Possession/control of financial collateral—ECJ takes narrow interpretation (Private Equity Insurance Group SIA v Swedbank AS)

Possession/control of financial collateral—ECJ takes narrow interpretation (Private Equity Insurance Group SIA v Swedbank AS)

Lindsay Hingston, associate at Freshfields, considers the decision in Private Equity Insurance Group SIA v Swedbank AS, a case concerning the enforcement of financial collateral post-insolvency.

Original news

C‑156/15: Private Equity Insurance Group SIA v Swedbank AS

What was the background to the case?

The case arose in connection with the insolvency proceedings of a Latvian company, Izdevniecība Stilus SIA (in respect of which Private Equity Insurance Group SIA is the legal successor) (the company).

Prior to its insolvency, the company opened a current account with Swedbank AS (the bank), the contract for which included a clause pledging all the monies in the account to the bank as financial collateral to cover all debts owed to it by the company. Following the insolvency of the company, the bank relied on this contractual provision to debit monies from the account which were applied in payment of the company’s debts to the bank.

The company (acting by its administrator) brought proceedings to recover these monies relying on provisions of Latvian insolvency law relating to pari passu treatment of creditors. The bank argued that its actions were permitted and protected under the Financial Collateral Directive 2002/47/EC (FCD).

Against this background, the Latvian Supreme Court referred a number of questions on the scope and applicability of the FCD to the European Court of Justice (ECJ). Advocate General Szpunar issued an Opinion on these matters in July 2016 and the ECJ handed down judgment in November 2016.

What were the legal issues that the ECJ had to decide in this matter?

The first question was whether and in what circumstances cash deposited in an account constitutes ‘financial collateral’ within the meaning of the FCD.

The second question was whether the effect of the FCD was to permit the enforcement of financial collateral notwithstanding the commencement or continuation of insolvency proceedings in respect of the collateral provider, even where such enforcement would (but for the FCD) be contrary to national insolvency law.

What were the main legal arguments put forward?

With

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