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Credit claims to qualify as financial collateral - Legal Newsletter

 

Legal Newsletter - Credit claims to qualify as financial collateral
Legal Newsletter - Credit claims to qualify as financial collateral

The introduction of credit claims as eligible collateral in financial collateral arrangements

Amendments and supplements to the Financial Collateral Agreements Act (the “Act”) will enter into force on 30 June 2011, the aim of which will be to transpose into the Bulgarian law the provisions of Directive 2009/44/EC of the European Parliament and of the Council of 6 May 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims (“Directive 2009/44/EC”).

Among the main amendments to the Act is the introduction of credit claims as eligible collateral in financial collateral arrangements.

According to the Act, a credit claim is a debt due to a credit institution arising from a loan it has made. It is interesting to note that all credit claims are covered and that Bulgaria has not exercised the right in Directive 2009/44/EC to exclude credit claims due by consumers and micro and small businesses.

Provision of credit claims as financial collateral

The Act introduces a facilitated regime for the provision of credit claims as financial collateral. The inclusion of a credit claim in a list delivered to the collateral taker in a written form (which includes recording by electronic means) is sufficient for the specification of the receivable and proving its provision as financial collateral between the parties, in respect of the debtor and any third party.

In accordance with the general principles of assignment of receivables (article 99 et seq. of the Obligations and Contracts Act) the provision of credit claims as financial collateral will have effect for the debtor and any third party after being communicated to the debtor. There are no other requirements to be fulfilled for the provision of credit claims as financial collateral.

Facilitation for the collateral taker

In accordance with the provisions of Directive 2009/44/EC, in order not to compromise the position of collateral takers the Act provides that debtors are able to validly waive in writing (i) their set-off rights vis-à-vis creditors and persons in whose favour the creditor has transferred, pledged or in other way has provided the claim as a guarantee; (ii) their rights based on bank secrecy rules because the application of these rules may impede or limit the ability of the collateral provider to present information about the credit claim or the debtor for the purposes of using the credit claim as financial collateral.

Obviously, these rules aim to facilitate the collateral takers and to prevent risks for them (for example, of lack of sufficient information for proper assessment of the value of the collateral and the potential for it to become less liquid). On the other hand, debtors may choose not to waive their rights which would make the credit claims less attractive as collateral.

Consumer credit agreements

The use of consumer credits as financial collateral should be in compliance with the requirements of the Consumer Credit Act including with regard to the provision of information to consumers about the consequences which will arise for them from the use of credits granted to them as financial collateral.

Protection of collateral provider’s interests

Apart from the provisions which aim to facilitate the collateral takers, the Act contains provisions which aim to protect the interests of collateral providers. For example, the use of a credit claim as financial collateral does not prejudice the operation or effect of the contractual terms of this claim such as rights, obligations or other conditions agreed between the creditor of such credit claim and the debtor.

An exception is introduced for the collateral taker from the possibility to exercise right of use over the credit claim which has been pledged in his favour. In order words, in case a credit claim is pledged, the right of use over this claim in favour of the collateral taker (e.g. the right of the collateral taker to use and deal with the credit claim as if it were the owner of that claim) may not be agreed (thereby preventing the risk for the credit claim to be rehypothecated by the collateral taker, among others).

In addition, the Act does not exclude the possibility for the parties to agree about the right of the collateral provider to substitute the credit claim given as collateral, to withdraw any amount exceeding the necessary collateral or to collect the proceeds from the credit claim without such actions to make the collateral invalid or affect the rights granted to the collateral taker.

Enforcement of the collateral

There are provisions introduced which aim to guarantee the efficiency of the agreements about provision of credit claims as financial collateral. For example, if a credit claim is pledged, the collateral taker in the event of default and in compliance with the terms of the pledge agreement has the right without court intervention to sell or acquire the credit claim by setting off its value against, or applying its value in discharge of, the relevant financial obligation guaranteed by the pledge agreement. The collateral taker has this right also in case of termination proceedings against the collateral provider.

According to the amended Act, a netting arrangement would be applicable in any case of non-performance of financial obligations including those guaranteed by provision of credit claims as financial collateral.

Conclusion

The provision of credit claims as financial collateral is a new and interesting possibility in the Bulgarian legislation, the introduction of which is in compliance with the purpose of Directive 2009/44/ЕC to increase the pool of available financial collateral and to guarantee the interests of both collateral takers and collateral providers when it is used in practice. Taking into account the facilitated use of credit claims as financial collateral according to the Act, it is a matter of time that this new possibility is introduced into the banking practice.

 

Credit claims to qualify as financial collateral - Legal Newsletter