly institutional financiers who have blanket security

73PressRelease:S&PGR:TitleRetentionOpinionCouldAffectFrenchABS.(2017,March30).DowJonesInstitutionalNews,p.DowJonesInstitutionalNews,Mar30,2017

206

interestsandotherreceivablefinanciers.Thecommonlawtreatstitleretention

totheproceedsofsaleandnewlymanufacturedproductsasaregistrablecharge.

TheexistingregistrationsystemandthepriorityrulesinEnglanddonotsupport

theregistrationoftitleretention.Extendedtitleretentionhasusuallybeenheld

to be void against liquidators, administrators and creditors due to lack of

registration74.Thissituationissatisfactoryfromthestandpointoflong-termand

receivablefinanciers,andtosomeextentprovidingacounterweighttothesuper-

rankingofthetitle-retainingsellerwithregardtotheoriginalgoods.

However, the treatment of title retention concerning the proceeds is not

consistent.TheRomalpacaseremainsanauthoritythatcanreversetheposition

ofa title-retainingseller fromachargeholdertoanabsolutebeneficiaryunder

the fiduciary doctrine. The lesson ofwording plays a crucial role, and a well-

prepared drafter does not hesitate to include terms indicating a fiduciary

relationship with regard to the proceeds to seek the first priority and escape

from the requirement of registration. The super-ranking of the title-retaining

seller under the fiduciary relationship, furthermore, does not have a sound

underlying policy. First, it demonstrates an invasion of equitable doctrine into

commercial transactionsthat insistonmutualinterestsorwin-winrelationship

rather than the demand for loyalty. Second, it has a negative impact on third

partiesduetolackoftransparency,andfinally,itattacksthebalanceofinterest

betweentitleretentionsellersandothersecuredcreditorsinthesensethatthe

formerisrelativelyadvantageouswithregardtotheoriginalgoods.

Althoughthesecurityapproachhasbeendominantinalmostalldisputesdealing

with the proceeds clause, the recent caseCaterpillar and the Irish lawon title

retentionaregoodillustrationsthatthereisacompetitionbetweenthefiduciary

approach established byRomalpa and the security approach. Title retention to

the proceeds can be treated differently under the two approaches irrespective

that they serve the same function. English law on this matter is inconsistent,

unpredictableandthereforeunsatisfactory.74Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbuthnot Factors Ltd [1988] 1 WLR 150;Tatung(UK)LtdvGalexTelesureLtd(1989)5BCC325;CompaqComputerLtdvAbercornGroupLtd & Ors [1991] BCC 484; Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25; RePeachdartLtd[1984]Ch131

207

Under Article 9 and the Australian PPSA where title retention is treated as a

PMSI,aquestionisraisedwhetherthefirstpriorityremainswhenthecollateral

isreplacedbytheproceedsornewproducts.Asecurityagreementandfinancing

statementmayexpresslyidentifythecollateraltoincludetheproceeds.However,

asecurityinterestincludingaPMSIisstatutorilyextendedtocovertheproceeds.

Without an agreement, the secured party still has rights to “any identifiable

proceeds of the collateral” irrespective of the secured party authorizes the

dispositionofthecollateralfreeofthesecurityinterest75.However,withregard

to an inventory PMSI, the purchase-money priority is only extending to cash

proceeds including checks, money and deposit accounts76. Non-cash proceeds

includingreceivableaccountsandchattelpapersarealsothecollateralsubjectto

the claim of receivables financiers. The provisionwith regard to the proceeds

generating from the inventory collateral manifests the policy to balance the

interests between inventory PMSI financiers and receivables or account

financierswhomaysupplycashtopaythepurchaseofinventory77.

The Australian PPSA follows and supports the policy as mentioned earlier.

Account financing plays a vital role in the debt financing market, and it also

provides the fund for thepurchaseof inventory.An inventorypurchase-money

secured party can maintain the first priority in the cash proceeds, but the

security interest in theaccountthat isgenerated fromthesaleofthe inventory

collateralissubordinatetoanon-purchase-moneysecurityinterestinaccounts.

It is seeminglyat first glancean improvement forany inventory financierwho

used tobea title-retaining sellerand subordinate to the claimof a receivables

financierundertheapplicationoftheDearlevHallrule.However,itisnoteasyto

oblige thegrantor tosell the inventory in termsof cashondelivery. Inventory

financierscannottakeadvantageoftheall-moniesclausebecausethePPSAdoes

not allow inventory cross-collateralization. It can be said that a PMSI in

merchandise inventory does not bring many benefits to a secured creditor

because naturally, the inventory of this kind is turning over rapidly in the

75UCC§9-315(a)(2)76UCC§9-324(b)77Comment8totheUCC§9-324,seeOfficialCommentatp.921

208

ordinarycourseofbusiness.Itisdesirabletoacceptcross-collateralizationinthe

inventoryasinArticle9,oratleastinventoryofthesamekind.

Concerning processing and manufacturing, Article 9 and the Australian PPSA

doesnotrequireanarrangementtoextendasecurity interest tonewproducts.

Withoutanagreement,apurchase-moneysecuredcreditorcanclaimtherightto

theaccessionortheproductormass.Article9distinguishesbetweenaccession

andcommingledgoods.Accession is“goodsthatarephysicallyunitedwithother

goods in such a manner that the identity of the original goods is not lost”78.

Commingledgoodsare“goodsthatarephysicallyunitedwithothergoodsinsuch

amannerthattheiridentityislostinaproductormass”79.Basically, thesecurity

interest and the status of perfection is extended to accession or a product or

massincorporatingtheoriginalcollateralwithoutanagreement.Thedifference

between accession and commingled goods is that a purchase-money status

cannotexistinthelatter,eventhoughthesecurityinterestremainsinaproduct

ormassresultingfromprocessingormanufacturingcommingledgoods80.

The Australian PPSA has similar rules applying for comingled goods and

accession. It provides a desirable solution from the standpoint of a purchase-

money inventory financier in comparisonwith Article 9 and English lawwith

regardtocomingledgoodsthatlosttheidentityintotheproductormassthrough

theprocessofmanufacturing.Thefirstpriorityremainsinthecompetitionwith

any secured creditorwho has a non-PMSI security interest in other comingled

goodscontinuingintheproductandmassortheproductandmassthemselves.

However, the treatment of accession in the PPSA departs from Article 9 and

remainclosetothelegalconsequenceundertheEnglishcommonlaw.Basically,

thesecurityinterestcontinuesintheaccessionthatallowstherelevantsecured

creditorhasthepriorityoverothersecuredcreditorswhoclaimtheaccessionas

awholewithouttherequirementofperfectionofthepurchase-moneystatus.In

thisrespect,Article9successfullyclarifiesthelawofaccessionbyimposingthe

generalrulesofpriorityincludingtheexceptionswithregardtoaPMSI.78UCC§9-102(a)(1)79UCC§9-336(a)80UCC§9-336(f)andComment4totheUCC§9-336,seeOfficialCommentsatp.949

209

Functionalism thatbrings title retention into theambitof a security interest in

substanceorbyitsfunctiondoesnotonlyservethepurposeoftransparency,but

italsoenhancestheavailabilityofthesecuredcredit.Lookingattitleretentionas

onlyaconsensualarrangementtopassthetitletothegoodsandstressingonthe

absolutepropertyrightsremainedwiththeselleruntilthefullpurchasepriceis

paidpreventabuyer/debtor fromgrantinga lower-rankingsecurity interest in

favourofothercreditorsasdemonstratedintheEnglish,FrenchandVietnamese

approach. In other words, a buyer cannot obtain credits from other secured

creditorsbyusingthegoodssubjecttotitleretentionasthecollateral.

CanweconsiderEnglishlawandArticle9astwocompetingmodelsintreating

thematter of title retention? Both jurisdictionsmanifest the twomainstreams

underlying the law of secured transactions: that is to say formalism and

functionalism. The Article 9 has gained some glory since many common law

jurisdictionslikeAustraliahaveshiftedfromtheEnglishlawmodeltotheArticle

9. On the other hand, although English law illustrates confusion between the

fiduciaryorthesecurityapproachintreatingtheproceedstitleretentionclause,

itachievesthebalanceof interestsamongrelatingparties thatmakethe lawof

titleretentionnottobeintheurgentneedofreform81.ThecurrentEnglishlawof

titleretentionrecommendsamodelinwhichregistrationoftitleretentionisnot

necessary toenforce the super-rankingandabsolute rightof the title-retaining

seller in the insolvency proceedings. Registration will be a burden to title

retentioniftheregistrationsystemitselfisnotreformedintoarelativelysimple,

fastandcost-savingfiling-noticesystem.Incontrast,othercreditorsmayhavea

concernthattheexpenseofregistrationincurredtotitle-retainingsellersmaybe

compensated by some more benefits like extending the first priority to the

proceedsandnewproducts,eventhoughitmaybesubjecttosomelimitations.In

otherwords,theexistingbalanceofinterestsundertheexistingEnglishcommon

law is likely to be broken. In this respect, from the perspective of blanket and

receivable financiers, the requirement of registration of title retention is not

appealing.

81SeediscussioninGulliferL,‘RetentionofTitleClauses:AQuestionofBalance’inBurrowsASandPeelE(eds),ContractTerms(OxfordUniversityPress2007)

210

Today,itissurprisingthatthereformofEnglishlawinthisareaisdesperatefor

thesurvivalofthelawonsaleofgoodsconcerningrawmaterialsorconsumables

goodsaftertheBunkersruling82.Titleretentionthreatenstheseller’srighttosue

for a price as demonstrating in the Caterpillar case83. The Re Highway Foods

ruling84also intervenes in thesubmissionofabona fidepurchasertokeepsthe

goodsbyrelyingontheruleofabuyerinpossessionbecauseshealsobuysunder

title retention arrangement, and the purchase price is not paid in full. The

widespreaduseoftitleretention,therefore,breaksthechainoftransactionsand

restrainstheflowofcommerceunexpectedly.

It cannot be denied that the treatment of title retention in English law is

favourable from the perspective of formalism. Vietnamese scholars who are

likely to emphasize on title retention as a contractual arrangement can find a

goodjustificationtoopposethetreatmentoftitleretentionasasecurityinterest.

The French approach does not provide a clear and satisfactory treatment

because title retention is just labeled as a security interest but an absolute

propertyrightinsubstance.However,thesideeffectoftitleretentiononthesale

ofgoodslawisaseriousthreatasintheEnglishmodel.

Treating title retentionasaPMSI is a comprehensive solution that theEnglish,

FrenchandVietnameseapproachcannotoffer.APMSIatfirstisanin-substance

security interest, and as a result under the unitary treatment of the Article 9

model,itshouldcomplywiththegeneralrulesofattachment,perfection,priority

andenforcement.ThemostconsiderableachievementofArticle9andthePPSAs

isthecomprehensivesystemofpriorityrulesthatgoverntheconflictinthesame

assets between a secured creditor and unsecured creditors including a lien

holder and a trustee in the insolvency proceeding, secured creditor and sub-

purchasers,asecuredcreditorsandothersecuredcreditors.Italsosuppliesthe

priorityruletogovernthesituationwheretheoriginalcollateralisputintothe

manufacturing process. The first priority rooted in the status of original

82PSTEnergy7ShippingLLCvOWBunkerMaltaLtd[2015] EWCACiv 1058; [2016]UKSC23;[2016]AC103483 FGWilson(Engineering)LtdvJohnHolt&Co(Liverpool)Ltd[2013]EWCACiv1232,[2014]1WLR2365 84ReHighwayFoodsInternationalLtd(InAdministrativeReceivership)[1995]BCC271

211

purchase-money collateral is considered to extend to the proceeds or the new

productsubject to thepolicy that takes intoaccountotherbenefitsrather than

onlyenhancingthesecuredcreditmarketingeneralorasset-acquiringfinancing

in particular. The free flow of commerce and the availability of account or

receivablefinancingareamongtheconsideration.Theunitaryapproachdoesnot

mean that the Article 9 model does not have any distinction. It severely

distinguishesdifferenttypesofcollateralandrecognizesthateachtype,namely

inventory, farm products, equipment, customer goods, and serial-number

property,bearsspecialcharacteristicsandreceivessomeparticulartreatment.

6.2 Whatshouldthe lawof titleretention inVietnamlook likewhentitleretentionisacceptedasasecurityinterest?

The current title retention law in Vietnam imports the French approach. As

discussedabove,theapproachofthiskindisnotsatisfactory;thus,itisraisedthe

questionofreform,andtheArticle9modelissuggestedtobethegoodlawinthis

area.However,itisdebatablethatArticle9andthePMSIconceptarethesolely

good solution to the title retention issue. The Article 9model is undoubtedly

relativelydesirablesinceitprovidesarobustandtransparentsecuritydeviceas

a counter-balance to a blanket lien, the all-inclusive shopping for all matters

arising froma secured transaction inpersonalproperty, anda fast, convenient

andcost-savingunitaryapproach includinganotice filing system. Importingor

transplantingalawevenitisprovedtobeagoodoneintheparentcountryisnot

aneasytasksinceitencounterstheresistfromtheangleoflegalcultureandlegal

practice.

This research has discussed the problem of legal transplant in compared

jurisdictions as a good lesson to the law-making in Vietnam. Legal transplant

increasingly occurs due to the impact of the globalization that demands the

harmonization among jurisdictions at least in commercial law. In England, the

Article 9 recommendation is not favourable because it conflicts with the

fundamentalprincipleofsecuredtransactionlaw,thatistheformalismapproach.

Amongthepackageoffunctionalism,anoticefilingsystemandunitaryapproach,

the lastone ispossibly tough to change inEnglandwhere thewholesystemof

diversesecuritydevices isoperatedwellandsteadily inoverall.The familiarity

212

withthecurrentsystemandthebalanceof interestsconcerningthe lawof title

retentionarealsothestrongreluctancetoshifttothenewapproach.Meanwhile,

theAustralianPPSAisagoodillustrationthatapreviousEnglish-likesystemin

theconcernedareaoflawcanadopttheArticle9modelasawholepackage.

French lawisanothervaluablesolutiontotheextent thatnothingrestrainsthe

adoptionof aPMSIor title retentionasa security interest alone, the formerof

whichisentirelypreferable.Theapproachofthiskindcannotexploitthebenefit

of an all-inclusive package, but in the short term, it can solve many urgent

problems,namelytheunexpectedoutcomeoftitleretentiononthesaleofgoods

law, theuncertain treatmentof theproceedsgenerating fromselling thegoods

subjecttotitleretentionasachargeoratrust.

Withinthescopeofthepresentthesisfocusingonthelawoftitleretention,some

goodlessonscanbelearntfromArticle9andthePPSAasaproductofArticle9

transplant with regard to the law of title retention. The legal transplant as

demonstrated in Australia, which is a jurisdiction belonging to the same legal

tradition with the United States, the common law system, has raised some

valuable lessons for the Vietnamese jurisdiction. In this sense, even though

Vietnam is not a common law country, it would share achievements and face

problemssimilartoAustraliathathasimportedtheArticle9approach.

First, title retention should be treated within the concept of purchase-money

securityinterestratherthanasecurityinterestundertheFrenchapproach.The

goodssupplied, therefore,hasa statusof thecollateral that is able toattach to

lower-ranking security interests. It also allows other financiers rather than a

sellerwho arewilling to bid for a loan to acquire new asset canhave the first

priorityinthenewly-acquiredcollateral.

Second,thedistinctionatleastbetweeninventoryandnon-inventorycollateralis

crucialinthetreatmentofapurchase-moneysecurityinterest.AlthoughArticle9

insistsonthesametreatment forall typesofsecurity interests, itdistinguishes

the typesof collateral that are typically categorized into inventory, equipment,

farmproductsandconsumergoods.Inventory(orstock),whichisexpectedtobe

consumed or processed or sold in the ordinary course of business, receives

213

special treatments. In the context of a PMSI, the item of inventory collateral

securesnotonlytheirpurchasepricebutalsootherPMSIsincurredbytheother

itemsofinventorycollateral,whichisknownascross-collateralizationofPMSIs

in inventory. Furthermore, an inventory PMSI has separate priority rules

particularly requiring notification sent to earlier-filed secured parties. The

relatively burdensome requirement aims at preventing earlier-filed secured

parties from advancing credit to the debtor to acquire new assets. Fraudulent

debtors may apply for advances under a future advance and after-acquired

property clause without revealing the intervening super-priority security

interest.The categorizationof collateral and the special treatmentof inventory

PMSI are at the heart of the functionalism scheme with regard to a PMSI.

However, theAustralian lawhas slightly departed from theArticle 9model in

this respect. Under the PPSA, the indication of purchase-money status in

registration is required instead of giving notice to earlier-registered creditors

who have a security interest in the same collateral. Therefore, an earlier-

registered secured creditorwho has an after-acquired security interest should

strategically check the public record for the intervening PMSIwhenever she is

going to advance credit. It does also not accept cross-collateralization

concerning an inventory PMSI. In this respect, it does not acknowledge the

importanceofthedistinctionbetweeninventoryandnon-inventorycollateral.

Thirdly, the lawofpurchase-money security interestmusthave the taking free

ruletosolvetheconflictbetweenapurchase-moneysecuredcreditorandasub-

purchaser underlying the policy of balance between the enhancement of the

securedlendingmarketandthefreeflowofcommerce.Thetitle-retainingseller

is no longer the owner of the goods supplied under the concept of a PMSI.

Therefore,shecannotinvoketheprovisionsthatprotectatrueowneragainsta

third party who at present possesses the goods without the original seller’s

consent.

In this respect, Article 9 has a clear distinction between a buyer in ordinary

course of business and a buyer relying on the authority to sell, both ofwhom

claimthetakingfreeinthecompetitionwithapurchase-moneysecuredcreditor.

IntheneweraoftheArticle9orPPSAmodel,thetakingfreeruleconcerninga

214

buyerinordinarycourseofbusinessisprimarilyrelevanttothesaleofinventory

in which selling in the ordinary course of business is firmly required. On the

otherhand,sellingintheordinarycourseofbusinessissupposedtobeirrelevant

whenabuyerreliesontheseller'sauthoritytosell.

TheAustralianPPSAdoesnothaveasatisfactorydistinctionbetweenabuyerin

ordinarycourseofbusinessandabuyerrelyingontheseller’sauthoritytosellto

set up the priority against a secured creditor. In other words, the rules with

regard to the two abovementioned cases are overlapped. The requirement of

selling in the ordinary course of business should not apply in the context of

authoritytosell.Thesellercantransferatitlefreeandclearofasecurityinterest

if the secured party authorizes a disposition free and clear irrespective of

whetherthesaleisintheseller’sordinarycourseofbusiness.Furthermore,the

wordingoftakingfreeruleundertheauthoritytoselldoesnothavethephrase

“freeof the security interest” that is similar to the old version of Article 9. The

concept of floating charge is employed to interpret that any security interest

accompanied by an authority to sell the collateral is equivalent to a floating

charge so that the transferee in the ordinary course of business can take free.

Again, the requirement of “in theordinarycourseofbusiness” is stressed in the

context of authority to sell. Interpretation of taking free rule in light of the

floating charge conceptpossiblyavoidsa lineofdisputesaswitnessed toarise

under the formerArticle9,but it isnotdesirable.ThePPSAhasputanend to

floating charges since it does not prevent the grantor from exploiting the

collateral for business purposes. Under the unitary approach, the PPSA

recognizes that any security interest automatically attaches to the proceeds,

accession, the product or mass generating from selling or manufacturing the

collateralrespectivelyintheabsenceofanagreementofthiskind.However,the

secured party basically has the right to follow the collateral disposed to third

parties without an effective authorization. In this sense, the PPSA has

corresponded well to Article 9, but it does not strictly follow Article 9 policy

concerning thepriority rulesapplying toadisputebetweena securedcreditor

anda third-partybuyer.Accordingly, abuyer inordinary courseofbusiness is

215

not required to check thepublic record to findoutwhethera security interest

encumbersthegoodsorinvestigatetheseller’sauthoritytosell.

Incontrast,withoutapositionofabuyerinordinarycourseofbusiness,inquiries

intoanyencumbranceand theauthority to sell is a strategy toavoida conflict

with any secured creditor. The PPSA does not take into consideration of this

policy, and the Lewis court confirms the approach85. Therefore, the taking free

rule under the authority to sell narrows its scope of application and overlaps

withthetakingfreeruleofabuyerinordinarycourseofbusiness.

The priority between a secured creditor and a third-party buyer is a good

illustration of legal transplantwhere the original rules have been transformed

under the legal systemof the host country. Although Australia and the United

Statesare in thesame legal tradition, theydepartedeachotherconsiderably in

the area of secured transaction law, at least with regard to the acceptance of

floating charge. In anAnglo-Australian jurisdiction, the floating charge concept

has long rooted and played a vital role in granting security interests in the

circulatingpoolofassets.Thecategoryoffloatingchargeisreluctantlyabolished

byauniformconceptofasecurityinterestdoesnotmeanthatitdoesnotleave

anytraceinthenewsystem.TheVietnamesejurisdictionmaynotencounterthe

sameproblemoffloatingchargesincethisconceptisnotofficiallymentionedin

thelawandscholarship.However,itiscrucialtodraftthetakingfreeruleswitha

cleardistinctionbetweenabuyerintheordinarycourseofbusinessandabuyer

relyingontheauthority tosellwitha thoroughconsiderationof theunderlying

policyasrecommendedunderArticle9.

Fourthly,thereformofthesecuredtransactionlawinpersonalpropertymustbe

done concurrently with the review and modification of related laws. The

American jurisdiction has an advantage that Article 9 was drafted within the

scheme of the uniform commercial law which involves sales, negotiable

instruments, secured transactions…, whereas the PPSA enactment is an

independent project. With regard to PMSIs, the law on sale of goods may

substantiallyinterferewiththeapplicationofthePPSAaswitnessedinAustralia.

85LewisvLGElectronicsAustraliaPtyLtd,[2014]VSC644

216

On the other hand, from the English law experience, the PPSA regulations on

PMSIs are likely not to neutralize unexpected outcome of title retention

arrangementonthesurvivalofthesaleofgoodslawinsomecases.Itisstrictly

requiredtoinsertaruleconsideringtitleretentiontohaveaneffectofasecurity

interest to ensure that the sale of goods law is consistent with the secured

transaction law in personal property that nowhas a functional approach. This

rulewillrestraintitleretentionfrombeinganarrangementtotransfertitleinthe

goodssothatitdoesnotplayanyroleininterpretingwhatasaleis.Theconcept

ofsaleiscriticaltosolvetheconflictbetweenapurchase-moneysecuredcreditor

and a buyer in the ordinary course of business. The English caseReHighway

Foodsdemonstratesthepossibilityofabuyerinordinarycourseofbusinesswho

is also subject to title retention to lose the title to the original title-retaining

seller.TheAustralianPPSAdoesnotimprovethepositionofabuyerinthissense

becausethesaleofgoodslawisnotadjustedtocomplywiththenewconceptof

security interest. Furthermore, to avoid that an unexpected outcome of the

EnglishBunkerscase,theunifiedtreatmentoftitleretentionasasecurityinterest

willredotreatingthetransferofrawmaterialandconsumablegoodsasthesale

ofgoods.

Fifthly,anoticefilingsysteminsteadofatransaction-basedonewouldfacilitate

theadoptionofaPMSItogainamoreconsiderableextentofefficiency.Afiling-

noticesystemthat issimple, fastandcost-saving isalsoacorerequirement for

the operation of PMSIs. Generally speaking, it provides a relatively accurate,

easily-determineddateforprioritypurposesthatispremisedonthefilingdate.

Rankingpriorityaccordingtothetimeasecurityinterestiscreatedorexecuted

isundoubtedlynotaneasytaskthatmayresult in thedebatewhether it is the

dateofasecurityagreementorthedateofdelivery.Furthermore,afiling-notice

system allows a financing statement to be filed preceding the creation of a

securityagreementandtheextensionofcredittothedebtorandcoversmultiple

security agreements. In other words, it is not necessary to file a financing

statement corresponding to a specific secured transaction. This advantage is

specificallypracticalwhenthecollateralisinventory,eveninthecaseofaPMSI.

The purchase-money secured party is not required to file for every up-coming

217

inventory item. It cannot be said that the recognition of PMSI cannot combine

withthetransactionalfilingsystem.Theproblemisthatitisfarfromworkable

andefficient,atleastincaseofinventoryfinancingbecauseitistime-consuming,

inconvenient,andcostlyforregistrationeverytimeatransactionisexecuted.

However,anoticefilingsystemaccompaniedbythefirst-to-filepriorityrulehas

someweaknesstotheextentthatitfavourstheinterestofafirst-to-filecreditor.

The underlying policy is to encourage early and timely filing to solve the

ostensibleownership problem. The later-in-time creditor does nothave strong

incentive to file against the same collateral to have only subordinate interest

irrespectiveoftheorderthatadvancesaremade.Furthermore,thenoticefiling

systemdoesnotrevealmuchinformationrelatingtothefiledsecurityinterests,

especially the amount of secured obligation. Potential creditors only learn

whether the specific collateral as a matter of their concern is possibly

encumbered.Theyshouldmakefurtherinquiriestothedebtorasto,forexample,

theattachmentofthesecurityinterestortheamountofthesecuredobligationor

whether the loan is fully paid off. Again, inventory financier before making

further advance may inquire the debtor for more information regarding the

intervening PMSI in inventory. From the debtor’s perspective,whereas it does

not incur transaction cost to dealwith the same secured creditor for series of

loans especially against inventory or receivables, the notice filing system does

not support the debtor who would like to take out loans against the same

collateral, mainly equipment collateral, from different lenders. Furthermore,

notice filing is a name-based system; thus, searchers must enter the debtor’s

name precisely to uncover the collateral in question. It depends much on the

searchingskillandtheconvenienceandaccuracyofthesearchengine.Although

there are some above-mentioned restrains on later-in-time creditor and the

debtor,thebenefitofafiling-noticesystemoutweighsitscost.

Aboveall,legaltransplantofaPMSIinVietnamhasconfrontedmorechallenges

than any common law jurisdictions. The first and foremost is the under-

developed status of secured transaction law and the unfamiliarity with the

technique and function of title retention. Title retention is recognized as a

security interest, but the treatment reliesheavily on the French approach that

218

appraisestheseller-basedapproachandtheowner-basedenforcementmethod.

IntroducingtitleretentionasasecurityinterestintheCivilCodeisthefirst-step

offerofanewsecuritydevicetothedebtfinancingmarketratherthaninitiated

by a high demand of satisfactory comprehensive rules for this transaction in

practice.

Acode-formulatedsystemisafeaturethatisattheoutsetanimportantobstacle

toimportaPMSIconcept.Acivilcodeisconsideredasaproudachievementand

aheartofacivil law jurisdiction,butanall-in-onecode isnotsuitable tocover

therapidly-changingandcomplicatingrelationshipsinmoderntimes86.However,

this problem is relating much to legal technique and legislative practice. It is

possibletotransformacivilcodeintoseveralinterrelatedbooks,oneofwhichis

the book on secured transaction law so that the amendment or reform can be

donewithouttheneedtorevisethewholecode.

The unitary approach is one ofmany reasons leading to the hesitation to the

Article9modeloccurredinEnglandaswellasVietnam.InEngland,shiftingfrom

formalismtofunctionalismisurgenttodaybecauseofthepotentialthreatoftitle

retention to themostpopular law, that is the sale of goods law. This situation

shouldbehandledinthisway,andtherefore,theabolishmentofthefundamental

formalismprinciple is compensatedby thesurvivalof thesaleof goods law. In

Vietnam,theadoptionoffunctionalismthroughtherecognitionoftitleretention

asasecurityinterestisrelativelysmooth.Itisnotnecessarytoadopttheunitary

approachwherethewell-accustomedsecuritydevices likeapledgeoracharge

are likely to change into auniform conceptof security interest. A PMSI can be

survivedinasystemwherethediversityofsecuritydevicesismaintainedeven

though it cannot achieve a desirable efficiency that it would have in a unitary

systemlikeArticle9.TheVietnameseCivilCodeunderwentasignificantrevision,

andanewcodewasenactedin2015.Itlostachancetotransplanttheconceptof

PMSIbecauseoftheoptfortheFrenchapproach.Ittakesaconsiderablelengthof

time to have a second chance to reform the lawof title retentionwhen a next

project to revise the code is initiated again. At that time, the law of secured

86NguyenX-TandNguyenBT,TransplantingSecuredTransactionsLaw:TrappedintheCivilCodeforEmergingEconomyCountries(2014),atp.21

219

transactionsinpersonalpropertyandthePMSIshouldfollowtheArticle9model

whetherornotisanintegralpartofacivilcodeorseparatedtobewritteninan

independentlegaltext.

Article9isagoodmodelforthesecuredtransactionlawinpersonalpropertyin

termsof efficiency, and for recognitionof title retentionasasecuritydevice in

termsofpromotingtransparency,creditavailabilityandcompetitivedebtfinance

market. Transplanting the treatment of title retention in Article 9 into a

jurisdictionisundoubtedlyinvolvingtheadoptionoffunctionalismdoctrine,and

it also raises questions about the transplant of notice filing system and the

unitaryapproachaswell.

220

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FactorsAct1889

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Title11U.S.Code–Bankruptcy

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221

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