Supreme Court facilitates financing companies with cross-border business

Previously, such rights were terminated once the asset was moved from Germany to Austria. The decision will substantially facilitate the financing of companies with cross-border business.

Background

Under Austrian law the transfer of ownership for security purposes is subject to strict publicity requirements. Thus, generally movable assets must be handed over to the creditor with the grantor having no right to further use or dispose of the assets. Only where such a handover is not feasible, the publicity requirements could be fulfilled by attaching clear signs to the relevant asset.

Under these rules, a haulage firm aiming to provide security over its vehicles would have to hand over its vehicles to the creditor in order to create a valid security interest under Austrian law. Naturally, this is impossible without severely impeding business.

By contrast, German law allows security transfers to be perfected simply by way of instructing the grantor of the security to hold the relevant assets on behalf of the creditor. The assets remain in the possession of the grantor, who can continue to use them in daily business. In this way, a haulage firm's vehicles may physically remain with the firm – only legal ownership is transferred by way of a simple declaration to the lender. The firm may continue using the vehicles for its business.

Against this background, the Austrian Supreme Court had for decades taken the position that a security transfer validly agreed on and perfected in Germany would become invalid once the asset was brought into Austria. Creditors lending to internationally active companies thus had to ensure that the assets would not be relocated from a foreign country to Austria or that any security interest would meet the strict publicity requirements under Austrian law.

Under this system, after a vehicle enters Austria (eg, by crossing Austria from Germany on its way to Italy), under Austrian law the valid German-law security interest would fall away.

Decision

In a recent decision, the Austrian Supreme Court explicitly revised its former position. The court held that if a 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 will generally remain in force if the asset is later transferred to Austria. The Austrian Supreme Court based this decision in particular on the doctrine of properly acquired rights and explicitly stated that recognising a security right that does not conform to Austrian publicity requirements does not violate Austrian public order. As a result, if a haulage firm validly provides security under German law to the creditor, such security will remain valid even if the vehicle is later brought into Austria.

Comment

This landmark decision will help companies when obtaining financing for their international operations and provides legal certainty to creditors and borrowers alike.

This article first appeared on International Law Office.

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Further reading:
Romania: Exit strategies: registering a share transfer when target shares are encumbered by third parties