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Future EU Regulation proposed to address conflicts of law on the assignment of receivables

On 12 March 2018 the European Commission published a proposal for a Regulation to govern the law applicable to the third-party effects of assignments of claims (the “Assignment Regulation”).

The proposal of the Assignment Regulation adopted by the European Commission deals with which law applies to determine the effectiveness and perfection of the transfer of title – and the creation of other rights like pledges and charges – in relation to claims and receivables vis-a-vis third parties.

The principles set out in Article 4 of the Assignment Regulation are that the law of the habitual residence of the assignor will apply (Article 4 (1)) unless:

–           the claim is cash credited to a bank account or claims arising from financial instruments, in which case the law governing the account or the financial instrument will apply (Article 4 (2)), or

–           there is a securitization, in which case the assignee and the assignor can chose the law applicable to the assignment (Article 4 (3)).

The Assignment Regulation will, once adopted on EU Level and subject to a 18-months waiting period (Article 15), have direct applicability in all Member States without the need to be implemented into the domestic laws of the Member States. All courts of the Member States of the EU will then need to apply the Assignment Regulation in respect of all such assignments which are concluded on or after the application date. However, the Assignment Regulation will not apply in and does not bind the courts of Denmark (Recital 37 of the Preamble to the Assignment Regulation), it will only apply in Ireland if Ireland opts into the Assignment Regulation (Recital 36 of the Preamble to the Assignment Regulation) and will not apply to the UK after the UK has ceased to be a Member State of the EU on 29 March 2019, unless the UK decides to apply it following Brexit.

The Assignment Regulation does not allow parties to contract out of the Assignment Regulation or to agree the applicable law which shall regulate the assignment of claims.

Universal Application

The Assignment Regulation is expressed to have Universal Application (Article 3), which means that it will apply the law designated by it, even if this is not the law of any Member State.

For example, if a US exporting company assigns an invoice or other claim arising from a contract governed by English law to an EU assignee, then US law will apply in determining whether the assignment was effective vis-à-vis third parties, not English law.

Because of this rule (set out in Article 3), the Assignment Regulation will have a major impact on international trade finance involving the assignment of receivables and could create uncertainty over which law is applicable, if the relevant third country’s law does not recognize the rule contained in Article 4(1).

Bank Accounts and Financial Instruments – the first exception

Bank accounts and account pledges will, pursuant to Article 4 (2) of the Assignment Regulation continue to be governed by the law of the country where the relevant bank is situated, provided that the account mandate and account relationship provides that the law of that country shall govern the banking relationship.

However, this will only apply to bank accounts held with banks, the head offices of which, are situated within the European Union and to branches of third country banks to the extent their offices are within the European Union.

As far as other banks situated outside of the European Union are concerned, Article 4 (2) will not apply.  In respect of those institutions the general rule contained in Article 4 (1) will apply, i.e. the relevant account security will be governed by the law of the country where the bank has its habitual residence, meaning – pursuant to Article 2 (f) –  the place of the central administration of the bank.

Insofar as Financial Instruments are concerned, the law governing the instrument shall apply in determining the effectiveness and perfection of the assignment.  Article 2 (i) of the Assignment Regulation provides that the term “Financial Instrument” means the instruments specified as such in the MIFID II Directive (Section C of Annex I of Directive 2014/65/EU of 15 May 2014).

It is an open issue whether and how this will affect the German Schuldschein-Market since Schuldscheine with a term of more than 397 days may not qualify as a Financial Instrument.  And that could mean that secondary trading in such Schuldscheinecould become quite complex since the assignment of the relevant Schuldscheine will not be governed by German law but potentially by various different laws depending on where the place of the central administration of the previous holders of the Schuldscheine is situate.

Securitization – second exception

Article 4 (3) of the Assignment Regulation provides that the assignor and the assignee of a receivable/claim may choose the law applicable to the assignment of the securitization.  However, the Assignment Regulation does not define “securitization”.

Accordingly the term “securitization” will need to be determined, although it may well end up being the case that the definition of Securitization contained in Article 2 No. 1 of the Securitization Regulation of the EU, 2017/2402 of 12 December 2017 is used.

In any event, there are still some uncertainties. Does Article 4 (3) mean that the law can be chosen on all levels of the securitization? For example, an Italian company securitizes a portfolio of trade receivables which are governed by French law, by using a Luxembourg purchasing SPV. In such a situation the Italian originator and the Luxembourg purchaser could chose German law for the assignment thus avoiding all the complexities of French and Italian law relating to the assignment. That would make the securitization much easier and less complex, as compared to the position as it is today.

However, if (as if often the case in such a scenario) the Luxembourg SPV then assigned the purchased receivables to a security trustee; which law would apply to that onward-assignment? German law under Article 4 (3) of the Assignment Regulation or Luxembourg law under Article 4 (1) of the Assignment Regulation?

What is the position in respect of factoring, asset based lending and invoice discounting?

Article 4 (3) of the Assignment Regulation only applies to securitizations.  It does not apply to other forms of receivable finance such as factoring, asset based lending or invoice discounting.  Insofar as they are concerned, the general rule set out in Article 4 (1) of the Assignment Regulation applies and the law of the central place of administration of the assignor determines the effectiveness and perfection of the assignment vis-à-vis third parties.

The consequence of that rule is that Assignment Regulation will make the financing of portfolios of receivables (which could be subject to a multitude of jurisdictions) much easier, where they are owned by one assignor situated in one jurisdiction.  In that case it will be much easier to identify the one relevant law applicable.

Conversely, it will make it more difficult to finance portfolios of those receivables where assignors are situated in various jurisdictions but the receivables themselves are governed by the same law.

How does the Assignment Regulation differ to the EU Insolvency Regulation?

Whilst there should be no difference (recitals 9 and 22) there are.

For example, the relevant test for the purposes of Article 4(1) of the Assignment Regulation in determining the “habitual residence” of the assignor is the “place of central administration” whereas the test under the Insolvency Regulation is the “centre of main interests” (COMI) and the presumption that the COMI is the company’s registered office.  There is no such assumption under the Assignment Regulation.

Applying either of those tests may result in the same answer but it cannot be excluded that the location of the assignor could be different in some circumstances, resulting in uncertainty as to which law might apply to cross-border assignments in insolvencies.

Further, unlike under the EU Insolvency Regulation where the definition of COMI requires the company to have held its centre of main interests for 3 months, the same does not apply under the Assignment Regulation.  Therefore, it could make it difficult to identify the “place of central administration” if the assignor has recently changed location, and again, the ability to identity the relevant applicable law.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume VIII, Number 190


About this Author

Andreas Lehmann, Squire Patton Boggs, Corporate Finance Transactions

Andreas Lehmann’s practice focuses on financial services and corporate finance transactions as well as restructuring & insolvency.

He advises banks on all aspects of debt financing structures including syndicated loans, corporate bonds and securitization transactions. Andreas has advised institutional investors, in particular investment funds, venture capital funds and real estate funds, in respect to their investments in Germany.

Andreas’ finance experience includes financial restructurings and non-performing loan...

49 69 17392 420
Andreas Fillman Lawyer Squire Patton Boggs Frankfort

Dr. Andreas Fillmann’s practice focuses on corporate finance, financial regulatory, compliance including data protection, banking and capital markets. The quality of his work is consistently mentioned in the JUVE Handbook of German Corporate and Commercial Law Firms and in the Nomos HandbookChambers Global has listed Andreas as a leading individual for banking and finance matters in Germany since 2012. 

He is a member of the European Finance Association, International Banking Federation, SAFE, International Bankers Forum, Center for International Legal Studies, Deutsches Aktieninstitut and the German and Frankfurt Bar Association.

His lengthy industry experience in the corporate finance, banking and capital markets industries includes various corporate finance structures, finance regulation, debt and equity funding, compliance including data protection, structured finance, syndicated loans and derivatives. He also represents various types of investments funds in issues relating to their investments and the related investment law. Andreas has advised FinTechs, financial institutions and international banks in relation to license applications with the German Federal Financial Supervisory Authority (BaFin).

Andreas has considerable experience advising on the EU regulatory framework (e.g. GDPR, PSD, EMIR, CRR/CRV, MiFiD/MiFiR) for the financial service industry and also has broad experience in derivatives, including advising a central bank, investment banks and funds on their related derivative activities. In addition, he has advised on a large number of capital markets transactions in relation to both equity and debt finance, including primary and secondary stock placements and the issue of stand-alone and structured bonds, Schuldscheine, and medium-term notes (MTNs). He has advised on a wide range of financial services policy and compliance matters relating to risk management, payment and clearing and data protection.

Prior to joining us, he was a partner at a major US-based law firm, where he advised on a broad range of capital markets, bank insolvency and bank regulatory matters. Before that, Andreas led the legal department at the Bank of Tokyo-Mitsubishi subsidiary and branch in Frankfurt, where he advised the bank in a broad range of corporate, bank regulatory, finance and capital market matters.

Andreas is the author of several articles on bank finance and capital markets-related issues and a speaker at numerous legal and industry conferences in Germany and abroad.

49 69 17392 423