Maciej Dejak

Securitisation: Be careful about reserving title to sold goods!

A business may enter into an agreement assigning its receivables to a securitisation fund, but effective assignment of claims of title to generically identified sold goods may require notice to the buyer.

In simple terms, securitisation consists of acquiring receivables and converting them into securities. From the legal side, the key element of a securitisation transaction is acquisition of the claim underlying the receivable. For this purpose the parties enter into an assignment agreement.

Under the Polish Civil Code, conclusion of an agreement on assignment of a receivable results in passage to the acquirer of all rights related to the receivable. This may involve, for example, rights under a mortgage or pledge. As a rule, however, a business will not establish such liens on current trade receivables arising out of the sale of goods, which would require operational and financial outlays incommensurate to the value of the receivable. Instead, merchants often resort to reserving title to the sold goods.

Under a reservation of title, the substance of the sale agreement is modified so that ownership of the item does not pass to the buyer until it has paid the full purchase price. Thus title remains with the seller until payment is made. This allows the seller to reclaim the item if the buyer fails to pay the price.

When including a reservation of title in a sale agreement, however, it is important to be aware that transfer of ownership, even if it is a condition for exercise of rights related to reservation of title to a sold good, is governed by different regulations than those governing assignment of receivables. If the subject of the sale agreement with a reservation of title is goods identified only by type, transfer of ownership requires, in addition to the agreement, that possession of the item also be transferred. In other words, the doubt arises in practice on whether mere conclusion of an agreement on assignment of receivables at the same time transfers ownership of goods sold with a reservation of title, or whether additional actions are also required, i.e. transfer of possession of the goods.

In the absence of clear guidelines in the case law, the safest solution appears to be fulfilment of the grounds required for both assignment of receivables and transfer of ownership of goods identified only by type. To this end, alongside conclusion of the assignment agreement, possession of the goods should be transferred by notifying the conditional holder, i.e. the buyer, of the change in the owner of the item.

Maciej Dejak, Banking & Finance practice, Wardyński & Partners