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Compatibility of the Cape Town Convention Regime with the General Principles Underlying Italian Secured Transactions Law

In assessing the compatibility of the Cape Town Convention system with Italian law two relevant points should be highlighted from the start.

Firstly, Italian law is clearly obsolete in many respects, especially in the case of security devices on tangible goods. Internationally accepted provisions that deviate from current domestic regulation may turn out to be a welcome innovation and even an interesting model for a future organic reform of Italian general secured transactions law. This is especially true for those areas where no fundamental incompatibility exists, or where recent developments have already paved the way to a more modern approach. I am referring, in particular, to the introduction of a publicity system through registration to solve priority issues and of speedier and more efficient enforcement proceedings.

Other aspects of the uniform provisions, such as the impact on insolvency law, deserve a more careful consideration, in view of the potentially disruptive effect vis-a-vis policy choices made by the national legislator. In this respect, however, it is important to consider the scope of application of the Cape Town Convention. The Cape Town ‘international interest’ does not purport to displace already existing domestic devices, but only to introduce an autonomous instrument, limited to enumerated high value, uniquely identifiable collateral, that would be effective against third parties and in insolvency wherever the equipment be at the time of enforcement (within the territorial scope of application of the Convention). Thus, the central aim of the uniform regime is to efficiently solve certain (cross-border) issues that are currently not addressed, in relation to a specific type of mobile equipment. This element, in my view, should play a fundamental role when analyzing the acceptability of deviations from current domestic law provisions and may well lead us to consider them proportionate to the economic benefits linked to the participation in the Cape Town Convention system.

Turning to the specific issues that were touched upon in para. 4, the introduction of a system of publicity through a public registry is perfectly compatible with Italian law. It is indeed a time-honored solution to the problem of admitting non-possessory security rights, and not only for uniquely identifiable, high value mobile collateral such as aircrafts or ships, for which a title registry exists. Consensual ‘liens’ or charges provided by special legislation were and are characterized by registration, and even sales with retention of title are supposed to be registered (though only for the purpose of superseding the good-faith acquisition rule). The main difference with the Cape Town Convention lies in two interconnected features: the choice of a ‘notice-filing’ approach, and the exclusive purpose of the registry (i.e. solving the priority conflicts between the holder of an international interest and other creditors with proprietary rights on the same asset, subsequent buyers and the debtor’s insolvency administrator). Both features, coupled with the development of a sophisticated software for electronic filing, provide a more efficient solution to priority issues than the current haphazard and diversified systems. The recently introduced non-possessory pledge for enterprises (see fn 15) was designed to enjoy the benefit of a more modern, dedicated and fully electronic registry. The extent to which other elements will be also introduced (e.g. preference for a notice-filing approach; limited role of the registrar etc.) will depend on the content of the forthcoming implementing ministerial regulations.

It should be noted that the Cape Town Convention opted for asset-based registries (separate registries for each type of collateral). Whilst an asset-based registry would not be ideal for a general non-possessory security device, the Cape Town choice is justified by the specific nature of the collateral and the high specialization of the financing and industry sectors involved (particularly so for aircrafts and satellites).

Another key set of provisions of the Cape Town Convention is devoted to enforcement remedies upon the debtor’s default. It is a sensitive area in respect to many domestic laws,[1] as demonstrated by the fact that the uniform regime allows derogation through a variety of opt-out and opt-in State declarations. Party autonomy certainly plays a much more important role in the Cape Town system than in Italian law. On the other hand, two critical points should be highlighted. Enforcement proceedings for charge creditors are excessively cumbersome in Italy when the suppler provisions of the possessory pledge are not applicable, so that the current discipline cannot be easily defended and a reform would be welcome, independently of the conventional rules. Furthermore, recent developments in other commercial sectors, such as financial markets, have already challenged the traditional limitations affecting the validity of the collateral agreement and/or the formalities of the enforcement mechanisms. In particular, the implementation of the EU Financial Collateral Directive has forced Italian courts and scholars to cope with the new concept of commercial ‘reasonability’ in enforcement as a substitute for the above-mentioned limitations.[2]

The insolvency provisions of the Cape Town Convention represent a further area where a contradiction with national law may be found. Enforceability against the debtor’s insolvency administrator is an essential element in any efficient secured transactions regime. As seen above, however, under the Protocols the holder of an international interest may prevail over the administrator not only in liquidation, but also in reorganization or ‘rescue’ proceedings, if ‘Alternative A’ in the insolvency provisions is chosen by the contracting State. Furthermore, national consensual and non-consensual liens would be postponed to the duly registered international interest, except when a State declared their status as preferred priorities under Art. 39 Conv. or when they were registered at an earlier time under Art. 40 Conv. This solu?tion appears to be justified in restricted and highly specialized economic sectors such as the ones within the scope of application of the Cape Town Convention. For the Aircraft Protocol, there is the additional incentive of the compliance with the so-called ‘Qualifying Declarations’ of the OECD Aircraft Sector Understanding (see above, para. 4.4). It would be more difficult to accept such unfettered creditor’s rights as a model on a wider scale.

Finally, treatment of (financial) leases under the Cape Town Convention should be briefly addressed. It is true that leases are not classified as security devices nor subject to any kind of publicity under current Italian law. The filing procedure under Cape Town, however, is simple and relatively inexpensive, so that it does not appear to constitute an excessive burden, especially when compared to the benefits of a full cross-border recognition of the lessee’s rights. Furthermore, as seen above (para. 4.1) the Convention simply extends to title reservation devices the basic regime applicable to traditional security rights, with some exceptions. In particular, leases (and sales with retention of title) are subject to different rules of enforcement. The resulting regime for lessors is perfectly compatible with Italian law.

  • [1] Tucci, G, The preliminary draft convention (above, fn. 14) 392: ‘The remedies provisions (...)and the realisation of the international interest via the procedural law of each State is naturally thepart of the future Convention which could potentially create the most significant problems in so faras they will need to be applied in conjunction with the domestic law rules of each State’.
  • [2] See in particular Murino, F, L’autotutela nell’escussione della garanziafinanziariapignoratizia,(Milano, Giuffre, 2010), 83.
 
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