European Union: One Step Forward, Two Steps Back – Proposed EU Regulation Impacting Cross-Border Receivables Financing

Last Updated: 18 June 2018
Article by Dominic Griffiths, Alex Dell, Merryn Craske and Charles Thain

 We recently submitted to the European Commission (the "Commission") our response to its proposed EU regulation on the law applicable to the third-party effects of assignments of claims. Whilst welcoming this long-awaited attempt to plug a gap left by the Rome I regulation, we have identified some serious problems with the Commission's proposal – so serious that, in our view, unless they are sorted out it would be better to leave things as they are, unplugged gap and all. You can find our response to the Commission here.

One step forward

Starting with the good news, the proposed regulation seeks to fill the gap left by current EU legislation on conf lict of laws rules for securitisations and other receivables financing transactions.

At the heart of most of these transactions is an assignment of the receivables to an SPV or the financier. In cross-border deals, it is crucial to know which laws will govern the various questions which arise in relation to these assignments. The 2008 EU regulation known as "Rome I" attempted to provide clarity in this area. It divided the relevant questions into three aspects and provided common conf lict of law rules for two of them:

  • Relationship between assignor and assignee – Article 14(1): determined by the law they choose to govern the assignment.
  • Issues between assignee and debtor and assignability of the receivables – Article 14(2): determined by the law governing the receivable.
  • Impact on third parties and questions of priorities of competing assignees – Article 27(2): no agreement reached, so left for further consideration.

 After 10 years of stop-start consultation on this third set of questions, the Commission is at last proposing its solution to this third aspect:

  • Generally, "third-party effects", including priority questions, are to be governed by the law of the country of the assignor's habitual residence (for a corporate, broadly similar to its "centre of main interests" for EU Insolvency Regulation purposes).
  • However, the law governing the receivable will govern these questions regarding cash credited to bank accounts and claims arising from financial instruments such as derivative contracts.
  • In addition, parties to securitisation transactions can decide to have these questions governed by the law governing the receivable instead (the "securitisation option").

The proposed solution is far from perfect. For example, there are irritating drafting glitches (such as the inexplicable absence of a definition of "securitisation"); and it is not clear why the securitisation option is not extended to other types of transactions (such as buyer-centric supply chain financing) where this could serve to achieve the stated aim of increasing cross-border transactions involving the assignment of receivables. However, especially if these deficiencies can be corrected, we welcome as a step forward the provision of clarity as to the appropriate governing laws for this third aspect.

Two steps back

Unfortunately, that's where the good news ends. In its current form, the proposed regulation would create more uncertainty than it resolves and will make structuring transactions harder, rather than easier. In particular, in our view it would limit the circumstances in which a receivables sale/purchase agreement with a single governing law (a "single law RPA") can be used for transactions including multi-jurisdictional receivables and originators/sellers.

In order to work, a single law RPA structure needs to navigate two obstacles. The proposed regulation would make life more difficult in respect of both of them.

The first obstacle is the need to ensure that an assignment of multi-jurisdictional receivables under a single law RPA will be treated in each relevant jurisdiction as working properly between assignor and assignee. Can the assignee rely on it being a valid assignment? Is it a "true sale" (i.e. an outright disposal), rather than a disguised security interest? In other words, has the assignee got what it is paying for? Under Article 14(1) of Rome I, the assignor-assignee relationship is governed by the law that applies to the contract between them. So these assignor-assignee questions (both contractual and proprietary) are ones for that governing law. This is why we, along with lawyers in various EU jurisdictions, have concluded that single law RPAs can work under Rome I as it stands.

If the proposed regulation comes into effect as currently drafted, this growing consensus would be replaced by considerable confusion. The proposed regulation baldly asserts in a recital that Rome I deals only with the contractual, rather than the proprietary, aspects of assignments, making no mention of the clear intention to the contrary stated in the recitals of Rome I. Another recital in the proposed regulation indicates that the new conflict of law rules which it will establish are intended to govern all proprietary effects of assignments of claims, including as between assignor and assignee and as between assignee and debtor. However, there is nothing in the operative provisions to put this into effect or to amend the relevant provisions of Rome I to allow for this change.

We find it next to impossible to make sense of this muddled thinking and inconsistent drafting. This is why in our response to the proposed regulation, we asked the Commission to delete the offending recitals and make clear in the new regulation that the assignor-assignee and assignee-debtor position (both contractual and proprietary) under Rome I is not intended to be affected.

The second obstacle to be navigated by a single law RPA structure is the need to ensure that an assignment of receivables by originators/sellers from more than one jurisdiction under a single law RPA will be binding in an insolvency of each originator/seller.

In the period which has elapsed since Rome I, there has been significant debate about whether liquidators and other insolvency appointees should be treated as "third parties" in the context of Article 27(2). We have consistently argued that they should not and that the effect of an assignment of a receivable vis-à-vis a liquidator or other insolvency appointee of the assignor should fall within the scope of Article 14(1) of Rome I. This would avoid the bizarre situation where a sale is effective against the assignor one day but may not be effective against its liquidator or other insolvency appointee the following day. Although the position is not made clear in the operative provisions of the proposed regulation, unfortunately it appears from the explanatory memorandum and a recital in the proposed regulation that the Commission disagrees and has decided to treat them as third parties for this purpose. This policy decision is regrettable. The resulting additional due diligence will make single law RPA structures less attractive for transactions involving multi-jurisdictional originators/sellers unless the financier or SPV is being protected in other ways from the risk of originator/supplier insolvency.

It is hoped that the proposed regulation will be clarified in order to resolve the above issues, without which it may not achieve its objective of increasing cross-border receivables financing transactions.

Mayer Brown has market-leading expertise in relation to, and extensive experience of, cross-border receivables financing transactions and securitisations.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions