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In Germany, securitization SPVs, factoring companies and asset based lenders take security over the leased assets owned by the leasing company by way of a security transfer of title. However, in all cases of a leasing company’s insolvency where the leasing company has still possession of the assets, the owner of the security in the leased assets was in the past not seen as being entitled to realise the value of the assets itself. This was because of the rule contained in the German Insolvency Code that any security transfer of a movable asset does not create a full segregation right of the secured party in case that the insolvency administrator has possession to the movable object. Instead, the insolvency administrator of the leasing company was seen to be entitled to dispose of the leased assets and the secured party was only entitled to a separate satisfaction out of the sale proceeds.

Not only did this mean that the financier received payment in most cases several months later than it was entitled to realise the value of the assets, but also the insolvency administrator could withhold, out of the realisation proceeds from the disposal of the assets, a cost contribution for the benefit of the insolvency estate, which is usually 9% of the realisation proceeds, plus any applicable VAT.

If a leasing company which (re-)finances the acquisition of leased assets by way of an asset based lending, securitization or factoring arrangement, the leasing company will usually grant security ownership in the leasing goods to the financer and also assign to the lender its claims against the lessee for payment of the lease instalments and, if applicable, residual value payments at maturity. If the leasing company then becomes insolvent, the physical possession of the leased assets is neither with the leasing company nor with the lender but with the lessee. In such a scenario, insolvency administrators have, in accordance with previous court rulings, usually taken the position that they are, based on their “indirect possession” (mittelbarer Besitz) in the leased objects or, at the latest, after the lessee has returned the same to them at end of the lease term, entitled to sell the leased assets to the effect that the insolvency estate can benefit from the percentage cost contribution referred to above.

The German Federal Civil Court (BGH), in judgment dated 11 January 2018 (IX ZR 295/16), has now ruled that in such a scenario the insolvency administrator is not entitled to dispose the leased goods if, under the relevant lease contract, the lessor is regarded to have lost possession of the leasing goods permanently. This is particularly so in the case of a financial lease where the term of the lease covers the whole lifetime of the leased assets and provides for a full amortisation of the acquisition costs of the leased assets.

Further and more importantly, the BGH held that where the lessor provided the security transfer to the lender at a time when the lessor already had handed over possession of the leased assets to the lessee, by assigning to the lender its right against the lessee under the lease contract for return of the leasing goods, the lessor does not retain any indirect possession which could justify a realisation right of the insolvency administrator over the lessor’s assets under the German Insolvency Code.

Securitization SPVs, factoring companies and asset based lenders will certainly welcome this new BGH ruling, as it increases the value of their security. Furthermore, the legal certainty generated by this new ruling will also make lease securitisation transactions easier in many circumstances, in particular in the case of residual value transactions.