The Court of Justice of the European Union ("CJEU") has given its first ever ruling on the question of what constitutes "possession or control" of financial collateral for the purposes of the Financial Collateral Directive - Directive 2002/47 ("FCD").
The brief facts were that a depositor had placed monies with a bank. The account documentation contained the following provision:
The Customer's monies in the Account, present and future, shall be pledged to the Bank as financial collateral and shall cover all debts owed by the Customer to the Bank. In the event that the Customer fails to provide the monies necessary to make the payments in the current account, or in any other situation in which, pursuant to the present contract or any other contracts entered into with the Bank, or on any other legal basis, a debt owed by the Customer to the Bank arises, the Bank shall be entitled to settle that debt by enforcing the financial collateral arrangement, that is to say, the Bank shall be entitled, without giving prior notice to the Customer, to debit (transfer) from the Account the amount owed.
The customer became insolvent and the bank debited the account for certain fees that had accrued prior to the onset of insolvency. The administrator of the customer sought to recover such fees. In proceedings in Latvia, the local courts were unsure as to: (i) the application of the FCD to ordinary bank accounts; and (ii) whether the priority given to holders of financial collateral was compatible with the general principles of pari passu treatment of creditors in insolvency. Accordingly, the Supreme Court of Latvia referred, inter alia, such questions to the CJEU for preliminary ruling. In response to those questions, the CJEU held:
Directive 2002/47 on financial collateral arrangements is to be interpreted as conferring on the taker of financial collateral, such as the collateral at issue in the main proceedings, whereby monies deposited in a bank account are pledged to the bank to cover all the account holder's debts to the bank, the right to enforce the collateral, notwithstanding the commencement of insolvency proceedings in respect of the collateral provider, only if, first, the monies covered by the collateral were deposited in the account in question before the commencement of those proceedings or those monies were deposited on the day of commencement, the bank having proved that it was not aware, nor should have been aware, that those proceedings had commenced and, second, the account holder was prevented from disposing of those monies after they had been deposited in that account.
The CJEU has made clear that the FCD protections in relation to "after-acquired" collateral will not be available in circumstances where the collateral was acquired after the onset of insolvency. However, the position in relation to pre-existing security interests which attach to after-acquired property is unclear. As regards the requirement for the collateral taker to have taken possession or control of the collateral, the CJEU decision does not add much to existing case law. Unfortunately, the CJEU did not provide any guidance as to what a clause preventing dispossession should look like. The view of the Attorney General is slightly more illuminating:
In the case of collateral provided in the form of cash deposited in an account, being in the control of the collateral taker must mean that the collateral taker not only has practical control over the account to which the collateral relates, but also has the right to prevent withdrawal of cash by the collateral taker in so far as is necessary to guarantee the relevant obligations ... Article 2(2) of [the FCD] must be interpreted to the effect that the provision of financial collateral in the form of cash deposited in a bank account requires the existence of a contractual clause conferring on the collateral taker the right to limit the use of monies deposited in that account in so far as is necessary to guarantee the relevant obligations.
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