Act of perfection without undue delay

Date 3 dec. 2009
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3 June 2009, the Danish Supreme Court ruled in a case regarding the reversal of a pledge on a car which had not been secured without undue delay pursuant to Section 70 of the Danish Insolvency Act. The pledge had not been submitted for registration until the following business day, and therefore the Supreme Court stated that the act of perfection had not been undertaken without undue delay.

 

The Supreme Court emphasised that the financing company had not proved that the submission of the pledge for registration taking place the following business day was necessitated by the nature of the process, taking into consideration that it was a professional financing company.

 

The case in brief

The pledgor, who is now in bankruptcy, bought a car from a car dealer. Part of the purchase price was financed by a loan through a financing company. The loan was secured by a pledge on the car. The financing company was to undertake the registration of the pledge.

 

The loan money was paid on Friday 11 February 2005 at 16:09 PM. The pledge was submitted for registration on Monday 14 February 2005 so that the registration did not take place before Tuesday 15 February 2005. The debtor was declared bankrupt 28 February 2005.

 

The legal background

The rules regarding reversal in the Insolvency Act, including Section 70(1), only apply if a valid agreement has been entered into between pledgor and pledge.

 

It is furthermore a requirement that pledgee must have secured his pledge on the pledged object against extinguishment, as an unregistered pledge will be extinguished by the bankruptcy estate upon registration of the bankruptcy order.

 

Section 70(1) of the Insolvency Act regulates cases where the loan money has been paid and act of perfection has taken place after payment of the loan money.

 

Application of Section 70(1) requires that act of perfection has taken place later than three months before the date when the petition for a liquidation order was presented to the court.

 

Section 70(1) further requires that act of perfection has taken place without undue delay from contracting of the pledge, which the Supreme Court ruling takes into consideration.

 

The act of perfection for a pledge on a vehicle is registration, cf. Section 42(d)(1) of the Registration of Property Act. A further requirement to the act of perfection for a pledge on a car is that the pledge deprives the pledgor the possession of the object in question to ensure that the pledgor does not dual-pledges the pledge, cf. Section 31(4) of the Danish Debt Instruments Act.

 

In the legislative material of Section 69 (now Section 70) of the Insolvency Act, (report 606/1971), “without undue delay” is described as “any delay, even short, which is not necessitated by the nature of the process”. It is emphasised in the report that the act of perfection must take place as soon as possible according to the chosen form of process.

In a Supreme Court ruling (U.1986.508H) from 1986, six days were considered an undue delay and the act of perfection was reversed pursuant to Section 70 of the Insolvency Act.

 

In a court ruling (U.1947.751/3S) from 1947, the act of perfection for two pledges paid on 12 and 13 November 1945 was not acted out before notification on 14 November 1945, which in this case was the correct form of acting out the act of perfection. The court ruled that notification had taken place in such connection with the payment of the loan money that the protection against the remaining creditors could be maintained. Thus, the provided security was not reversed.

 

Rulings of the Supreme, High and City Courts

Århus City Court emphasised that, in theory, a gap between payment of the loan money and performance of the act of perfection can occur. However, such a gap may not be increased by postponing registration until next day. The City Court further states that if the handling of the case, preparation of documents etc. is commenced late on Friday afternoon, and the registration of the pledge is postponed until the following business day, it is considered an undue delay.

 

The High Court merely concluded that when a business passes between the payment of the loan money and registration, it is considered an undue delay. Whether the company performing the act of perfection is an office with established office and working hours and an established timing of postal delivery, is of no significance.

 

The Supreme Court majority emphasised in their ruling that Section 70 of the Insolvency Act is an objective rule of reversal, and therefore the rule is best complied with if there are strict requirements to a professional pledgee’s proof that the nature of the due process necessitated a delay of registration until the following business day. According to the majority, such a proof had not been demonstrated.

 

The Supreme Court also consented to the ruling of the High Court.

 

The two judges who dissented found that registration of the pledge on the following business day was to be considered part of a continuous process which was completed without any other interruption or delay than what could be expected as a consequence of the intervening weekend.

 

The Supreme Court thereby upheld the City and High Court rulings.

 

Consequences of the ruling 

From the Supreme Court ruling, it can be concluded that a professional financing company should have very structured business processes, especially concerning the performance of acts of perfection, including pledging in connection with payment of loans. It is recommended that the loan is not paid before registration of the pledge. However, the act of perfection can still be performed after the payment of the loan, but the gap cannot be stretched over a longer period of time if such a stretch is not necessitated by the nature of the process.

 

It should be noted that the period for the performance of the act of perfection can be expected to narrow considerably in connection with the transition to digital registration.

The transition to digital registration has already taken place with the Land Register and thereby for registrations regarding real property. For the motor vehicles, personal records and housing co-operative registers, the existing rules apply. The transition to digital registration for the remaining registers is expected to take place during the summer of 2010.

 

Digital registration of e.g. pledges must take place either before payment of the loan or in continuation hereof. The period of time from payment of the loan until registration of the pledge must not stretch beyond what is required as a consequence of the nature of process.

 

Digital registration is presently possible between 6 am and 10 pm on all business days. This means that the payment of the loan must be immediately followed by registration of the pledge, regardless of the payment being made within or outside regular business hours. Registration may take place after preparation of other letters and documents of the case related to the payment of the loan and may therefore be postponed to the following morning if payment is made very close to 10 pm the previous night, but it cannot in any case be postponed longer than what can be explained by the nature of the process.

 

 

If you have questions regarding the above or require additional information about the Supreme Court ruling, please contact attorney Thomas Weitemeyer (twe@mwblaw.dk) or trainee Anders Kjær Dybdahl Pedersen (akd@mwblaw.dk).

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations