Good news for creditors: Austrian Supreme Court strikes down significant impediment to creating valid collateral in Austria

This decision will enhance legal security and the overall position of creditors in an international context.

1. Security Transfer and a controversial decision

Besides granting pledges, transfer of ownership for security purposes (Sicherungsübereignung) is a common way to provide creditors with collateral over the debtor's assets. Given the similarities to pledges, Austrian courts have decided that the transfer for security purposes has to adhere to the same principles as granting a pledge, most notably the strict publicity requirements (Publizitätserfordernisse) have to be met and maintained.

Most assets, thus, have to be handed over to the creditor with the grantor not having any right to use or dispose of such assets. As a consequence, granting pledges or a security transfer over movable assets is frequently considered to be such a severe impediment to the grantor's business that creditors even abstain from taking security over such assets.

In contrast, German law allows a security transfer to be perfected not by handing over the assets but simply by way of instructing the grantor of the security to hold the relevant assets on behalf of the creditor (Besitzanweisung). The assets remain in the possession of the grantor who may continue to use them in daily business.

Formerly, the Austrian Supreme Court had taken the position that a security transfer that was validly agreed on and perfected while the charged asset was located in Germany would become invalid once the asset was brought to Austria. This decision lead to quite some headache for creditors lending to internationally active companies. These creditors, in effect, had to make sure that they not only took valid security at the time of granting the loan but that assets would either not be relocated from a foreign country to Austria or that any security interest granted under such foreign jurisdiction would meet the strict publicity requirements under Austrian law.

Academic writing strongly criticised the decision, in particular it was argued that the decision was not in line with Austrian Private International Law Act ("APIL") nor EU law, respectively the fundamental freedoms of the EU, because creditors would tend to avoid funding when collateral rights would lapse by the simple transfer of the asset from one member state to another. Nevertheless, the Austrian Supreme Court took over 30 years to revise its position on this matter.

2. Changing views

In a recent decision, the Austrian Supreme Court again had to decide on a case involving collateral granted by way of a German security transfer and perfected only by way of instruction (Besitzanweisung) where the underlying asset had been brought into Austria.1 Although the court was not able to finally decide on the case, it took this opportunity to analyse the above-mentioned arguments.

The Austrian Supreme Court concluded that the earlier line of argument could not be maintained and reversed its earlier position on the question explicitly. Its new position states that a security transfer validly effected under German law is not affected by the mere relocation of the charged asset to Austria.

The Austrian Supreme Court held that if security transfer has validly been agreed on and perfected according to the laws of the state where the asset was located at that time, this right shall generally remain in force also in case the asset is later transferred to Austria. The Austrian Supreme Court bases this decision in particular on the doctrine of properly acquired rights (wohlerworbene Rechte) and states explicitly, that recognising a security right that does not conform with Austrian publicity requirements does not violate Austrian ordre public.

Following this decision, creditors will have much more legal certainty when it comes to collateral granted in an international context.

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Further reading:
Looking beyond the margin: non-financial matters to keep in mind when negotiating corporate debt documentation

(1) OGH 23.01.2019, 3 Ob 249/18s

authors: Miriam Simsa and Michael Lindtner