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Which Law Applies When Determining the Validity of an Assignment of Receivables Cross-Border?

The validity of an assignment of receivables cross-border depends on the law that applies to the assignment.

What might amount to a valid assignment in one jurisdiction does not mean that it is valid in another, and where there are competing claims to the receivables and competing jurisdictions, the question of which law applies - and therefore whether there has been a valid assignment - significantly affects the ability of the assignee to rely on the assignment.

This question arose in the context of a German bankruptcy where the issue was referred to the European Court of Justice (“ECJ “) for a preliminary ruling. The recent decision of the ECJ of 9 October 2019 surprised many because it went against the commonly held view that in determining jurisdictional questions Article 14 of the European Union Rome I Regulation applied.

In this blog we consider the implications of the ECJ judgment in Case C-548/18 BGL BNP Paribas SA vs. TeamBank AG Nürnberg and how this affects assignees and the priority of competing claims. We also consider the proposed EU Assignment Regulation and how that might assist in determining the question of jurisdiction in the future.

The Facts

A national of Luxembourg (the “employee”) but resident of Germany was employed by a Luxembourg employer under Luxembourg law. A German bank granted a German law governed loan to the employee and the employee assigned to the German bank all its claims to receive remuneration from the Luxembourg employer.

Three months later the employee obtained another loan, this time from a Luxembourg bank and assigned the same remuneration claims as security for that second loan to the Luxembourg bank under a Luxembourg law governed assignment contract. The Luxembourg bank notified the assignment to the Luxembourg employer, the German bank did not do so.

The employee became insolvent and German insolvency proceedings were commenced.

Under German law notification of an assignment is not required to perfect the assignment, but under Luxembourg law it is. Accordingly, in this case if German law applied the assignment to the German bank would have had priority over the assignment to the Luxembourg bank but if Luxembourg law the priority position would have been reversed.

Which law therefore took precedence? The German court requested the ECJ give a preliminary ruling on the question.  Contrary to the commonly held view, the ECJ concluded that Article 14 of the Rome I Regulation did not assist and was therefore unable to provide for an answer to the question leaving the German court in a challenging situation particularly so, because the relevant rules for determining the conflict of law were actually deleted from German law in 2009.

So which law do the courts apply when determining whether there has been a valid cross-border assignment of receivables? Currently the answer depends on which country is being asked to consider the question:

(i)             It could be the law which is expressed to govern the contract from which the assigned receivable arises. This is the approach normally adopted in Germany.

(ii)            In England, the Netherlands and Spain it is in principle the law chosen by the assignor and the assignee to govern the contract under which the receivable is assigned;

(iii)           Whereas in the U.S., for example it is in principle the law of the jurisdiction in which the assignor is situated.

The position is far from clear meaning that an assignees of receivables cannot always be certain whether the assignment is valid and enforceable.

Hope for the future? -The proposed EU Assignment Regulation

Thankfully the European Union intends to introduce new legislation that will help clarify the position. The Assignment Regulation proposed in March 2018 is currently being discussed in the Council of the European Union. However it is likely to be subject to extensive negotiation before adoption.

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)).

Once adopted (subject to a 18 month waiting period) the Assignment Regulation will be directly applicable. This means that whilst EU Member States do not need to implement it into their domestic laws the courts of the Member States are bound to apply it in respect of all assignments which are concluded on or after the date it comes into effect.

However, the Assignment Regulation will not apply in Denmark, it will only apply in Ireland if Ireland opts into the Assignment Regulation and will not apply to the UK since it is expected that the UK will no longer be a EU Member State at the time the regulation is adopted and becomes effective.

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

Major impact on international trade finance

The Assignment Regulation is expressed to have Universal Application, which means that it will apply the law designated by the assignment, 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 German law to an EU assignee, then US law will apply in determining whether the assignment was effective vis-à-vis third parties, and not German law.

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

What is the effect of the Assignment Regulation on Bank Accounts?

Bank accounts and account pledges will continue to be governed by the law of the country where the relevant bank is situated, provided that the account mandate prescribes that the law of that country shall govern the banking relationship.

However, this will only apply to bank accounts held with banks where the head office is situated within the European Union and to branches of third country banks which are located within the European Union.

In respect of banks situated outside of the European Union Article 4 (1) applies and the relevant account security will be governed by the law of the country where the bank has its place of central administration. .

What is the effect of the Assignment Regulation on Financial Instruments?

The law that applies to Financial Instruments will be the law governing the instrument. Article 2 (i) of the Assignment Regulation defines “Financial Instrument” as 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 unclear 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. This could mean that secondary trading in such Schuldscheine becomes quite complex since the assignment of the relevant Schuldscheine will not be governed by German law, but by the law of the jurisdiction where the previous holders of the Schuldscheine is situated – and this could be any number of jurisdictions

What is the effect of the Assignment Regulation on securitization?

Presently 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 European Parliament propose to delete this exemption. This is disappointing because the proposal made by the European Commission could make securitization much easier and less complex than is currently the case.

What is the position in respect of Factoring, Asset Based Lending and Invoice Discounting?

Article 4(1) will apply to all other forms of receivable finance such as factoring, asset based lending, invoice discounting or other forms of supply chain finance. Accordingly the law of the central place of administration of the assignor determines the effectiveness and perfection of the assignment vis-à-vis third parties.

In practice that rule 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 apply to cross-border assignments in insolvency?

The difficulty here, is that 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 EU 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 identify the relevant applicable law.

Conclusion

The principles set out in the Assignment Regulation are welcome because they provide much needed clarity on which law applies when determining the validity of an assignment of receivables cross-border. It will provide more certainty to assignees, and hopefully lead to less litigation as a consequence.

© Copyright 2020 Squire Patton Boggs (US) LLP

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About this Author

Jens Rinze, Squire Patton Boggs, Structured Finance Attorney,
Partner

Dr. Jens Rinze is a partner in the Frankfurt office and heads the Financial Services Practice Group in Germany. His practice focuses on capital markets, structured finance, banking, insurance and other finance industry related transactions, in particular securitization, real estate finance, acquisition finance, receivables finance and asset finance  as well as other forms of structured finance and capital markets instruments (including the regulatory aspects thereof) as well as the restructuring and work-out of such transactions. Moreover, he advises financial...

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