The European Union Court of Justice states that pledges over bank accounts are not resistant to insolvency procedures if the account holder can dispose of the monies deposited in the account

The European Union Court of Justice ("EUCJ") has issued a judgment dated 10 November 2016 in the Matter No C-156/15 (Private Equity Insurance Group ("SIA") v Swedbank AS) in response to a request for a preliminary ruling from the Supreme Court of Latvia, the country in which the bank Swedbank AS is based.

In its judgment, the Fourth Chamber of the EUCJ analyses the concept of "financial collateral guarantee" contained in Directive 2002/47 (which was incorporated to Spanish Law by means of the now well-known Royal Decree Law 5/2005 of 11 November, hereinafter "RDL 5/2005") and whether such financial collateral can be enforced notwithstanding the commencement of insolvency proceedings in respect of the collateral provider. In essence, the EUCJ makes several statements in relation to monies deposited in a bank account pledged in favour of the bank which diverge from what the market and practitioners had understood under RDL 5/2005.

In the dispute in the main proceedings which gives rise to the questions referred for a preliminary ruling SIA (or rather its legal predecessor Izdevniecība Stilus) entered into a standard current account contract with Swedbank AS. That contract contained a financial collateral clause under which monies deposited into SIA's account were pledged to Swedbank AS as financial collateral in order to cover all debts owed by SIA to Swedbank AS. The account holder was declared insolvent on 25 October 2016. On 8 June 2011, Swedbank AS debited 192.30 Latvian lats ("LVL") (approximately EUR 274) from the SIA's current account as a maintenance commission. SIA's insolvency administrator brought an action against Swedbank AS for recovery of that amount, invoking the principle laid down in national Latvian law of equal treatment of creditors in insolvency proceedings and the prohibition preventing an individual creditor carrying out actions liable to prejudice other creditors.

The Latvian courts dismissed the application at first instance and on appeal on the basis, inter alia, of the Latvian Law on financial collateral (the transposition of Directive 2002/47) which excluded financial collateral from the application of insolvency law. An appeal in cassation was then lodged before the Supreme Court of Latvia which referred certain questions to the EUCJ for preliminary ruling.

In its response to those questions the EUCJ declared that "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."

That is, the EUCJ understands that the financial collateral may only be enforced in case of insolvency, i.e. the financial collateral "is resistant" to the commencement of an insolvency proceeding (i) if the account holder cannot dispose of the monies deposited in the account, and (ii) only up to the amount credited in the account prior to the declaration of insolvency (or on the same date as the declaration of insolvency provided the beneficiary of the collateral was unaware of such declaration).

The key to the EUCJ's argument is that it believes that Directive 2002/47 requires the "provision" of financial collateral so that such financial collateral is "in the possession or under the control" of the collateral taker or of a person acting on the collateral taker’s behalf. What does to be in "possession" or "control" of the collateral mean? The EUCJ indicates that such criterion must be given an autonomous and uniform interpretation throughout the European Union so it proceeds to provide such uniform interpretation. In doing so, the EUCJ links "to be in possession" with the fact that the collateral taker identified in the financial collateral arrangement is actually in a position to dispose of the collateral when an enforcement event occurs. Having said that, the EUCJ understands that there is no "possession" or "control" of the taker of collateral consisting in monies deposited in a bank account if the account holder may freely dispose of them. Therefore, it can only be said that the collateral taker has possession or control of the financial collateral if the account holder is prevented from disposing of them.

Following the Court's interpretation, a pledge over monies in an account may only be enforced by appropriation or set-off if the collateral taker has such monies under its control or possession, and no such control or possession is deemed to exist if the account holder can dispose of the funds. Should the account holder have the ability to dispose of funds up to a certain minimum amount remaining in the account, then such minimum amount is all that the collateral taker has control or possession over.

This interpretation differs to what the Spanish market and Spanish Law practitioners had understood in the light of RDL 5/2005 and could have a significant effect on numerous pledges over bank accounts which are currently in place. Such pledges would need to be carefully revised and amended if Spanish national courts were to follow the interpretation put forward by the EUCJ.