Annexes to COM(2016)626 - Question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of such a claim over the right of another person - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2016)626 - Question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of such a ... |
|---|---|
| document | COM(2016)626  |
| date | September 29, 2016 |
Furthermore, the average legal costs for cross-border transactions involving assignments, an important proportion of which stem from the need to carry out due diligence in respect of several legal systems, are in many cases very high and can amount to several hundreds of thousands of euros. For example, one factoring business reported legal costs ranging from £350,000 to £1 million per transaction.
4. possible approaches
4.1.General considerations
The study 38 shows that, as also set forth in the Capital Markets Union Action Plan, a harmonised conflict of law rule governing the third-party aspects of assignment is needed in order to ensure legal certainty and a balancing of the interests of all parties concerned in a cross-border assignment. Such a rule would also support cross-border trade, in particular by reducing legal costs and due diligence, and facilitating the availability of capital and credit at affordable rates for SMEs.
The study also shows that a single connecting factor may not be appropriate for all types of assignment operations; a combination of connecting factors which would accommodate the interests of various stakeholders may be more appropriate. However, since sector-specific rules carry the risk of inherent complexity and characterisation problems, their use should be limited as much as possible.
Among all possible connecting factors, the law of the contract of assignment, the law of the assignor's habitual residence and that of the law of the claim assigned have been supported by a majority of stakeholders as well as a significant number of Member States.
Some connected matters could also benefit from further clarification, such as the scope of Article 14 of the Rome I Regulation 39 .
In the light of this, three possible approaches have emerged 40 .
4.2.The law of the contract between assignor and assignee
Currently, the proprietary aspects of assignment between the assignor and assignee are governed by the law of the contract of assignment 41 . This approach would subject all proprietary aspects of assignment – including the effectiveness of an assigned or subrogated claim against third-parties and the question of priority between the assignee and competing right holders - to the law chosen by the assignor and assignee for their contract of assignment. However, to prevent any possible prejudice to third parties, this choice should be limited, in what concerns the effects of the assignment 42 , to either the law of the country in which the assignor has his habitual residence or the law governing the assigned or subrogated claim.
In the absence of a choice of law, or if the law chosen does not correspond to the two solutions envisaged, all the proprietary aspects of assignment would be governed by the law of the country of the habitual residence of the assignor 43 . This solution would avoid the use of sector-specific rules and reduce the number of laws applicable to the same assignment constellation 44 .
The priority issues between competing assignees can be solved by analysing the effects of each transaction in sequence, according to its own applicable law. The analysis would follow the property law principle of "first in time, first in right and rank", which is qualified only by rules on good faith acquisition in the subsequent transactions.
The main advantages of this solution are that it ensures that all proprietary aspects of assignment are governed by the same law as well as flexibility for actors in different market sectors to choose a law which responds to their particular needs. At the same time, the debtor continues to be protected under existing rules. This solution could also accommodate cases of bulk assignments of current and future claims, since the law of the assignor's domicile could be applied either as a result of the choice of the parties or by default.
The main possible disadvantage of this solution is the risk of avoidance of publicity requirements in some Member States. However, this risk is diminished by the fact that the choice of law is limited to two laws, both closely connected to the assignment in question.
4.3. The law of the assignor's habitual residence
The third-party aspects of assignment could be determined by the law of the habitual residence of the assignor 45 . Certain financial claims may not be well served by this rule, namely claims under an existing contract concluded within the type of system coming in the scope of under Article 4(h) of the Rome I Regulation or within a multilateral system for the settlement of payments or other transactions between banks and financial institutions or a claim under a financial instrument. This drawback could be mitigated by supplementing the general rule with a specific rule on the third-party effects of assignment of certain financial claims, which would point to the law governing the assigned or subrogated claim at the relevant date.
Questions of priority would be resolved by reference to the date of the last assignment or other event giving rise to a competing right.
The main advantages of this proposal are that it provides a single connecting factor which promotes certainty among secured and unsecured creditors and, in cases of competing assignments, a suitable and predictable solution in determining who has the best title to the assigned debt. The law of the assignor's habitual residence is easy to determine and most likely to be the place in which the main insolvency proceedings with respect to the assignor will be opened. As a result, conflicts between secured transactions and insolvency laws would be easier to address. The proposal is also particularly suitable for bulk assignments and assignments of receivables under future contracts which are an important source of obtaining finance for SMEs. The proposal would furthermore be coherent with the UN Receivables Convention as well as the UNCITRAL Legislative Guide on Secured Transactions 46 , in respect of those types of assignments within the scope of those instruments 47 .
The disadvantages include increased transaction costs and complexity, since this proposal would lead potentially to two laws being applied to the proprietary aspects of assignment, the law of the contract of assignment as between the assignor and assignee, and the law of the habitual residence of the assignor for the third-party aspects. There is also potentially a conflict of connecting factors in cases of joint assignors located in different States and in cases of subsequent assignments, where the same claim is assigned several times by assignors located in different States
4.4.The law applicable to the assigned claim
Under this proposal, the same law governing the relationship between the assignee and the debtor would also govern the proprietary aspects of assignment in respect of third parties. This general rule would need to be accompanied by a specific rule pointing to the law of the country of the assignor's habitual residence in respect of assignment of claims under future contracts, where the law of the claim cannot be determined at the time of the assignment. This specific rule would also accommodate the factoring and discount invoicing industry, where bulk assignments may otherwise trigger the application of many different laws to the same portfolio of claims.
Questions of priority would be resolved by reference to the date of the last assignment or other event giving rise to a competing right.
The main advantages of this solution are the stability of the connecting factor which is unlikely to change over time and thus the reduced risk of conflicts between connecting factors in the event of competition between assignees or other right holders. In the event of a change in the law applicable to the assigned claim, third parties would not be adversely affected. The proposal leads to a reduction of the number of applicable laws to an assignment, leading to the avoidance of characterisation problems between "debtor" issues and "third party" issues and to the reduction of legal costs associated with assignment. The proposal is particularly suitable for certain financial claims.
The main disadvantages include the potential uncertainty in cases of insolvency of the assignor where the lex concursus does not coincide with the law applicable to the assignment. As with the previous approach there is also a potential disconnect between the proprietary effects of assignment between the assignor and assignee and in respect of third parties. There is also uncertainty about the applicable law when there is no clear choice of law in the original contract or where the claim assigned is not contractual in nature. In such situations, the applicable law would need to be determined by reference to Article 4 of the Rome I Regulation or by Article 10 of the Rome II Regulation.
5. Conclusions
Uniform conflict of law rules governing the effectiveness of assignments against third parties as well as questions of priority between competing assignees or between assignees and other right holders would enhance legal certainty and reduce inherent practical problems and legal costs relating to the current diversity of approaches in the Member States.
The Commission presents in this report three possible approaches. The first is based on the law of the contract between assignor and assignee. The second is based on the law of the assignor's habitual residence. The third is based on the law applicable to the assigned claim. All proposals are combined with either fall back or specific rules to take into account the various interests or situations at stake.
In the future, when developing a solution to ensure legal certainty in assignment of claims transactions, due regard should be given to any parallel or similar solution developed to ensure legal certainty in securities transactions. To this end, a study on the law applicable to securities as well as claims traded on financial markets will be completed by mid-2017 48 .
Following the adoption of this report, the Commission will launch, by the end of 2016, a broad public consultation on the issues identified in this report. Any legislative solution proposed to address the lack of legal certainty in this report will be accompanied by an impact assessment, including an adequate quantification of the problem.
(1) Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions 'Action Plan on Building a Capital Markets Union' ('CMU Action Plan'), COM(2015) 468 final, p. 23.
(2) See Report from the Commission to the Council and the European Parliament on the appropriateness of Article 3(1) of Directive 2002/47/EC on financial collateral arrangements ('FCD report'), COM(2016) 430 final.
(3) See Capital Markets Union Action Plan, Annex 1: List of actions and indicative timeline, p. 30.
(4) See Article 14 of Regulation (EC) No 593/2008 on the law applicable to contractual obligations (the Rome I Regulation).
(5) Article 14(1) of the Rome I Regulation.
(6) Article 14(2) of the Rome I Regulation.
(7) Although Recital (38) of the Rome I Regulation stipulates that the term "relationship" in Article 14(1) extends to the proprietary aspects of assignment as between assignor and assignee in legal orders where such aspects are treated separately from the aspects under the law of obligations, the negotiations in the run-up to the adoption of the Rome I Regulation were conclusive on the fact that no agreement could be reached on a common rule on third party effects of assignment.
(8) The adoption of this report was postponed in order to await the political opportunity to follow its publication by a legislative proposal, which is now undertaken in the Action Plan on a Capital Markets Union.
(9) Directive 98/26/EC on settlement finality in payment and securities settlement systems (SFD).
(10) Directive 2002/47/EC on financial collateral arrangements (FCD).
(11) Directive 2001/24/EC on the reorganization and winding up of credit institutions, OJ 2001 L 125.
(12) Commission withdrew a proposal for a Council Decision concerning the signing of the 2006 Hague Convention on the Law applicable to certain rights in respect of securities held with an intermediary.
(13) Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories.
(14) Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities depositories.
(15) Directive 2014/65/EU on markets in financial instruments.
(16) Regulation (EU) No 600/2014 on markets in financial instruments.
(17) Impact Assessment accompanying the Proposal for a Directive of the European Parliament and of the Council on legal certainty of securities holding and transactions, 23.09.2009
(18) The study was carried out by the British Institute of International and Comparative Law in 2011 and is available at: http://ec.europa.eu/justice/civil/document/index_en.htm.
(19) These are: Belgium, Czech Republic, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Poland, Spain, Sweden and England.
(20) These are: Australia, Canada, Japan, the Russian Federation, Switzerland and the United States.
(21) The claim may result from a contract or from tort, unjust enrichment, negotiorum gestio, culpa in contrahendo or other legal relationships.
(22) Many Member States do not require a notice or any type of registration for an assignment to be effective against third parties (for example Belgium, the Czech Republic, Germany, Poland, Spain and England), while other require notice to the debtor (e.g. France, Luxembourg) or the acceptance by the debtor in an authentic act (e.g. Italy).
(23) The assignment of future claims is subject to different regimes in the Member States: generally it is accepted that they can be assigned, but under Belgian, Finnish and German laws for example future claims need to be identified or identifiable to be assigned, while Swedish law provides that future claims are obligations clearly contemplated by the relevant security document.
(24) It may also happen that C assigns a claim in breach of a statutory or contractual prohibition to assign. Statutory prohibitions concern for example personal debts such as wages and pensions (e.g. Belgium, The Netherlands, Poland) or bulk assignments (Poland). In some Member States, non-assignability clauses are given full effect (e.g. The Netherlands) while in others exceptions are made for money claims (e.g. Germany). Assignment is subject to the debtor's consent in Czech Republic, Finland and Poland. The situation is not clear under Belgium law.
(25) In national laws, the rule is generally that priority is given to the first assignee (for example Belgium, Czech Republic, Finland, Germany, Italy, Poland, the Netherlands, England). In England and the Netherlands, the relevant time is the notification of the assignment to the debtor. In England, assignment of debts as security by way of a charge or mortgage needs to be registered with the Registrar of Companies.
(26) Understanding Securitisation, Background − benefits – risks, European Parliamentary Research Service (PE 569.017), January 2016, p. 1.
(27) This example is an adaptation of the illustration used in the UNCITRAL Legislative Guide on Secured Transactions, pp. 16-17.
(28) See Example 1. Differences in formal requirements in relation to credit claims are elaborated in the recent FCD report, COM(2016) 430 final.
(29) See R. Plender, M. Wilderspin, The European Private International Law of Obligations, 3rd edition, Thomas Reuters 2009, paras 13-019 and 13-020.
(30) This is common view for 'shares' (see R. Plender, M. Wilderspin, op. cit., para 13-020; H. van Houtte (ed.), The Law of Cross-border Securities Transactions, Sweet & Maxwell 1999, p. 7; Dicey, Morris and Collins on the Conflict of Laws, vol. 2, 15th ed., Thomson Reuters 2012, para 24-066; BIICL Study, p. 244 and 347) and 'bonds' (H. van Houtte (ed.), op. cit., p. 31–32).
(31) This is the prevailing view for the German 'rights in securities', i.e. the 'Gutschrift in Wertpapierrechnung' according to M. Born, Europäisches Kollisionsrecht des Effektengiros. Intermediatisierte Wertpapiere im Schnittfeld von Internationalem Sachen-, Schuld- und Insolvenzrecht, Mohr Siebeck 2014, p. 63. Also R. Plender, M. Wilderspin, op. cit., p. 375 suggest that transfers of 'equitable interests' generally fall within the scope of Article 14 of the Rome I Regulation. However, Dicey, Morris and Collins on the Conflict of Laws, op. cit., para 24-067 assume that 'interests in a trust' are outside Article 14.
(32) Regulation (EC) No 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), OJ 2015 L141/19, repeals Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, OJ 2000 L 160/1.
(33) See Article 3(2) of the Insolvency Regulation (recast).
(34) See Article 2(9) of the Insolvency Regulation (recast).
(35) Article 8 and 10 respectively of the Insolvency Regulation (recast).
(36) The empirical analysis highlights the practical problems encountered in different market sectors in cross-border assignment and subrogation cases and is based on replies to a questionnaire which was answered by 36 stakeholders representing businesses, trade bodies and associations, financial markets institutions, law societies, legal practitioners, academics and other interested parties.
(37) Guideline (EU) 2015/510 of the European Central Bank of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (the ‘ECB General Documentationʼ). Article 97 of the ECB General Documentation requires no more than 2 governing laws applicable to(a) the counterparty; (b) the creditor; (c) the debtor; (d) the guarantor (if relevant); (e) the credit claim agreement; (f) the mobilisation agreement..
(38) 80% of the stakeholders participating in the study have expressed a need for a common rule to determine the law applicable to the third-party effects of assignment. As a solution, 44% of the respondents favour the law of the assignor's habitual residence, 30% favour the law of the underlying claim assigned and 11% opt for the law chosen by the assignor and assignee.
(39) On the question which law governs the recovery of the proceeds of a claim or their value, it could be clarified that this matter is governed by the law determined by Article 14 of the Rome I Regulation. Further clarification could also be brought to ensure that all issues which have a direct bearing upon the debtor are regulated by the law applicable to the claim assigned, including the question of whether the assignee has the right to bring a direct claim against the debtor or must join the assignor as a party to such legal proceedings.
(40) Three other solutions, the law of the debtor's location, the law of the place of assignment and the law of the forum have little support among stakeholders, create uncertainty, are unsuited for electronic means of transacting or encourage forum shopping (see study pp. 384-385).
(41) See Recital 38 of the Rome I Regulation.
(42) Another law could continue to govern the contractual aspects of the assignment.
(43) In the absence of choice, the applicable law is normally determined by reference to the characteristic performance of the contract which is that of the assignee, as provided for in Article 4 of the Rome I Regulation. This default solution would lead to the application of yet another law to a particular assignment, that of the habitual residence of the assignee.
(44) For this reason, proposal A departs in this respect from the study, which suggests a fall back rule based on the law applicable to the assigned claim, coupled with a sectoral rule for claims under future contracts.
(45) For the purposes of this provision, Article 19(2) and (3) of the Rome I Regulation may need to be disapplied.
(46) Adopted on 14 December 2007.
(47) Both the UN Convention and the UNCITRAL Guide exclude from their scope assignment of receivables arising from securities, independent guarantees, bank deposits, derivatives and foreign exchange transactions, and payment systems. The UN Convention further excludes letters of credit.
(48) Call for tender No JUST/2016/JCOO/PR/CIVI/0062.