European Court of Justice issue preliminary ruling on financial collateral arrangements
In Private Equity Insurance Group SIA v Swedbank AS  EUECJ C-156/15 the Court of Justice of the European Union (“CJEU”) delivered a preliminary ruling (the “Ruling”) on financial collateral arrangements (“FCAs”) (to include money, financial instruments (including assets and shares) together with credit claims), (the “Collateral”).
The purpose of the Ruling was to consider the conditions which the Financial Collateral Directive (the “FCD”) confers on a taker of Collateral (a “Lender”), and the conditions which need to be met to allow a subsequent right to enforce notwithstanding the onset of insolvency of a Collateral provider.
The FCD was enacted to simplify the procedure for taking and enforcing security over Collateral. Arrangements which qualify as FCAs under the FCD are conferred an advantage over other types of security on insolvency of the Collateral provider. In England, Wales and Northern Ireland, the FCD is implemented via the Financial Collateral Arrangements (No 2) Regulations 2003 (SI/2003/3226) (the “Regulations”).
The Ruling concerned a charged bank account that potentially qualified as an FCA. To qualify (and therefore be considered enforceable by the Lender), the Collateral must be “in the possession of” or “under the control of the Lender or a person acting on its behalf”.
The lack of clarity in this concept has caused a blurred line over the interpretive scope of the Regulations and the CJEU established that the following conditions must be satisfied prior to enforcement:
(1) the monies covered by the Collateral were deposited in the account prior to the onset of insolvency proceedings (or on the day of commencement of proceedings if the Lender proves it was not aware, nor should have been aware of such proceedings); and
(2) the account holder was prevented from disposing of those monies after they had been deposited in that account.
Point (2) is to vital to those considering taking security as it must be ensured from the outset that any Collateral falls within your ‘possession’ or ‘control’ for the security interest to qualify for the protections available under the FCA regime.
For more information, please contact a member of the Tughans Finance & Restructuring Team.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.