How the Eigentumsvorbehalt Works Under German Law
Under German law, the Eigentumsvorbehalt (EV) is the dominant form of credit security in the supply of goods. Section 449(1) of the Buergerliches Gesetzbuch (BGB) provides that where a seller of a movable asset has reserved title until payment of the purchase price, ownership is transferred under the suspensive condition of full payment. The seller never loses title. No registration is required. No public notice is given.
Relevant to the structure of the German Eigentumsvorbehalt, the German legislature held in § 449(1) BGB, in force:
“Hat sich der Verkaefer einer beweglichen Sache das Eigentum bis zur Zahlung des Kaufpreises vorbehalten, so ist im Zweifel anzunehmen, dass das Eigentum unter der aufschiebenden Bedingung vollstaendiger Zahlung des Kaufpreises uebertragen wird.”
|
- 449(1) Buergerliches Gesetzbuch (BGB) (Germany).
The seller retains what German law calls auflösend bedingtes Eigentum (defeasibly conditional ownership), plus mittelbarer Besitz (indirect possession). The buyer holds an Anwartschaftsrecht, a transferable expectancy right. Title passes automatically and without further act when the full purchase price is received. The system is entirely private: no court, no register, no public record.
How the PPSA Recharacterises the Same Arrangement
The PPSA takes the opposite approach. It does not ask who holds title. It asks one question: does this transaction, in substance, secure payment or performance of an obligation? If the answer is yes, the transaction is a security interest and the PPSA governs it. Title is irrelevant.
Relevant to the substance-over-form definition of a security interest, the Commonwealth Parliament held in Personal Property Securities Act 2009 (Cth) s 12(1):
“A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation, regardless of the form of the transaction or the identity of the person who has title to the property.”
|
Personal Property Securities Act 2009 (Cth) s 12(1).
A retention of title clause in a supply agreement is, in substance, a security interest: the seller retains title precisely because payment has not yet been made. The seller is therefore a secured party under the PPSA. Its collateral is the goods. Its obligation to perfect that interest is immediate.
Attachment, Perfection, and the Registration Obligation
A PPSA security interest attaches to collateral when the grantor (buyer) has rights in the collateral and value has been given. For a retention of title sale, attachment typically occurs on delivery. Attachment alone does not protect the seller against third parties or in the buyer’s insolvency.
Perfection is the additional step that determines priority and insolvency outcomes. A security interest is perfected by registration of a financing statement on the PPSR, or by possession of the collateral. A seller operating under an RoT clause must register a financing statement identifying the collateral before, or at the time of, delivery. A security interest is perfected if it has attached, is enforceable against third parties, and a financing statement has been registered or the secured party has possession.
The Purchase Money Security Interest: Your Priority Shield
The PPSA’s most powerful protection for a seller who finances the acquisition of collateral is the Purchase Money Security Interest (PMSI). Under s 14 of the PPSA, a security interest is a PMSI to the extent it secures the purchase price of collateral or finance provided to enable the grantor to acquire it.
Relevant to the PMSI super-priority rule, the Commonwealth Parliament held in Personal Property Securities Act 2009 (Cth) s 14:
“A purchase money security interest in collateral or its proceeds has priority over a security interest in the same collateral… if the purchase money security interest is perfected when the grantor, or another person at the request of the grantor, obtains possession of the collateral.”
|
Personal Property Securities Act 2009 (Cth) s 62.
For a German exporter, this means that a retention of title interest, if perfected as a PMSI before or at the time the buyer takes possession of the goods, will have super-priority over any earlier-registered general security interest (such as a bank’s all-assets security). Perfection as a PMSI is the single most important protective step available to a foreign supplier.
The Vesting Trap: What Happens Without Registration
The consequence of failing to register is stark. Section 267 of the PPSA provides that an unperfected security interest in personal property of a grantor vests in the grantor immediately before the grantor enters voluntary administration, has a receiver or controller appointed, or begins to be wound up.
In practical terms: the goods you believed you owned become the property of the insolvent company the moment insolvency proceedings begin. The administrator or liquidator can deal with them as assets of the estate. You have no proprietary claim. You are an unsecured creditor. The contrast with an Australian bank guarantee is instructive: the High Court in Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 confirmed that an unconditional bank guarantee is ‘as good as cash, instantly and unconditionally convertible.’ An unregistered retention of title interest is the precise opposite: worthless the moment you most need it.
The Extended Eigentumsvorbehalt: A Double Exposure
German exporters who use the verlängerter Eigentumsvorbehalt (extended EV) face compounded exposure. Under the extended EV, the seller typically consents to the buyer reselling the goods and takes an advance assignment (Vorausabtretung) of the buyer’s receivable against the sub-purchaser as a substitute security.
Under the PPSA, a transfer of an account (receivable) is itself a security interest within the extended definition in s 12(3). The Vorausabtretung therefore creates a second PPSA security interest, in addition to the RoT interest in the goods, both of which require registration. A German supplier relying on standard extended EV terms without Australian PPSA advice has, in effect, two unregistered and unperfected security interests that will vest in the buyer’s insolvent estate simultaneously.
Disclaimer: This article is provided for general information purposes only and does not constitute legal advice. Specialised legal counsel should be sought for specific fact patterns.