Can Your Security Benefit From The Financial Collateral Arrangements Regulations 2003 - A Whistle-Stop Tour

Summary

This brief note examines, in outline, some of the major advantages in having security 'caught' by the provisions of the FCAR and then examines recent judicial commentary and case-law as to what type of security can benefit from the advantageous exemptions detailed in the FCAR.

Background

The FCAR came into force on 26 December 2003. The purpose of the FCA Directive was to simplify the process of taking financial collateral across the EU by introducing a minimum uniform legal framework.

Advantages

If your security complies with the criteria as stipulated in the FCARs (detailed below) then the following, amongst a number of other advantages, apply:

There is no requirement to register a charge under section 860 of the Companies Act 2006 (charges created by a company) and section 874 (consequence of failure to register charges created by a company) does not apply. Paragraph 42(3) of Schedule B1 to the Insolvency Act 1986 ("IA") (restriction on enforcement of security) does not apply. This means that neither the consent of the administrator nor the permission of the court is required to enforce such a security interest. Paragraph 65(2) of Schedule B1 to the IA 1986 (distribution) is disapplied. This paragraph means that, in an administration, a company's preferential creditors will not be paid in priority to the claims of a floating charge holder, if that floating charge is created or otherwise arises under a financial collateral arrangement. Criteria

In brief, the FCARs apply to:

Financial collateral which is defined as cash, financial instruments or credit claims; Financial collateral arrangements which is defined as a security financial collateral arrangement or a title transfer financial collateral arrangement (this note only examines security financial arrangements); Under the definitions (for both type of arrangements):

1. The arrangement must be evidenced in writing.

2. The collateral-provider and the collateral-taker must both be non-natural persons.

security financial collateral arrangements which are arrangements that have both of the following features: The collateral-provider creates, or there arises, a security interest over financial collateral to secure amounts owed to the collateral-taker

The financial collateral is delivered, transferred, held, registered or otherwise designated so as to be in the possession or under the control of the collateral-taker or a person acting on its behalf. Any right of the...