On 7 June 2021, the Council of the EU approved its general approach on the proposal for a regulation on the law applicable to the third-party effects of assignments of claims (“the Council General Approach” or “the proposal”). The text adopted by the Council has introduced some important amendments to the Commission’s Proposal of 12 March 2018 (COM (2018) 96 final).
Scope of application
The proposal lays down universal conflict of laws rules on the law applicable to the third-party effects of voluntarily assignments of claims and contractual subrogation (articles 1-3). The term ‘claims’ is very broad and includes monetary and non-monetary, contractual and non-contractual, existing and future obligations (article 2(d) and recital 16i).
Regarding its material scope of application, the main amendments introduced by the Council concern financial instruments, crypto-assets and secured claims.
The General Approach has (presumably) clarified and broadened the exclusion of financial instruments and securities. The proposal now distinguishes between (i) financial instruments as such, (ii) and claims arising from these instruments. The transfer or assignment, including by way of security, of all these instruments as such is excluded from the scope of application of the proposal (see article 1.1a, recital 16a). Furthermore, the Council General Approach also clarifies that it does not apply to the assignment of claims arising from transferable securities, units in collective investment undertakings and money-market instruments, even if they are assigned in immaterial form, which is legally possible is certain jurisdictions (see article 1.2 (g) and (h), and recitals 16,16a,16b, 16c, and 16d). Conversely, the proposal applies to claims deriving from financials instruments other than transferable securities, money-market instruments and units in collective investment undertakings (see article 4.2). Therefore, it does not apply to the transfer of a swap (a contract) or an option, but it does apply to the assignment of the payment netting amounts or the close-out netting amount arising from such a swap or the cash settlement amount that may arise from the exercise of the option (see recital 27 and for emission allowances recital 16f).
The Council General Approach has also excluded the transfer of crypto-assets, irrespective of whether they qualify as financial instruments or not (see article 1.1ab, recital 16a in fine). But it does apply to claims arising from crypto-assets with the exceptions of those that qualify as transferable securities, money-market instruments and units in collective investment undertakings (see recital 16bis). This solution replicates the same solution applied to financial instruments and is consistent with the technology-neutral approach underlying the proposal (see recital 16bis).
The Council General Approach has also sought to clarify its application to claims secured by a tangible asset (e.g. an immovable property). The proposal applies to the assignment of claims, even if they are secured by a security right over a tangible asset, e.g. a pledge or a mortgage (see recital 16aa). However, it does not apply to the transfer of the security right (e.g. the mortgage), nor does it apply to the consequences of failing to comply with the requirements of the lex rei sitae for the resolution of a priority conflict over the secured claim (article 1.1.aa, and recitals 16aa, 16aaa and 16ab). Thus, for example, where under the law of the State where the immovable property is situated or under the authority of which the register is maintained, compliance with certain form or registration requirements for the effectiveness of the transfer of the security right is also required for the assignee to acquire title over the claim itself, the proposal should not apply to the effects of complying or failing to comply with any these requirements when resolving priority conflicts over the secured claim (see recitals 16ii and 16ab).
Finally, as regards its application in time, the Council General Approach has clarified that the proposal only applies to assignments based on contracts concluded on or after the date of application (see article 14). Recital 33b suggests that, unlike the Commission Proposal, it does not apply to a priority conflict between two assignments, one prior to the application of the Regulation and one under the Regulation.
Applicable law: main rule
In line with the Commission proposal, the Council General Approach maintains the law of the assignor’s habitual residence as the general rule and the law of the assigned claim as the special rule (note, however, that the reference to collateral arrangements in recital 19 as part of the justification for this option is misleading, as they now will be covered by the special rule, infra). As for the general rule, the Council General Approach has linked the relevant time for determining the assignor’s habitual residence to the conclusion of the assignment contract, not to the time when the assignment becomes effective against third parties (this is consistent with the Parliament’s report, infra).
However, the most relevant amend concerns the special rule. With good reasons, the Council has considerably broadened the number of cases in which the special rule must be applied. Whereas the Commission proposal only included under this rule the assignment of cash accounts and claims arising from financial instrument, the Council General Approach also includes, in addition to others (e.g. e-money accounts or claims arising from crypto-assets), all claims arising out of a loan (“agreements whereby credit is granted in the form of a loan”, see article 4.2 (d)). All loans are now covered by the special rule, i.e. the application of the law governing the assigned claim, so that its relevance in practice has grown exponentially. In fact, it is quantitatively much more important than the general rule. It covers, for example, non-performing loans, syndicated loans, company and intra-group lending or lending-based crowdfunding (see recital 27b). Certain transactions may, however, be difficult to qualify, e.g. the financial leases.
Alongside this important change, the Council General Approach has included new recitals that seek to clarify the identification of the law governing the assigned claim in relation to financial instruments, in particular concluded in financial market infrastructures and systems (recitals 27a, 27i, 27ii and 27a). Unfortunately, the wording of some parts of these recitals is not always clear and easily understandable.
Finally, and also in line with the structure of the Commission proposal, the Council General Approach maintains the possibility to choose between the law of the assignor’s habitual residence and the law of the assigned claim for securitisation. The aim of this flexibility is not to affect the current practice of large operators and, at the same time, to facilitate the expansion of the cross-border securitisation market to smaller operators. The Council has limited itself to including covered bonds within the application of this rule (see Article 4.3 and recital 28); and, as a corollary of the expansion of the special rule, has clarified that the choice of law applies to both cases, i.e. where the default rule is the law of the assignor and where the default rule is the law of the assigned claim, depending on the nature of the claims to be securitised (Article 4.3)
Scope of the applicable law and other provisions
As regards the scope of the applicable law, the text approved by the Council has excluded priority conflicts involving novation (see article 2, recital 17). The final picture may be questionable from a functional perspective. On the one hand, the proposal does not apply to “transfers of contracts, in which both rights and obligations are included, or the novation of contracts including such rights and obligations” (article 2 (c)). And it does not apply to a priority conflict involving novation. But, on the other hand, it does apply to a priority conflict involving the same claim which has been assigned independently and also “as a result of the transfer of the contract from which the claim arises” (article 5 (d)).
As regards the final provisions, the Council General Approach has, surprisingly, modified the solution to multi-unit States and has opted for the application of the internal conflict of laws provisions as the primary rule (article 9.1), which will complicate unnecessarily the practical application of the future regulation, in particular when the internal conflict of laws are ambiguous or take a different approach.
The European Parliament adopted its first-reading position, which included 24 amendments to the Commission’s Proposal, on 13 February 2019. The proposal will therefore now enter the trilogue phase and will probably be adopted by the end of this year. This will be the culmination of a longstanding project aimed at establishing a common framework in the EU on the law applicable to the third party effects of assignments of claims, following the failure to achieve this objective in the context of the Rome I Regulation.