A recent decision of the European Court of Justice (“ECJ”), on a referral from the Latvian courts and which is binding on the English courts (although the UK has commenced steps to leave the EU, the UK’s formal exit is still some time away), will make it more difficult for the holder of an English floating charge to enjoy the benefit of the UK’s Financial Collateral Arrangements (No.2) Regulations 2003 (“FCARS”)
FCARS implement an EU directive whose purpose was to assist the taking of security over financial collateral, which includes securities and cash. When the FCARS apply, the collateral taker has certain advantages: a number of insolvency law provisions as well as some formalities will not apply. The FCARS can also permit the collateral taker to enforce its security by appropriating collateral without having to get a court order. Thus for a holder of security over financial collateral the applicability of the FCARS to its security can be very useful.
The English floating charge is used widely. It is a form of security whose creation in response to the needs of the emerging economic environment was endorsed by the English courts in the nineteenth century. It allows companies to grant security whilst at the same time still being able to carry on their business.
For the FCARS to apply, the financial collateral must be in the possession or control of the collateral taker. As a result, recent cases in the English courts have suggested that an English floating charge will rarely fall within the FCARS. The ECJ’s ruling appears to confirm that, since to be in the possession or under the control of the collateral taker requires the collateral taker not only to have practical control but also a legal right to prevent withdrawal of the collateral.
So it looks like in most cases the holder of an English floating charge will not have the benefits potentially available to collateral takers under the FCARS. The point will most likely be a concern where a lender thinks it has fixed charge security only for the English courts to rule that the security is in fact a floating security. Such a decision will turn on the extent of control actually exercised by the lender but similar analysis may lead a court to decide that the lender also does not have sufficient possession or control to enjoy the benefits of the FCARS it thought it had.
All this serves to highlight the tension between, on the one hand, wanting to allow a borrower to carry on its business in the ordinary course and, on the other, having the strongest security.