ECJ judgment on financial collateral arrangements

In Case C-156/15 (hereinafter the Case) the Court of Justice of the European Union (hereinafter the Court) ruled for the first time on the Directive 2002/47/EC (hereinafter the Directive) applicable to financial collateral arrangements (hereinafter the Judgment). The Case provided an opportunity for the Court to examine the balance established by the Directive between market efficiency and the safety of the parties to the arrangement and third parties.

Facts of the Case

On 14 April 2007, Izdevniecība Stilus SIA (hereinafter the Depositor) entered into a standard current account contract with Swedbank AS (hereinafter the Bank) which 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.’

On 25 October 2010, the Depositor was declared insolvent. Subsequently, the insolvency administrator of the Depositor entered into a new current account contract with the Bank which also contained the same financial collateral clause as the original contract.

On 8 June 2011, the Bank debited about EUR 274 to the current account of the Depositor as a maintenance commission in respect of the period up to the declaration of insolvency.

The Judgement of the Court

The main question submitted to the Court was whether the Directive is applicable to such collateral arrangement or not. The Court emphasised that the Directive was adopted with the objective of going beyond the scope of directive 98/26 on settlement finality in payment and securities settlement systems. The Court confirmed that the Directive also applies to situations in which the collateral secures not only individual obligations but also all the debts owed by the account holder to the bank.

Subsequently, the Court addressed the provisions of the Directive which provide that the Directive applies only to financial collateral which ‘has been provided’ (Article 3 paragraph 2 of the Directive), and that the provision of financial collateral requires that the collateral shall be in the possession or under the control of the collateral taker (Article 2 paragraph 2 of the Directive). However the Directive does not specify the circumstances in which this criterion is fulfilled in a case in which the financial collateral consists of monies deposited in a bank account.

In the opinion of the Advocate General, in such case ‘being in the possession or under 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 the withdrawal of cash by the collateral provider in so far as is necessary to guarantee the relevant obligations.’

Accordingly the Court examined whether the collateral arrangement in question included a clause regulating that the Depositor is prevented from disposing of the monies deposited at the account. The Court concluded that this requirement was not met in the absence of any such clause.

Finally, the Court held that deposits constitute collateral only if the monies were deposited in the account before the commencement of the insolvency proceedings (or on the day those proceedings commenced if the collateral taker proves that it was not aware, nor should have been aware of the commencement of the proceedings). The Court ruled that this requirement was not met either since the monies debited by the Bank were deposited after the date on which the insolvency proceedings commenced.

Implications of the Case on security deposit regulated under Hungarian law

Under Hungarian law security deposit qualifies as the collateral regulated under the Directive. According to Act V of 2013 on the Civil Code (hereinafter Civil Code) in case of establishing security deposit on claims arising from payment account, the collateralized asset is needed to be removed from the possession of the collateral provider and transferred to the possession of the collateral taker in a clearly identifiable manner, or otherwise removed from the unrestricted control of the collateral provider (Sections 5:95 (1) (b) and 5:95 (2) of the Civil Code).

Accordingly in case the account holder establishes such collateral in favour of a third person, the account holder, the account managing bank and the collateral taker are required to enter into a written agreement which regulates that the bank shall execute the account holder’s orders only with the collateral taker’s consent, and shall execute the collateral taker’s orders without the account holder’s consent (Section 5:95 (3) (a) of the Civil Code). However in case the collateral taker is the payment service provider itself, such three-party agreement is not required. The rationale behind the regulation is that in such case the pledge agreement itself could regulate provisions limiting the account holder’s control over the account (Section 5:95 (3) (b) of the Civil Code). However for the collateral to qualify as security deposit and at the same time meet the requirements for establishing collateral under the Directive the pledge agreement is required to actually limit the account holder’s control over the account in order and provide actual control to the account manager as the collateral taker over the amount determined under the pledge agreement. In the absence of such provisions of the pledge agreement, the collateral would only constitute an ordinary mortgage assuming that the lien is registered in the collateral register (Sections 5:88. (a) and 5:93. (1) (b) of the Civil Code).

Accordingly based on the Judgment, the Directive is applicable to a security arrangement regarding claims arising from payment account in case it complies with the abovementioned requirements. The relevant provisions of the Civil Code are in accordance with the requirements of financial collaterals regulated under the Directive, and the collateral established in compliance with these provisions of the Civil Code shall qualify as financial collateral under the Directive. However it is important to note that for establishing security deposit by only concluding a pledge agreement, the pledge agreement is required to provide that the claims arising from the account which constitute security deposit shall be under the control of the account manager as the collateral taker.

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