In rendering its judgment of 10 November 2016 in the matter Private Equity Insurance Group SIA (the “Depositor”) v. Swedbank AS (the “Bank”) (C-156/15), the Court of Justice of the European Union (the “CJEU”) has shed some light on the contours of a “financial collateral guarantee” as brought into play by the Financial Collateral Directive (which has been implemented in Belgian law through the Law dated 15 December 2004).
The CJEU was called on to respond to a preliminary ruling (renvoi préjudiciel/prejudiciële verwijzing) requested by the Latvian Supreme Court. The case facts concern a standard current account agreement governed by the laws of Latvia. It contained a clause stipulating that monies deposited in the account are pledged to the benefit of the Bank as financial collateral and are meant to secure any and all of the Bank’s claims against the Depositor. The dispute arose as a result of the Bank having debited 192.30 Latvian lats (around EUR 274) as account maintenance fees on 8 June 2011, whereas the Depositor had earlier entered into insolvency proceedings on 25 October 2010.
On the main statement, the CJEU argued that the Financial Collateral Directive "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” provided that (i) “the collateral provider is prevented from disposing of them” and (ii) “the collateral was provided on the day of commencement and the collateral taker provides evidence that he was not aware, nor should have been aware, of the commencement of the proceedings”.
The first premise invites further comment. The CJEU reiterates that the financial collateral must be “in the possession or under the control” of the pledgee. Such a condition will not be deemed to be met where the account holder can freely dispose of its funds, hence restricting the collateral taker from enforcing its rights of appropriation or set-off. It should rather be subject to a proviso of restricted access to the collateral account (without prejudice to agreed withdrawal and substitution technique).
This should be read in the light of the opinion of Advocate General Szpunar, who declares that “in the case of collateral provided in the form of cash deposited in an account, 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” and that Article 2(2) of the Financial Collateral Directive “must be interpreted to the effect that the provision of financial collateral in the form of cash deposited in a bank account requires the existence of a contractual clause conferring on the collateral taker the right to limit the use of monies deposited in that account in so far as is necessary to guarantee the relevant obligations”.
The CJEU leaves a fair amount of legal uncertainty as to the soundness of a pledge over bank account in the event that the aforementioned contractual clause has not been provided for within the pledge conditions. Belgian banks will have to amend their general terms and conditions as they typically foresee such a pledge over all monies held on their bank accounts but without any right to limit the use of monies in so far as is necessary to guarantee the relevant obligations.
Apart from these cases, Belgian pledge agreements over bank accounts generally contain a freezing process, thereby enabling the pledgee to take control over the account under certain circumstances (including defaults or events of default) and it is our current understanding that such mechanisms have not as yet been challenged by the CJEU.