Security Enforcement - English High Court Guidance On The Appropriation Of Collateral Under The Financial Collateral Regulations

• Published date: 21 December 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Financial Services, Financial Restructuring
• Law Firm: Mayer Brown
• Author: Ms Alexandra Wood and Amy Rothbarth

Summary

The English High Court¹ has upheld a collateral-taker's appropriation of shares under the Financial Collateral Arrangements (No 2) Regulations 2003 (the "FCARs"), rejecting arguments raised by the collateral-provider. The shares were the subject of a share charge in favour of the collateral-taker which constituted a "security financial collateral arrangement" under the FCARs. The collateral-taker had enforced the share charge by appropriating the shares.

What is appropriation?

The FCARs implement into English law Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements. The FCARs introduced the concept of "a security financial collateral arrangement" (where a security interest is granted in the financial collateral) and the self-help remedy of appropriation (which a collateral-taker may exercise without a Court order).

Pursuant to Articles 17 and 18 of the FCARs, where a security interest is created or arises under a security financial collateral arrangement on terms that include a power for the collateral-taker to appropriate the financial collateral, the collateral-taker may exercise that power in accordance with the terms of the security financial collateral arrangement, without any order for foreclosure from the courts. The power to appropriate is subject to a duty on the collateral-taker to value the collateral and account for the difference if the value of the collateral exceeds the relevant secured financial obligations. The collateral-taker must value the financial collateral in accordance with the terms of the arrangement and in any event in a commercially reasonable manner. The FCARs do not provide any guidance as to what is meant by "commercially reasonable" in this context.

In this decision, the High Court considered and gave guidance on the requirement that the valuation of the financial collateral (the shares, in this case) be carried out in a commercially reasonable manner.

The Judgment

The Judge confirmed that all that was required pursuant to Regulation 18(1) of the FCARs was that: the valuation which was carried out was done in a commercially reasonable manner; and that such commercially reasonable manner was one that is permitted by (ie, 'in accordance with') the terms of the arrangement.

The requirement in Regulation 18(1) that the valuation to be conducted in a commercially reasonable manner enabled the court to review the valuation after the event. However, compliance with this requirement was not a...