Restriction on disposal remains key as European Court of Justice (ECJ) gives its first ruling on the interpretation of the financial collateral arrangements directive in Private Equity Insurance Group SIA v Swedbank AS [2016]

The ECJ recently delivered a judgment on the interpretation of Directive 2002/47 of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements ('FCA Directive') and in doing so provided its first ruling on the interpretation of the FCA Directive.


The FCA Directive was enacted to provide a simplified regime for taking and enforcing security over 'financial collateral' including cash, financial instruments (including shares) and credit claims. Qualifying financial collateral arrangements ('FCA') are conferred an advantage over other types of security on the collateral provider's insolvency. In English law, the FCA Directive is implemented by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI/2003/3226) ('FCA Regulations').

The case before the ECJ concerned a charged bank account that was potentially a 'security financial collateral arrangement' under the FCA Regulations ('Security FCA'). In order to qualify as a Security FCA, the financial collateral must be 'in the possession or under the control of the collateral-taker or a person acting on its behalf'. The absence of a statutory definition of this concept has caused considerable uncertainty regarding the scope of the FCA Regulations and calls for the point to be clarified.


In 2007, Izdevnieciba Stilus SIA (Private Equity Insurance Group SIA) ('customer') entered into a standard current account contract with Swedbank AS ('bank'). This included a financial collateral clause in which the cash in the customer's current account was pledged to the bank, covering all debts owed.

The customer was subsequently declared insolvent. The administrator entered into a new current account contract with the bank containing the same financial collateral clause. The bank later debited some funds from the customer's account as a maintenance commission for the period up to the customer's insolvency.

The customer, represented by the administrator, brought an action against the bank for recovery of the funds debited, raising, amongst other arguments, the Latvian law principle of equal treatment of creditors in insolvency proceedings. The application was dismissed on the basis that the FCA Directive excluded the arrangement from the application of insolvency law. The matter was referred to the ECJ for guidance on interpretation of the FCA Directive.


The ECJ held that:

  1. The scope of FCA directive is not limited to monies deposited in accounts used in payment and securities settlement systems - The FCA Directive applies to collateral that is provided by cash deposited in a bank account and which covers all the bank's claims against the account holder, whether or not the account is used in securities payment and settlement systems (a formal arrangement governed by an EU Member State relating to collateral security provided in connection with the arrangement, or with the operations of central banks of the Member States).
  2. 'Possession or control' requires that the collateral-provider is prevented from disposing of the financial collateral - The requirement under Article 2(2) of the FCA Directive that the financial collateral be 'in the possession' or 'under the control' of the collateral-taker means that the collateral-taker must be able to prevent the collateral-provider from withdrawing cash secured by the FCA. This affirms two judgments made by the English High Court. In Gray and others v G-T-P Group Ltd: Re F2G Realisations Ltd (in liquidation) [2010] EWHC 1772 (Ch), the court held that a floating charge will only benefit from the FCA Regulations if the collateral-taker has 'legal control' as opposed to 'administrative' control of the financial collateral. In Re Lehman Brothers International (Europe) (In Administration) [2012] EWHC 2997 (Ch), the court held that to qualify as a Security FCA, the collateral-taker had to have sufficient possession or control for the collateral-provider to be 'dispossessed' of the financial collateral.
  3. The advantage given an FCA on insolvency applies only to monies deposited before commencement of insolvency proceedings / on that date if the bank was not aware of the insolvency proceedings and should not have been - The FCA Directive gives the collateral-taker the right to realise any financial collateral provided under an FCA before insolvency proceedings were commenced and on the day of commencement only if the collateral-taker can prove that it was not aware of the proceedings and that it should not have been aware.


The ECJ's ruling in this case has provided a useful degree of clarification on the interpretation of the FCA Directive and confirmed that the approach of the English courts in relation to possession and control is correct.

It is clear that restriction on disposal remains key and it is essential for those administering these arrangements to ensure appropriate restrictions are in place if they are to benefit from the FCA regime and the considerable advantages it affords lenders on enforcement.