regulation on third party effects of assignment of claims

Assignment of claims

The European Commission proposes to harmonise conflict of laws rules on the third-party effects of assignment of claims

When claims are assigned across borders, it's not always easy for investors, credit providers and other market participants to know which national law applies to determine who owns the assigned claims. Different national rules about the third-party (or ownership) effects of assignments of claims complicate the use of claims as collateral and make it difficult for investors to price the risk of debt investments.

Removing legal uncertainties about the ownership of claims after they have been assigned on a cross-border basis is important for the assignor and the assignee of the claims. However, it is also essential for market participants who are not party to the assignment but who interact with any of the parties and need certainty about who has legal title over the assigned claims.

Commission initiatives

The  Action plan on building a capital markets union , adopted by the Commission in September 2015, envisaged targeted action on securities ownership rules and third-party effects of assignments of claims.

In order to consult all interested parties, in February 2017 the Commission published an  inception impact assessment  providing an overview of the problems to be addressed and the possible solutions.

In April 2017, the Commission launched a public consultation ( consultation on conflict of laws rules for third party effects of transactions in securities and claims ) and established an Expert group on conflict of laws regarding securities and claims. The members of the Expert group assisted the Commission by providing specialist advice on private international law and financial markets as a sound basis for policymaking.

On 12 March 2018, the Commission proposed the adoption of common conflict of laws rules on the third-party effects of assignments of claims . The proposal provides that, as a rule, the law of the country where the assignor has its habitual residence will govern the third-party effects of the assignment of claims. As an exception, the law of the assigned claim will govern the third-party effects of the assignment of specific claims. By introducing legal certainty, the new rules will promote cross-border investment, enhance access to credit and contribute to market integration. The proposal, which deals with the law applicable to the ownership questions of assignments of claims, complements the rules in the Rome I Regulation , which deal with the law applicable to the contractual questions of assignments of claims.

Previous work in relation to claims

The question of the third-party effects of assignments of claims was raised when the  Rome Convention  was being transformed into the Rome I Regulation ( Regulation (EC) No 593/2008 ). The Rome I Regulation did not address the issue, but required the Commission to prepare a report on the matter. To that effect, the Commission asked the British Institute of International and Comparative Law (BIICL) to carry out a study and the Commission presented its report in September 2016

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Article Contents

• Introduction
• I. The importance of a coordinated approach
• II. Scope of application
• III. Matters covered
• IV. Applicable law: main rule
• V. Applicable law: special rule for the assignment of claims arising from deposit accounts and financial instruments
• VI. Applicable law: special rule for the assignment of claims in securitization transactions
• VII. Applicable law: special rule for assignments of claims with respect to which the matters governed may be referred to more than one law
• VIII. Public policy and mandatory rules
• IX. Conclusions
• < Previous

The law applicable to third-party effects of assignments of claims: the UN Convention and the EU Commission Proposal compared

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Spyridon V Bazinas, The law applicable to third-party effects of assignments of claims: the UN Convention and the EU Commission Proposal compared, Uniform Law Review , Volume 24, Issue 4, December 2019, Pages 609–632, https://doi.org/10.1093/ulr/unz032

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In October 2019, the U.S. ratified the United Nations Convention on the Assignment of Receivables in International Trade (the “Convention”) by the US, thus creating a new impetus for the broad adoption and entry into force of the Convention and with that for the facilitation of international receivables finance. In March 2018, the E.U. Commission issued a Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the third-party effects of assignments of claims (the “Commission Proposal” or “Proposal”). The Commission Proposal includes a first draft of the proposed Regulation (the “draft Regulation”). An alignment of the main rule of the draft Regulation with the equivalent rule in the Convention could result in an internationally uniform conflict-of-laws rule on this matter, which would remove the legal divergences existing among legal systems and reduce the uncertainty as to the law applicable to the third-party effects of assignments of claims. The purpose of this article is to compare the relevant rules of the Convention and the draft Regulation, determine whether this coordinated approach is achieved and, if not, make suggestions as to how it can be achieved to the benefit of all parties involved in international receivables finance.

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EU Council to Vote on Regulation on Third Party Effects of Assignment of Claims

The text which should be adopted is an amended version of the 2018 proposal of the European Commission for a Regulation on the law applicable to the third-party effects of assignments of claims, which was adopted by the European Parliament  in 2019 with 24 amendments.

The main features of the new  text  are as follows.

Law of the Habitual Residence of the Assignor

One of the most debated issues was whether the principle should be that third party effects of assignment of claims should be governed by the law of the habitual residence of the assignor or the law of the assigned claim. The Commission had proposed to retain the former, with certain exceptions.

In line with the Commission proposal, the law of the assignor’s habitual residence received more support than the assigned-claim law as it would lead to more predictability for third parties. The law of the assignor’s habitual residence was deemed suitable for bulk assignments subject to different laws and future claims and consistent with Regulation (EU) 2015/848 (Insolvency Regulation).

Law of the Assigned Claim

The list of exceptions, however, has slightly increased. The law of the assigned claim would apply to a longer list of claims in financial markets, but also to credit claims. This last exception will not doubt be criticised. Recital 27(b) clarifies its scope, which seems extensive:

The third-party effects of assignments of claims arising out of agreements whereby credit is granted in the form of a loan should be governed by the law of the assigned claim. This should include credit claims as defined in point (o) of Article 2(1) of Directive 2002/47, often used as financial collateral within the Eurosystem. In order to facilitate the cross-border assignment of claims arising out of syndicated loans and lending-based crowdfunding on secondary financial markets, the third-party effects of the assignment of claims arising out of syndicated loans and lending-based crowdfunding should also be subject to the law of the assigned claim.

It was also thought that the scope of the instrument should be further clarified and restricted. In particular, three matters are excluded from the scope of the future regulation:

– the transfer of financial instruments, including securities and derivatives; – the transfer of crypto-assets; and – the assignment of claims where the claims are not in intangible form but incorporated in a certificate or represented by a book entry.

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CONTACT US Association Européenne de droit international privé European Association of Private International Law 4 Rue Alphonse Weicker, L-2721 Luxembourg

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Follow the steps of procedure 2018/0044/COD

First reading, european parliament, council of the european union, european central bank, economic and social committee, european commission.

Assignment of claims and securities ownership

In “Legal Affairs - JURI”

Legislative

MID-TERM REVIEW OF THE CAPITAL MARKETS UNION ACTION PLAN

In the spotlight:

2018/0044(COD)

Consultative bodies:

Rapporteur(s)

Pavel SVOBODA

Discover more

• Framework for an EU personal pension product (Pan European Personal Pension - PEPP)
• European crowdfunding service providers (ECSP) for business
• LOW CARBON BENCHMARKS AND POSITIVE CARBON IMPACT BENCHMARKS

In contract law, a claim gives a person (the creditor) the right to receive a sum of money or to obtain the performance of an obligation by another person (the debtor). According to the Commission, claims can be classified in three categories:

• 'traditional claims' or receivables. If a retailer sells a product on credit, the product is acquired by the customer but the payment will only come in the future. This money to be received by the company is a traditional claim;
• claims arising from financial instruments (sometimes referred to as 'financial claims'). An investor buying a company's bond, obtains the right to either fixed or variable instalments on a specific date or dates. The investor has a financial claim; and
• cash credited to an account in a bank. An account holder depositing money in a bank (the creditor) has a claim against the bank (the debtor).

An assignment is a transfer of property or ownership rights from one person to another. The assignment of a claim is a mechanism, allowing a creditor, the assignor, to transfer his right to claim a debt to another person, the assignee. This mechanism is used by companies to obtain liquidity (factoring), gain access to credit (collateralisation), or optimise the use of their capital (securitisation).

The proprietary elements or third-party effects of an assignment of claims refer in general to who has ownership rights over a claim and, in particular, to (i) which requirements must be fulfilled by the assignee in order to ensure that the assignee acquires legal title over the claim after the assignment (for example, registration of the assignment in a public register, written notification of the assignment to the debtor), and (ii) how to resolve priority conflicts, that is, conflicts between several competing claimants as to who owns the claim after a cross-border assignment (for example, between two assignees where the same claim has been assigned twice, or between an assignee and a creditor of the assignor in the event of an insolvency).

The Commission proposal concerns the third-party (or proprietary) effects of the assignment of the above-mentioned claims. It does not cover the transfer of the contracts (for example derivative contracts), in which both rights (or claims) and obligations are included, or the novation of contracts including such rights and obligations.

On 11 July 2018, the European Economic and Social Committee adopted in plenary its Opinion on the Commission proposal. The Opinion was published on 25 July.

The JURI Committee in the European Parliament appointed Pavel Svoboda (EPP, Czech Republic) as rapporteur for the file. On 3 May 2018, the committee draft report was published. On 4 June, amendments were tabled. On 10 July, the report was adopted by the Committee and the decision was taken to start interinstitutional negotiations. On 17 July, the report was tabled for plenary. It was adopted in plenary on 13 February 2019.

The report concludes that

• The conflict of laws rules laid down in the regulation should govern the effects of assignments of claims in respect of third parties, for example, a creditor of the assignor, excluding the debtor.
• Regulation (EU) 2015/848 on insolvency proceedings contains rules relating to applicable law. For that reason, assignments done in the course of a collective proceeding according to that regulation should be excluded from the scope of application of this Regulation. 
• The third-party effects of an assignment shall be governed by the law of the country in which the assignor has its habitual residence at the time of the conclusion of the assignment contract.
• The overriding mandatory provisions shall apply to the law of the Member State where the assignment has to be or has been performed, insofar as those overriding mandatory provisions render the performance of the assignment contract unlawful.

Some provisions were deleted, especially those providing that the assignor and the assignee may choose the law applicable to the assigned claim as the law applicable to the third-party effects of an assignment of claims in view of a securitisation.

On 7 June 2021, the Council  approved mandate for negotiations.  The Council agrees that the law of the country where creditors ('assignors') have their habitual residence would apply regardless of which member state's courts or authorities examine the case,. Nevertheless, for certain assignments in the text, such as the assignment of cash claims and claims in financial markets, the Council concluded that the law of the assigned claim would be more suitable.

Interinstitutional trilogue negotiations are ongoing.

References:

• EP Legislative Observatory, Law applicable to the third-party effects of assignments of claims, 2018/0044 (COD)
• European Commission, Proposal for a Regulation on the law applicable to the third-party effects of assignments of claims , COM(2018)0096
• European Economic and Social Committee, Opinion on the Commission proposals COM(2018) 92 final, COM(2018) 96 final and COM(2018) 110 final
• Council of the European Union - General Approach .

Further reading:

• European Parliament, EPRS, Law applicable to the third-party effects of assignments of claims , Briefing, September 2022.

Author: Issam Hallak, Members' Research Service, [email protected]

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