The Court of Justice of the European Union (CJEU) has given a preliminary ruling on when a security holder has "possession or…control" of financial collateral for the purposes of Directive 2002/47 on financial collateral arrangements. From an English law perspective, this is particularly relevant for anyone considering whether a floating charge over financial collateral qualifies as a security financial collateral arrangement (or SFCA).

Background – UK implementation and interpretation

The UK implemented Directive 2002/47 through the Financial Collateral Arrangements (No 2) Regulations 2003 (the FCA Regulations). If security over financial collateral (broadly, cash at bank or securities) is an SFCA (meaning it is within the scope of the FCA Regulations) this can make a significant difference to the security holder. For example, if that is the case:

  • The security is not registrable at Companies House.
  • The security can be enforced even during the security provider's administration.
  • The security holder will have a right to appropriate (take outright ownership of) the financial collateral when the security becomes enforceable, if the security document gives it a right to do so. (This is more relevant when the financial collateral is shares or other securities, than when it is cash at bank.)
  • Even if the security is a floating charge, the recoveries from it in the insolvency of the security provider will not be subject to the same prior claims as other floating charge recoveries (expenses, preferential claims and the prescribed part).

If a floating charge over financial collateral can be an SFCA, this last point would be particularly significant. But can it be? The FCA Regulations set out a list of eligible security types. This includes:

"a charge created as a floating charge where the financial collateral charged is delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf; any right of the collateral-provider to substitute equivalent financial collateral or withdraw excess financial collateral shall not prevent the financial collateral being in the possession or under the control of the collateral-taker".

As in the Directive, this "possession or control" test applies to all SFCAs under the FCA Regulations. However, the draftsperson of the FCA Regulations clearly felt the need to apply the test again specifically to floating charges, perhaps to stress that it is a test a floating charge will often not pass. (Unsurprisingly, the Directive itself makes no specific mention of floating charges, which are a feature of English common law.)

Since the FCA Regulations came into force, the English courts have considered the "possession or control" test, in Gray v. G-T-P Group Ltd [2010] All ER (D) 80 May and Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 2997 (Ch). In the latter case, Mr Justice Briggs stated that a security holder must have sufficient control "for it to be proper to describe the collateral provider as having been 'dispossessed'".

The CJEU ruling

In case C-156/15, the Latvian courts asked the CJEU to interpret the "possession or control" test in the Directive for the purposes of a dispute where security had been granted over monies in a current account. In its ruling, the CJEU emphasised that there must be "an autonomous and uniform interpretation throughout the European Union", a reminder that its interpretation overrides any conflicting approach by national courts. As it happens, the CJEU's conclusions were broadly consistent with how most practitioners had interpreted the earlier English court judgments referred to above.

The CJEU held that the security holder "may be regarded as having acquired 'possession or control' of the monies only if the collateral provider is prevented from disposing of them". As reflected in the FCA Regulations, the Directive expressly provides that a right of substitution or to withdraw excess financial collateral in favour of the collateral provider will not prevent an arrangement from passing this "possession or control" test. The CJEU commented that "that right [of substitution or withdrawal] would lack any force if the taker of collateral consisting of monies deposited in an account were also to be regarded as having acquired 'possession or control' of the monies where the account holder may freely dispose of them".

So, this CJEU decision now confirms that in practice an English law floating charge over a bank account (or other financial collateral) will rarely be an SFCA. This is because the security holder will usually not have taken steps to prevent the security provider withdrawing monies from the account. If it has taken those steps, it is likely to have fixed security.

The only likely exception to this is where a security provider is prevented from withdrawing cash from an account, subject only to a right to withdraw excess cash. "Excess" here is likely to mean cash exceeding the total amount of the secured obligations at the time, rather then merely exceeding the amount the security holder considers adequate to secure the relevant obligations. Even this narrow withdrawal right could prevent an English law security being fixed in nature, but should not of itself prevent security qualifying as an SFCA.

Law stated as at 6 December 2016.