assignment of claim plc

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40 U.S.C. 121(c) ; 10 U.S.C. chapter 4 and 10 U.S.C. chapter 137 legacy provisions (see 10 U.S.C. 3016 ); and 51 U.S.C. 20113 .

48 FR 42328 , Sept. 19, 1983, unless otherwise noted.

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Subpart 32.8—assignment of claims, 32.800 scope of subpart..

This subpart prescribes policies and procedures for the assignment of claims under the Assignment of Claims Act of 1940, as amended, ( 31 U.S.C. 3727 , 41 U.S.C. 6305 ) (hereafter referred to as the Act ).

[ 48 FR 42328 , Sept. 19, 1983, as amended at 51 FR 2665 , Jan. 17, 1986; 79 FR 24212 , Apr. 29, 2014]

32.801 Definitions.

Designated agency, as used in this subpart, means any department or agency of the executive branch of the United States Government (see 32.803(d)).

No-setoff commitment, as used in this subpart, means a contractual undertaking that, to the extent permitted by the Act, payments by the designated agency to the assignee under an assignment of claims will not be reduced to liquidate the indebtedness of the contractor to the Government.

[ 48 FR 42328 , Sept. 19, 1983, as amended at 60 FR 49730 , Sept. 26, 1995; 66 FR 2132 , Jan. 10, 2001]

32.802 Conditions.

Under the Assignment of Claims Act, a contractor may assign moneys due or to become due under a contract if all the following conditions are met:

( a ) The contract specifies payments aggregating $1,000 or more.

( b ) The assignment is made to a bank, trust company, or other financing institution, including any Federal lending agency.

( c ) The contract does not prohibit the assignment.

( d ) Unless otherwise expressly permitted in the contract, the assignment—

( 1 ) Covers all unpaid amounts payable under the contract;

( 2 ) Is made only to one party, except that any assignment may be made to one party as agent or trustee for two or more parties participating in the financing of the contract; and

( 3 ) Is not subject to further assignment.

( e ) The assignee sends a written notice of assignment together with a true copy of the assignment instrument to the—

( 1 ) Contracting officer or the agency head;

( 2 ) Surety on any bond applicable to the contract; and

( 3 ) Disbursing officer designated in the contract to make payment.

32.803 Policies.

( a ) Any assignment of claims that has been made under the Act to any type of financing institution listed in 32.802(b) may thereafter be further assigned and reassigned to any such institution if the conditions in 32.802(d) and (e) continue to be met.

( b ) A contract may prohibit the assignment of claims if the agency determines the prohibition to be in the Government's interest.

( c ) Under a requirements or indefinite quantity type contract that authorizes ordering and payment by multiple Government activities, amounts due for individual orders for $1,000 or more may be assigned.

( d ) Any contract of a designated agency (see FAR 32.801), except a contract under which full payment has been made, may include a no-setoff commitment only when a determination of need is made by the head of the agency, in accordance with the Presidential delegation of authority dated October 3, 1995, and after such determination has been published in the Federal Register. The Presidential delegation makes such determinations of need subject to further guidance issued by the Office of Federal Procurement Policy. The following guidance has been provided: Use of the no-setoff provision may be appropriate to facilitate the national defense; in the event of a national emergency or natural disaster; or when the use of the no-setoff provision may facilitate private financing of contract performance. However, in the event an offeror is significantly indebted to the United States, the contracting officer should consider whether the inclusion of the no-setoff commitment in a particular contract is in the best interests of the United States. In such an event, the contracting officer should consult with the Government officer(s) responsible for collecting the debt(s).

( e ) When an assigned contract does not include a no-setoff commitment, the Government may apply against payments to the assignee any liability of the contractor to the Government arising independently of the assigned contract if the liability existed at the time notice of the assignment was received even though that liability had not yet matured so as to be due and payable.

[ 48 FR 42328 , Sept. 19, 1983, as amended at 60 FR 49730 , Sept. 26, 1995; 61 FR 18921 , Apr. 29, 1996]

32.804 Extent of assignee's protection.

( a ) No payments made by the Government to the assignee under any contract assigned in accordance with the Act may be recovered on account of any liability of the contractor to the Government. This immunity of the assignee is effective whether the contractor's liability arises from or independently of the assigned contract.

( b ) Except as provided in paragraph (c) below, the inclusion of a no-setoff commitment in an assigned contract entitles the assignee to receive contract payments free of reduction or setoff for—

( 1 ) Any liability of the contractor to the Government arising independently of the contract; and

( 2 ) Any of the following liabilities of the contractor to the Government arising from the assigned contract:

( i ) Renegotiation under any statute or contract clause.

( ii ) Fines.

( iii ) Penalties, exclusive of amounts that may be collected or witheld from the contractor under, or for failure to comply with, the terms of the contract.

( iv ) Taxes or social security contributions.

( v ) Withholding or nonwithholding of taxes or social security contributions.

( c ) In some circumstances, a setoff may be appropriate even though the assigned contract includes a no-setoff commitment, e.g.—

( 1 ) When the assignee has neither made a loan under the assignment nor made a commitment to do so; or

( 2 ) To the extent that the amount due on the contract exceeds the amount of any loans made or expected to be made under a firm commitment for financing.

32.805 Procedure.

( a ) Assignments.

( 1 ) Assignments by corporations shall be—

( i ) Executed by an authorized representative;

( ii ) Attested by the secretary or the assistant secretary of the corporation; and

( iii ) Impressed with the corporate seal or accompanied by a true copy of the resolution of the corporation's board of directors authorizing the signing representative to execute the assignment.

( 2 ) Assignments by a partnership may be signed by one partner, if the assignment is accompanied by adequate evidence that the signer is a general partner of the partnership and is authorized to execute assignments on behalf of the partnership.

( 3 ) Assignments by an individual shall be signed by that individual and the signature acknowledged before a notary public or other person authorized to administer oaths.

( b ) Filing. The assignee shall forward to each party specified in 32.802(e) an original and three copies of the notice of assignment, together with one true copy of the instrument of assignment. The true copy shall be a certified duplicate or photostat copy of the original assignment.

( c ) Format for notice of assignment. The following is a suggested format for use by an assignee in providing the notice of assignment required by 32.802(e).

Notice of Assignment

TO: __________ [ address to one of the parties specified in 32.802(e) ].

This has reference to Contract No. ______ dated ______, entered into between ________ [ contractor's name and address ] and ________ [ government agency, name of office, and address ], for ________ [ describe nature of the contract ].

Moneys due or to become due under the contract described above have been assigned to the undersigned under the provisions of the Assignment of Claims Act of 1940, as amended, ( 31 U.S.C. 3727 , 41 U.S.C. 6305 ).

A true copy of the instrument of assignment executed by the Contractor on ________ [ date ], is attached to the original notice.

Payments due or to become due under this contract should be made to the undersigned assignee.

Please return to the undersigned the three enclosed copies of this notice with appropriate notations showing the date and hour of receipt, and signed by the person acknowledging receipt on behalf of the addressee.

Very truly yours,

[ name of assignee ]

[ signature of signing officer

[ title of signing officer ]

[ address of assignee ]

Acknowledgement

Receipt is acknowledged of the above notice and of a copy of the instrument of assignment. They were received at ____ (a.m.) (p.m.) on ________, 20____.

[ signature ]

On behalf of

[ name of addressee of this notice ]

( d ) Examination by the Government. In examining and processing notices of assignment and before acknowleging their receipt, contracting officers should assure that the following conditions and any additional conditions specified in agency regulations, have been met:

( 1 ) The contract has been properly approved and executed.

( 2 ) The contract is one under which claims may be assigned.

( 3 ) The assignment covers only money due or to become due under the contract.

( 4 ) The assignee is registered separately in the System for Award Management unless one of the exceptions in 4.1102 applies.

( e ) Release of assignment.

( 1 ) A release of an assignment is required whenever—

( i ) There has been a further assignment or reassignment under the Act; or

( ii ) The contractor wishes to reestablish its right to receive further payments after the contractor's obligations to the assignee have been satisfied and a balance remains due under the contract.

( 2 ) The assignee, under a further assignment or reassignment, in order to establish a right to receive payment from the Government, must file with the addressees listed in 32.802(e) a—

( i ) Written notice of release of the contractor by the assigning financing institution;

( ii ) Copy of the release instrument;

( iii ) Written notice of the further assignment or reassignment; and

( iv ) Copy of the further assignment or reassignment instrument.

( 3 ) If the assignee releases the contractor from an assignment of claims under a contract, the contractor, in order to establish a right to receive payment of the balance due under the contract, must file a written notice of release together with a true copy of the release of assignment instrument with the addressees noted in 32.802(e).

( 4 ) The addressee of a notice of release of assignment or the official acting on behalf of that addressee shall acknowledge receipt of the notice.

[ 48 FR 42328 , Sept. 19, 1983, as amended at 51 FR 2665 , Jan. 17, 1986; 52 FR 9039 , Mar. 20, 1987; 62 FR 237 , Jan. 2, 1997; 64 FR 10533 , Mar. 4, 1999; 65 FR 24325 , Apr. 25, 2000; 68 FR 56673 , Oct. 1, 2003; 78 FR 37679 , June 21, 2013; 79 FR 24212 , Apr. 29, 2014]

32.806 Contract clauses.

( 1 ) The contracting officer shall insert the clause at 52.232-23, Assignment of Claims, in solicitations and contracts expected to exceed the micro-purchase threshold, unless the contract will prohibit the assignment of claims (see 32.803(b)). The use of the clause is not required for purchase orders. However, the clause may be used in purchase orders expected to exceed the micro-purchase threshold, that are accepted in writing by the contractor, if such use is consistent with agency policies and regulations.

( 2 ) If a no-setoff commitment has been authorized (see FAR 32.803(d)), the contracting officer shall use the clause with its Alternate I.

( b ) The contracting officer shall insert the clause at 52.232-24, Prohibition of Assignment of Claims, in solicitations and contracts for which a determination has been made under agency regulations that the prohibition of assignment of claims is in the Government's interest.

[ 48 FR 42328 , Sept. 19, 1983, as amended at 51 FR 2665 , Jan. 17, 1986; 60 FR 49730 , Sept. 26, 1995; 61 FR 18921 , Apr. 29, 1996]

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Assignment of Claims: A Comparative Analysis of the United Kingdom and Australia

The United Kingdom and Australia have recently implemented legislative changes to permit external administrators to assign or sell causes of action available to them. The reforms were directed at bolstering the negotiating position of external administrators, enhancing director accountability and, importantly, allowing added ‘value of [liquidators’ rights of action] to be realised’. [1]  With the benefit of almost five years of implementation in the UK and over three years in Australia, we explore key aspects of both regimes with a view to leveraging this collective experience to assist practitioners to effectively realise the value of their rights of action and maximise returns to creditors in both jurisdictions.

The assignment of claims

Put simply, the assignment of a claim involves the transfer of a cause of action from the company or its external administrator to a third party (commonly a litigation funder) for a purchase price. Following the assignment, the claim is pursued in the name of the purchaser with no requirement for further external administrator involvement (unless agreed), contribution or exposure.

What claims can be assigned?

External administrators in the UK and Australia have historically had power to dispose of a company’s property (including a cause of action) by way of assignment. The recent legislative changes further supplement this power by allowing external administrators to also assign causes of action that are conferred on them personally. Following these changes, the claims that are capable of assignment can be summarised as follows.

• United Kingdom
• Company claims, including claims available to the company prior to the date of liquidation and proceedings commenced prior to that date; and
• causes of action conferred on the external administrator by the  Insolvency Act 1986 , including fraudulent trading (England, Wales and Scotland), wrongful trading (England, Wales and Scotland), transactions at undervalue (England and Wales), preferences (England and Wales), gratuitous alienations (Scotland), unfair preferences (Scotland) and extortionate credit transactions (England, Wales and Scotland).
• Company claims, including debt claims and contractual rights to claim damages; and
• causes of action conferred on the external administrator by the  Corporation Act 2001  (Cth), including unfair preferences, uncommercial transactions, insolvent transactions, unfair loans to a company, unreasonable director-related transactions and insolvent trading claims.

It must also be noted that certain claims cannot be assigned. For example, in both the UK and Australia, it is not possible to assign causes of action under a contract that expressly prohibits assignment. In the UK, it is not possible to assign rights to appeal against the imposition of a tax liability. In Australia, a company’s un-assignable statutory cause of action (e.g. a misleading and deceptive conduct claim) cannot be assigned merely because that company is in external administration, and there is also conflicting authority on whether an external administrator is permitted to assign a claim for breach of directors’ duties.

Why assign?

The post-implementation experience in both jurisdictions supports the proposition that, as intended, assignments do improve external administrators’ ability to effectively ‘realise the value of their rights of action’ by providing them with an additional tool for the monetisation of claims. Notwithstanding the adoption of lawyers’ damages-based and contingency fee agreements in the UK and solicitors’ conditional costs agreements in Australia, there remains a significant proportion of legal claims which external administrators would ordinarily be unable to pursue due to funding and other constraints. However, with the benefit of assignment, external administrators:

• can monetise claims that were not otherwise able to be pursued and, therefore, had no value;
• by monetising claims, can distribute funds to creditors without achieving a successful outcome in the claim and without incurring the significant costs and delays associated with litigation; and
• are able to maximise returns to creditors and receive and distribute funds earlier, while mitigating risk and decreasing cost.

Consequently, the ability to assign claims leads to better outcomes for creditors, external administrators and other stakeholders.

Assignment structure

Although there are a number of ways to structure the purchase of a claim, we suggest that the following are the most commonly negotiated arrangements:

• One-off upfront payment. Such an arrangement can be reached very early in the claim’s lifecycle and has the benefit of requiring no long-term involvement from the company or the administrator. The purchase price can be distributed to creditors without delay and the administration can be closed. All future investigations and litigation are undertaken by the purchaser.
• Funding of investigations and subsequent payment (whether as ‘one-off’ as above, or ‘split’ as below). Such an arrangement allows for the claim to be investigated utilising the investigative powers of the external administrator (available in both the UK and Australia), with the benefit of funding from the purchaser. It allows the claim to be quantified and assessed prior to assignment.
• Split payment including a fixed up-front component and a contingent component payable as a share of the recovery. This arrangement allows for a sharing of risk and reward between the external administrator and the purchaser, and is particularly common in claims with an uncertain quantum.

In our experience, the ‘split payment’ structure is most commonly used in the UK, whereas in Australia the use of the above options is more evenly spread. Every claim and administration will have different characteristics which may invite a different assignment structure. Therefore, we advocate for a flexible approach to assignment negotiations. By way of illustration, an upfront payment provides certainty and eliminates risk, but at a discounted price; whereas a contingent structure shares the risk and delay but offers a potentially greater return. External administrators should consider their priorities, and that of the creditors, before settling on a preferred assignment structure.

Assignment pricing

In the absence of an active market for legal claims, an objective and transparent valuation of a claim is critical to an external administrator’s assessment of its sale price. In our experience, this is best achieved through a discounted cashflow methodology, [2]  using the anticipated cashflows from the cause of action (i.e. likely quantum of the claim or settlement), adjusted for outputs (i.e. legal costs, after-the-event insurance, security for costs, administrator’s fees), risk (i.e. litigation risk, enforcement risk) and time.

With the benefit of clear and transparent modelling, an objective price for the claim can be assessed, negotiated and compared with other monetisation options (like using the administration’s resources to fund the claim or obtaining litigation funding).

LCM case study

The future of assignments

The assignment markets in the UK and Australia are growing and gaining momentum. The benefit of the collective experience in these jurisdictions offers further opportunities to continue to develop the ‘toolkit’ available to external administrators. This toolkit better assists external administrators to ‘realise the value of their rights of action’, thereby maximising returns to creditors and improving outcomes for all stakeholders.

First published in INSOL World Quarterly Journal.

Filed under

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• Litigation Capital Management
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• Liquidation
• Liquidator (law)
• Litigation funding
• Corporations Act 2001 (Australia)

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• Home News and Insights Assignment of claims by officeholders – a future regulatory storm for insolvency practitioners

Assignment of claims by officeholders – a future regulatory storm for insolvency practitioners

9th June 2022

The recent decision by the Court of Appeal in Re Edengate Homes (Butley Hall) Limited (in Liquidation) 2022 has focused many practitioners’ minds on the issues and potential pitfalls concerning the assignment of causes of action by officeholders to litigation funders.

The role of an officeholder is to realise an estate’s assets for the benefit of all stakeholders, including in particular the general body of creditors. For several years now officeholders have been able to assign not only any causes of action that vest in the estate directly, but also officeholder claims.

At the same time we are also seeing an increasingly competitive market, with increasing numbers of entrants to the litigation funding marketplace.

Whilst there can be no doubt that litigation funding can be of invaluable use to insolvency practitioners, since often there are little or no funds within an estate to pursue or investigate causes of action, the concern is that too often situations arise where insolvency practitioners have assigned a cause of action for a relatively modest lump sum that is invariably used to meet fees.  This is often combined with an entitlement to a  limited share of any net recoveries, but often in the writer’s experience the insolvency practitioner’s file does not clearly record what other alternatives were considered, or what steps were taken to maximise returns for the general body of creditors.

The decision in Re Edengate concerned a challenge to the validity of an assignment of a cause of action by an officeholder. While the challenge in Edengate was unsuccessful, on the facts of that particular case certain findings of the Court of Appeal could be subject to further appeal. One also must consider from an insolvency practitioner’s perspective how a regulator would view actions taken by an insolvency practitioner when assigning a cause of action.

Re Edengate Homes (Butley Hall) Limited (in Liquidation)

On 28 April 2022 the Court of Appeal handed down a judgment in respect of Edengate. This concerned an appeal by Adele Lock (‘Mrs Lock’), a former creditor and former director of Edengate. The appeal concerned Edengate being placed into liquidation, and its only asset was a cause of action against Mrs Lock and members of her family.

Mrs Lock sought to challenge the validity of the assignment of the claim to a litigation funder, Manolete Partners plc (‘Manolete’), primarily on the basis that her and her family were not given an opportunity to purchase the cause of action.

Mrs Lock was unsuccessful both at first instance, before the Business & Property Courts in Manchester in November 2021, and before the Court of Appeal.

Mrs Lock sought to challenge the assignment of the cause of action, and it ought to be borne in mind the corresponding similar provisions in other types of insolvency appointment, pursuant to s168(5) Insolvency Act 1986 which provides that:

“If any person who is aggrieved by any act or decision of the Liquidator, that person may apply to the court, and the court may confirm, reverse or modify the act or decision complained of, and make such order in the case as it thinks just.”

In the correct circumstances s168 Insolvency Act 1986 provides the court with the ability to set aside an assignment to a litigation funder.

On 26 November 2015 Edengate was placed into creditors voluntary liquidation.  Whilst not revealed in the statement of affairs, there were monies owing to Edengate in respect of directors’ loans, and from connected debtors, estimated at approximately £2m. Mrs Lock was shown as a creditor in the statement of affairs for approximately £2m.

Although the company had been placed into creditors voluntary liquidation, a trade creditor petitioned for the compulsory winding-up of the company, and a winding-up order was made on 15 March 2016. The liquidator appointed following the making of the compulsory winding-up order was of the view that the company had substantial claims against Mrs Lock, her husband, her parents, and her parents’ company based upon transaction at an undervalue, preference and misfeasance. The value of those claims was estimated at £1.2m, and were disputed by Mrs Lock and her family. On 1 February 2018 solicitors instructed to act on behalf of the liquidator asserted claims against Mrs Lock’s parents, but not (for reasons unknown)  against Mrs Lock for the lesser sum of £1,198,222.

This resulted in discussions taking place between Mrs Lock and the liquidator in relation to threatened proceedings. Although disputed, Mrs Lock in evidence before the court suggested that on 8 February 2018 she discussed the possibility of taking an assignment of the cause of action from the liquidator, but accepted that no formal offer was made to take an assignment.

In the absence of a settlement being reached the liquidator had little or no funds within the appointment to pursue the claims. The liquidator considered alternative funding possibilities, and sought the views of the majority trade creditor who was not prepared to provide funding or to take an assignment of the cause of action.

The liquidator also considered instructing solicitors pursuant to a CFA agreement, combined with an ATE insurance policy (notwithstanding that the premium could be insured), but formed the view that this was unlikely to be practical.

As a result the liquidator sought to assign the cause of action to a litigation funding company, and an offer was received from Manolete in April 2019 for £20,000 together with a percentage of net recoveries.

Following receipt of this offer the liquidator’s solicitors wrote to Mrs Lock’s parents putting them on notice that they were considering assigning the cause of action, and in the absence of settlement being reached within a period of time the cause of action would be assigned to the litigation funder.

This letter, it is accepted, was forwarded to Mrs Lock by her parents. In Edengate therefore Mrs Lock was aware that the cause of action would be assigned to Manolete, and that she had been put on notice of the proposed assignment.

No offer was made to settle the claims at that point in time, and the assignment to Manolete was ultimately progressed on 24 September 2019. The sum of £30,000 was paid on assignment, and an improved percentage of net recoveries was agreed with Manolete.

Up to and including the date of the assignment, whilst a cause of action had been intimated against Mrs Lock’s parents, no formal claim had been asserted against Mrs Lock or her husband. The definition of the ‘ Claim ’ in the assignment to Manolete was very broad, and included any causes of action against Mrs Lock and her husband.

Following the issue of a letter before action in early 2020, proceedings were issued on 19 January 2021. Proceedings were issued against Mrs Lock, her husband, her parents, and her parents’ company. Following preliminary steps, trial was listed to take place in December 2021. The claim was disputed.

On 18 February 2021 Mrs Lock issued an application to set aside the assignment of the cause of action to Manolete, which was heard on 28 October 2021. It is not clear why an application to set aside the assignment was not made prior to the issue of proceedings when Mrs Lock was on notice of the assignment.

Requirements of s168(5) Insolvency Act 1986

To succeed in a challenge pursuant to this section of the insolvency legislation an applicant must not only demonstrate whether it falls within the category of persons entitled to make such an application (i.e. any person aggrieved), but must also demonstrate that it has “ an underlying legitimate interest in the relief sought “.

In this instance Mrs Lock was a creditor, although she would not be entitled to claim set-off in respect of the cause of action against her, and therefore prima facie she was a member of the class of persons entitled to seek to challenge the validity of the assignment.

The court held that Mrs Lock’s claim as a creditor however had to be aligned with the interests of the class of general body of creditors – namely with a view to maximising recoveries for the estate from the assigned claims.

In addition, adopting the criteria laid down by the court in Re Edennote Ltd, any applicant pursuant to s168 Insolvency Act 1986 would have to demonstrate that, in this instance, the liquidator’s decision to assign the cause of action was ‘ perverse ’.

In summary to succeed on a challenge the applicant must demonstrate that:

• They form part of the category of persons entitled to make the application under the relevant section – in this instance a creditor
• The liquidator’s decision was perverse, namely that it was “ so utterly unreasonable and absurd that no reasonable man would have done it “.

Standing to make the application

A creditor, in order to form part of the class of applicant entitled to make an application, must be a ‘substantial creditor’ – i.e. a creditor who is owed more than a minimal amount. The fact that the creditor who issues the application is also a defendant does not mean that they cannot issue such an application.

In Re Edennote Ltd it was held that “any person aggrieved” as set out in s168(5) Insolvency Act 1986, by reference to s20 Bankruptcy Act 1869, included “any creditor, debtor or other person aggrieved”. Re Edennote Ltd confirmed that an outsider to a liquidation had no standing to make such an application, from which it follows that if for example another litigation funder had submitted an unsuccessful competing offer they could not bring an application.

The Court of Appeal in Edengate found that, in addition to being a creditor, the interests of the applicant had to be aligned with the interests of the class of the general body of creditors. The purpose of seeking a challenge to set aside must not be, for example, to ‘stifle a claim’. The applicant must demonstrate that the purpose of the application is to maximise realisations for the benefit of the general body of creditors.

Logically this involves an analysis of whether the applicant (or indeed potentially a third party if a regulatory complaint were to be made) would have offered a greater amount than ultimately a litigation funder had taken the assignment of the relevant cause of action for.

In Edengate Mrs Lock was notified of potential claims prior to assignment, and effectively given an opportunity to put forward an offer by way of settlement or to take an assignment of the cause of action.  She was notified of the proposed assignment of the causes of action before they were assigned to Manolete. That, however, is not the case in other instances where insolvency practitioners have simply assigned a cause of action to a litigation funder. In Edengate there was no suggestion that Mrs Lock would be willing, or had ever been willing, to match or beat the offer made by Manolete.

In circumstances, where claims have not been intimated at all, and where the proposed defendants are creditors for more than a minimal amount, simply assigning a cause of action without notification of any proposed claim, and/or putting the defendants on notice of the proposed assignment, it is submitted entails potential regulatory and financial risks for assignor office-holders.

The Court of Appeal confirmed in Re Edennote Ltd that the court would only interfere with the act of an officeholder where the officeholder had “ done something so utterly unreasonable and absurd that no reasonable man would have done it “. The Court of Appeal held that whilst it may be sensible, or good practice, to give a defendant an opportunity to submit an offer to acquire or settle a cause of action prior to assignment, failure to do so was not necessarily perverse.

Whether an assignment is perverse will depend upon a scrutiny of all the facts of any particular case. Re Edennote Ltd contains several important features that were not present in Edengate, namely:

• In Re Edennote Ltd (the dispute concerned Terry Venables, Lord Alan Sugar, and Tottenham Hotspur plc) the liquidator had incorrectly believed that he could not assign a cause of action to a proposed defendant (such assignment can take place as confirmed in both Re Edennote Ltd and Re GMEL ).
• The liquidator failed to take advice as to the effects of assignment regarding security for costs.
• The judgment in Edengate cites the following passage from the judgement of Lord Justice Nourse in Re Edennote Ltd :

“ It is certainly possible for the liquidator to do something so utterly and unreasonably absurd that no reasonable man would have done it … simply by selling an asset … without taking into account the possibility that a third party may well have made a far better offer to whom it was sold … “.

• At first instance in Edengate the judge criticised the liquidator for not advising Mrs Lock directly that the cause of action was to be assigned to Manolete, but did not go as far as to suggest that that failure was ‘perverse’.

The test as to whether an assignment is perverse is objective. The Court of Appeal in Edengate ruled that the decision was not perverse because Mrs Lock never followed up her suggestion made at a meeting with the liquidator in late February 2018 that she might be interested in buying the claims i.e. She did not make an offer, and her parents did not respond to the letters advising that the claims were to be assigned. The court was not satisfied that Mrs Lock would have made an offer, she had an opportunity to do so, and the court was not satisfied that a third party would offer a greater amount of the cause of action.

The relief following inter alia s168 Insolvency Act 1986 is discretionary. In a situation where an application to set aside the cause of action is made late in the day, the court will not readily assign a cause of action and delay trial.

Is an assignment of a cause of action to a litigation funder capable of assignment?

Notwithstanding that the appeal in Edengate was unsuccessful, the writer’s view is that an assignment of a cause of action to a litigation funder is capable of being set aside subject to being able to demonstrate that:

• the applicant would have submitted a greater bid for the cause of action
• The applicant was in a position financially to submit a greater bid than that accepted upon assignment
• The applicant had not been given notice of a potential claim, or at the very least put on notice of the intention to assign the cause of action to a third party, prior to the assignment taking place
• The offer accepted for the cause of action was ‘perverse’.

The definition of what constitutes perverse is capable of challenge.

The concern is that there have been instances where insolvency practitioners have simply assigned causes of action for a modest amount, together with perhaps a percentage of recoveries, and yet the market has not been tested, and there is no suitable file note as to why the assignment has taken place.

The lump sum payment received on completion is often used to meet the insolvency practitioner’s fees, and does not result in a return for the general body of creditors. In cases that involve a percentage of net recoveries, there may also be realisations for the estate in the final analysis. However, what if there isn’t, and how can a licensed insolvency practitioner say that the assignment is in the best interests of the general body of creditors if the market has not been tested?

Misfeasance and paragraphs 73 & 74 Schedule B1 Insolvency Act 1986

There is a risk that if an insolvency practitioner assigns a cause of action without taking the appropriate steps, and preparing a suitable file note to explain the rationale for any assignment, they could be subject to scrutiny from inter alia creditors and their regulatory body.

Creditors could progress proceedings by misfeasance in a liquidation, challenge the administrator’s conduct pursuant to paragraphs 73 & 74 Schedule B1 of the Insolvency Act 1986, or in bankruptcy an application pursuant to ss303 & 304 Insolvency Act 1986. The aforementioned involve a claim for financial redress against the officeholder.

Why should the general body of creditors suffer financially if an officeholder has not taken the correct steps prior to assigning a cause of action? As the litigation funding market continues to develop, invariably there will be greater scrutiny on insolvency practitioners arising due to the assignment of causes of action.

Regulatory implications

In addition to the risk of a challenge pursuant to inter alia s212 Insolvency Act 1986, there is significant concern that going forwards regulators will be asked to scrutinise an officeholder’s conduct when assigning a cause of action.

A regulator would consider not primarily consider whether an assignment is capable of being challenged, which is a matter for the court, but primarily whether the office-holder’s actions meet the requisite duties of care and standards expected.

Well-advised persons aggrieved by an assignment of a cause of action it is submitted would in the first instance complain to the regulator through the gateway, as opposed to simply challenging an assignment at court, as this would not place them at risk on costs.

Suggested steps to be taken by an insolvency practitioner prior to assigning a cause of action

Insolvency practitioners ought to consider the Official Receiver’s guidance in relation to assigning causes of action, which is useful. The summary of the steps to be taken by the Official Receiver before considering an assignment of a cause of action are as follows:

• Identify the cause of action that is capable of assignment, and the extent to which it falls within the estate and is capable of assignment either as a legal estate claim or as an officeholder claim;
• Identify the merits of the cause of action, and whether the same is frivolous or vexatious;
• If the claim is frivolous or vexatious it ought not to be assigned;
• If a claim is not frivolous or vexatious, and assignment is not barred by (for example) contractual conditions, an assignment ought not to be made without testing the market;
• When testing the market, the cause of action to be assigned ought to be offered inter alia to the defendant in accordance with the principles established in Re GMEL and Re Pennyfeathers . All potentially interested parties, including the defendant, should be given an opportunity to submit an offer for the cause of action that is offered for assignment; &
• A cause of action ought not to be assigned if any offer received is derisory.

The Official Receiver’s technical manual contains  ‘good guidance’ that ought to be considered by all officeholders. The writer however would go further and suggest the following steps that it is submitted ought to be taken prior to assigning a cause of action. The suggested steps below ought to be recorded in a full file note that is maintained on file prior to assigning any cause of action:

• With the assistance of solicitors if appropriate, identify what causes of action the company or the officeholders have, and as against whom;
• Discount any causes of action that are frivolous or vexatious, which ought not to be assigned;
• Consider how any potential claim can be investigated further, and funded;
• Instructing solicitors pursuant to a CFA or DBA agreement;
• Seek funding from majority creditors;
• How to meet the costs of putting in place ATE insurance if appropriate, to include the self-insuring option; &
• The risk of a successful application for security for costs, considering the principles established inter alia in D’Jan of London
• Once a cause of action has been identified, write to the proposed defendants putting them on notice of the potential cause of action, attaching core documentation, and inviting them to put forward proposals. This need not necessarily be, in the first instance, a pre-action protocol letter before action;
• To explore all avenues of funding the claim, to establish which is likely to achieve the greatest return for the general body of creditors, and which are not capable of being progressed.
• If appropriate, invite offers from litigation funders. We would suggest inviting offers from at least two or three litigation funders, so that offers received can be compared and the best offer accepted in principle;
• At the same time invite offers from all interested parties (to include proposed defendants, and majority creditors) to take an assignment of the causes of action;
• Compare all offers received. In the event that the best offer is received from a litigation funder, who will be in a position to fully fund proceedings, notify the proposed defendants that an offer has been received from a litigation funder and afford them a final opportunity of (say) 21 days to put forward offers of settlement or to take an assignment of the cause of action, failing which the proposed defendants are expressly put on notice that the claim will be assigned without further notice;
• Limiting the definition of “ the Claim ” to be assigned – the definition in most assignments is so wide that it encompasses any potential claim that may exist and vest in the estate or that can be progressed by the insolvency practitioners. To avoid future criticism, limit the definition of the cause of action to be assigned to specifically the claims identified, and no others.
• Increase the scope of the indemnity – when negotiating with a litigation funder always seek to increase the standard indemnity in any assignment so that it includes not only the matters usually covered, but also specifically an indemnity in respect of a challenge to the assignment, any misfeasance claim, and any claim pursuant to paragraph 74 Schedule B1 Insolvency Act 1986.

Whilst there is nothing perverse in assigning causes of action to litigation funders, and the emphasis must always be on maximising recoveries for the general body of creditors, it is suggested that the steps suggested above ought to be taken so as not to expose assignor office-holders to financial and regulatory risk. A full file note should be kept in order to explain the rationale for any assignment. In the writer’s opinion offering causes of action to proposed defendants is key, since it could generate greater returns for the general body of creditors as a well-advised defendant may be advised to submit a higher offer than a third party whose objective is to generate a profit.

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Assignment of a claim or cause of action

Practical law uk practice note 1-522-7861  (approx. 32 pages), get full access to this document with practical law.

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• Enhance productivity
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• Substantive Law
• 1 Scope of this note
• Effect of contractual prohibition on assignment
• 3 At what stage may a claim be assigned?
• 4 To whom can a cause of action be assigned?
• Legal assignment or equitable assignment?
• Requirements for a legal assignment
• Requirements for an equitable assignment
• Effect of consideration
• No loss occurring to assignee before assignment of claim
• General principles
• Exceptions to the rules on maintenance and champerty
• Security for costs
• Costs incurred by the assignor before the assignment
• Who is liable for costs awarded in favour of the defendant?
• Assignment of benefit and burden of solicitors' retainer
• When might an office-holder assign a claim?
• Who may assign a claim in insolvency?
• Claims capable of assignment by an office-holder
• Claims not capable of assignment by an office-holder
• Assignment of claims to an office-holder
• Potential liability of office-holder
• 10 Drafting an assignment of a cause of action
• Legal assignment
• Equitable assignment
• Assigning proceedings that have been commenced
• Counterclaims where a claim has been assigned

• Insights & events

Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

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Document 52018PC0096

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

COM/2018/096 final - 2018/044 (COD)

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Brussels, 12.3.2018

COM(2018) 96 final

2018/0044(COD)

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

{SWD(2018) 52 final} {SWD(2018) 53 final}

EXPLANATORY MEMORANDUM

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

The Commission's priority is to further strengthen Europe's economy and stimulate investment to create jobs and sustain growth. In order to reach this objective, there is a need for stronger, deeper and more integrated capital markets. Efficient and safe post-trade infrastructures are key elements of such well-functioning capital markets. Following on from the 2015 Action Plan on Capital Markets Union (CMU), in May 2017 the Commission's Mid-term Review set out the remaining actions which will be taken to put in place the building blocks of the CMU by 2019, with the objective of removing barriers to cross-border investment and lowering the costs of funding. Completing the CMU is an urgent priority.

As part of the CMU Action Plan and the Mid-Term Review, the Commission announced targeted action on rules on the ownership of securities and the third-party effects of assignments of claims to reduce legal uncertainty for cross-border transactions in securities and claims. This proposal and the Communication on the law applicable to the proprietary effects of transactions in securities 1 , presented in parallel, implement this commitment. The Communication clarifies the Commission's views on important aspects of the existing Union acquis with regard to the law applicable to the proprietary effects of transactions in securities and accompanies this legislative proposal on the third-party effects of assignments of claims. Matters governed by the Financial Collateral Directive 2 , the Settlement Finality Directive 3 , the Winding-up Directive 4 and the Registry Regulation 5 are not affected by this legislative proposal 6 .

The general objective of this proposal is, in line with the objectives of the CMU Action Plan, to foster cross-border investment in the EU and, thereby, facilitate access to finance for firms, including SMEs, and consumers. The specific objective of this proposal is to help to increase cross-border transactions in claims by providing legal certainty through the adoption of uniform conflict of laws rules at Union level.

Indeed, in order to increase cross-border transactions in claims and securities, clarity and predictability as to which country's law applies to determine who owns a claim or a security after a cross-border transaction are essential. Legal uncertainty as to which national law determines who owns an asset further to a cross-border transaction means that, depending on which Member State's courts or authorities assess a dispute concerning the ownership of a claim or a security, the cross-border transaction may or may not confer the expected legal title. In case of insolvency, when the questions of ownership and enforceability of rights resulting from cross-border transactions are put under judicial scrutiny, legal risks stemming from legal uncertainty may result in unexpected losses.

The uniform rules laid down in this proposal will designate which national law should determine the ownership of a claim after it has been assigned on a cross-border basis and, thereby, eliminate legal risk and potential systemic consequences. The introduction of legal certainty will promote cross-border investment, access to cheaper credit and market integration.

The assignment of claims is a mechanism used by companies to obtain liquidity and have access to credit, as in factoring and collateralisation, and by banks and companies to optimise the use of their capital, as in securitisation.

Factoring is a crucial source of liquidity for many firms. In factoring, a company (the assignor, most often an SME) assigns (sells) its receivables to a factor (the assignee, often a bank) at a discount price as a means for the assignor to obtain immediate cash. The factor will collect the money owed for the invoices and accept the risk of bad debts. The majority of users of factoring are SMEs: Small represent 76%, Medium 11% and Large 13%. Factoring for SMEs is thus regarded by the industry as a basis for economic growth, as SMEs may find sourcing traditional lending more challenging 7 . Europe as a region is the largest factoring market world-wide and represents 66% of the world market 8 .

In collateralisation, claims such as cash credited to a bank account (where the customer is the creditor and the bank is the debtor) or credit claims (that is, bank loans) can be used as financial collateral to secure a loan agreement (for example, a consumer can use cash credited to a bank account as collateral to obtain credit, and a bank can use a credit loan as collateral to obtain credit). The collateralisation of credit claims for the financial industry is very important. About 22% of the Eurosystem 9 refinancing operations are secured by credit claims as collateral 10 .

Securitisation enables the assignor, called ‘originatorʼ (for example, a company or a bank) to refinance a set of its claims (for example, motor vehicle rents, credit card receivables, mortgage loan payments) by assigning them to a ‘special purpose vehicle’ (SPV). The special purpose vehicle (assignee) then issues debt securities (for example, bonds) in the capital markets reflecting the proceeds from these claims. As payments are made under the underlying claims, the special purpose vehicle uses the proceeds it receives to make payments on the securities to the investors. Securitisation can lower the cost of financing because the special purpose vehicle is structured in such a way as to make it insolvency-remote. For companies, securitisation can provide access to credit at lower cost than bank loans. For banks, securitisation is a way to put some of their assets to better use and free up their balance sheets to allow for further lending to the economy 11 . As part of the Capital Markets Union Action Plan, the Union has adopted legislation to promote a safe and liquid market for securitisation. These rules aim to re-establish a safe securitisation market in the EU by differentiating simple, transparent and standardised securitisation products from more opaque and costly ones. For all types of securitisation, legal certainty about who owns the assigned claim is crucial.

Why is legal certainty important?

Ensuring the acquisition of legal title over the assigned claim is important for the assignee (for example, a factor, a collateral taker or an originator) as third parties could claim legal title over the same claim. This would give rise to a priority conflict, that is, a situation in which it would need to be determined which of the two rights, the right of the assignee or the right of the competing claimant, should prevail. A priority conflict between the assignee of the claim(s) and a third party can arise in essentially two situations:

-     if a claim has been assigned twice (accidentally or not) by the assignor to different assignees, a second assignee could claim legal title over the same claim. The law applicable to the third-party effects of the assignment of claims will resolve the priority conflict between the two assignees of the same claim;

-     in case the assignor becomes insolvent, the creditors of the assignor will want to know whether or not the assigned claim still forms part of the insolvency estate, that is, whether or not the assignment was effective and thus the assignee has acquired legal title over the claim. The law applicable to the third-party effects of the assignment of claims will resolve the priority conflict between the assignee and the creditors of the assignor.

In purely domestic assignments of claims, it is clear that national substantive law will determine the third-party (or proprietary) effects of the assignment of claims, that is, which requirements must be met by the assignee in order to ensure that he acquires legal title over the assigned claims in case a priority conflict should arise. However, in a cross-border scenario, several national laws can potentially apply and assignees need clarity as to which of such laws they must observe in order to acquire legal title over the assigned claims.

The applicable law, that is, the national law that applies to a given situation with a cross-border element, is determined by conflict of laws rules. In the absence of uniform Union conflict of laws rules, the applicable law is determined by national conflict of laws rules.

Conflict of laws rules on the third-party effects of assignments of claims are currently laid down at Member State level. Member States' conflict of laws rules are inconsistent as they are based on different connecting factors to determine the applicable law: for example, the conflict rules of Spain and Poland are based on the law of the assigned claim, the conflict rules of Belgium and France are based on the law of the assignor's habitual residence and the conflict rules of the Netherlands are based on the law of the assignment contract. National conflict of laws rules are also unclear, in particular where they are not laid down in statutory law.

Inconsistency in Member States’ conflict of laws rules means that Member States may designate the law of different countries as the law that should govern the third-party effects of the assignment of claims. This lack of legal certainty as to which national law applies to third-party effects creates a legal risk in cross-border assignments which does not exist in domestic assignments. Faced with this legal risk, an assignee may react in three different ways:

(i)     if the assignee is not aware of the legal risk or chooses to ignore it, it may end up facing unexpected financial losses if a priority conflict arises and it loses legal title over the assigned claims. The legal risk stemming from the legal uncertainty as to who owns a claim further to a cross-border assignment emerged during the 2008 financial crisis, for example in the Lehman Brothers International (Europe) collapse, where the inquiry into the legal ownership of assets is still ongoing today 13 . Uncertainty about the ownership of claims can thus have knock-on effects and deepen and prolong the impact of a financial crisis;

(ii)     if the assignee decides to mitigate the legal risk by seeking specific legal advice as to which national laws can potentially apply to the third-party effects of the cross-border assignment and comply with the requirements under all such laws to ensure legal title over the claims assigned, it will incur higher transaction costs of between 25% and 60% 14 which are not required for domestic assignments;

(iii)     if the assignee is deterred by the legal risk and chooses to avoid it, it may forego business opportunities and market integration may be reduced. Given the current absence of common conflict of laws rules regarding the third-party effects of assignments of claims, assignments of claims are mainly done on a national rather than on a cross-border basis: for example, the dominant type of factoring is domestic and, in 2016, it represented around 78% of total turnover 15 .

If the assignee decides to carry out the assignment, the inconsistency between Member States’ conflict of laws rules means that the outcome of a priority conflict as to who owns a claim further to a cross-border assignment will vary depending on the national law applied by the Member State's court or authority assessing the dispute. Depending on the national law applied, the cross-border assignment may or may not confer the expected legal title on claimants.

Added value of uniform rules

Currently, uniform Union conflict of laws rules determine the law applicable to the contractual obligations of transactions in claims and securities. In particular, the Rome I Regulation 16 determines the law applicable to the contractual relationships between the parties to an assignment of claims (between the assignor and the assignee and between the assignee and the debtor) and between the creditor/assignor and the debtor. The Rome I Regulation also determines the law applicable to the contractual relationship between the seller and the buyer in transactions in securities.

Uniform Union conflict of laws rules also determine the law applicable to the proprietary effects of transactions in book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system in three Directives, namely the Financial Collateral Directive, the Settlement Finality Directive and the Winding-Up Directive. However, no uniform Union conflict of laws rules have been adopted on the law applicable to the proprietary effects of assignments of claims. This proposed Regulation aims at filling this gap.

The common conflict of laws rules laid down in the proposed Regulation provide that, as a general rule, the law of the country where the assignor has its habitual residence will govern the third-party effects of assignments of claims. However, the proposed Regulation also lays down exceptions which subject certain assignments to the law of the assigned claim where the general rule would not be suitable and also a choice of law possibility for securitisations aimed at expanding the securitisation market.

The adoption of uniform conflict of laws rules at Union level on the third-party effects of assignments of claims will bring significant added value to financial markets.

First, the legal certainty brought by the uniform rules will enable assignees to comply with the requirements of only one national law to ensure the acquisition of legal title over the assigned claims. This legal certainty will eliminate the legal risk currently linked to cross-border assignments of claims in terms of unexpected losses and possible knock-on effects, increased transaction costs, missed business opportunities and reduced market integration. The uniform conflict of laws rules laid down, in particular, for securitisation, recognise the practice of large operators of applying the law of the assigned claim to the third-party effects of assignments of claims but aim, at the same time, at enabling smaller operators to enter or strengthen their presence in the securitisation market by subjecting the third-party effects of their assignments to the law of the assignor’s habitual residence. The flexibility in the conflict of laws rules applicable to securitisation will facilitate the expansion of the securitisation market with new market entrants and the creation of new business opportunities.

Second, the uniformity of the conflict of laws rules among Member States will ensure that the same national law will apply to resolve any priority conflict which arises between the assignee and a competing claimant regardless of which Member State’s court or authority examines the dispute.

The introduction of legal certainty will in this way promote cross-border investment, which is the ultimate goal of this proposed Regulation pursuant to the Capital Markets Union Action Plan.

What is a claim?

A claim is the right of a creditor against a debtor to the payment of a sum of money (for example, receivables) or the performance of an obligation (for example, delivery obligation of the underlying assets under derivative contracts).

Claims may be classified in three categories:

(i)     The first category would cover 'traditional claims' or receivables, such as money to be received for unsettled transactions (for example, money to be received by a company from a customer for unpaid invoices).

(ii)     Financial instruments as defined in MiFID II 17 include securities and derivatives traded on financial markets. While securities are assets, derivatives are contracts which include both rights (or claims) and obligations for the parties to the contract. The second category of claims would be claims arising from financial instruments (sometimes referred to as 'financial claims'), such as claims arising from derivative contracts (for example, the amount due after the calculation of the close-out in a derivative contract).

(iii)     The third category of claims would be cash credited to an account in a credit institution (such as a bank), where the account holder (for example, a consumer) is the creditor and the credit institution is the debtor.

This 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. As this proposal does not cover the transfer or the novation of contracts, trading in financial instruments, as well as the clearing and the settlement of these instruments, will continue to be governed by the law applicable to contractual obligations as laid down in the Rome I Regulation. This law is normally chosen by the parties to the contract or is designated by non-discretionary rules applicable to financial markets.

Claims arising from financial instruments as defined in MiFID II, such as claims arising from derivative contracts, are relevant for the proper functioning of financial markets. Similarly to securities, trade in financial instruments such as derivatives generates large volumes of cross-border transactions. Financial instruments such as derivatives are often recorded in book-entry form.

The form of recording the existence or transfer of financial instruments such as derivatives, whether in book-entry form or otherwise, is governed by Member State law. In some Member States certain kinds of derivatives are recorded in book-entry form and are regarded as securities while, in other Member States, they are not. Depending on whether or not, under national law, a financial instrument such as a derivative contract is recorded in book-entry form and regarded as a security, the authority or court dealing with a dispute as to who has legal title over the financial instrument or over the claim arising from that financial instrument will apply the conflict of laws rule on the proprietary effects of the transfer of book-entry securities or the conflict of laws rule on the proprietary effects of the assignment of claims.

This proposal concerns conflict of laws rules on the third-party effects of the assignment of 'traditional claims', 'financial claims' (that is, claims arising from financial instruments such as derivatives not recorded in book-entry form and not regarded as securities under national law) and ‘cash credited to a credit institution’, all of which are referred to as 'claims'.

The third-party effects of transactions in financial instruments such as derivatives recorded in book-entry form and regarded as securities under national law are governed by the conflict of laws rules applicable to the proprietary effects of transactions in book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system laid down, in particular, in the Financial Collateral Directive, the Settlement Finality Directive and the Winding-Up Directive. The scope of the conflict of laws rules in this proposal and the scope of the conflict of laws rules in these three Directives do not therefore overlap as the former apply to claims and the latter apply to book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system 18 . The three Directives are clarified by the Communication on the law applicable to the proprietary effects of transactions in securities adopted today.

What is the assignment of a claim?

In an assignment of a claim, a creditor ("assignor") transfers his right to a claim against a debtor to another person ("assignee").

Clarity as to who owns a claim further to its cross-border assignment is relevant for participants in financial markets and also for the real economy. This is because the assignment of claims is often used by firms as a mechanism to obtain liquidity or access to credit.

In factoring, for example, a company (the assignor) sells its claims at a discount price to a factor (the assignee), often a bank, in exchange for immediate cash. The majority of factoring users are SMEs (87%) 19 .

The assignment of claims is also used by consumers, companies and banks to have access to credit, for example in collateralisation. In collateralisation, claims such as cash credited to a bank account or credit claims (that is, bank loans) can be used as financial collateral to secure a loan agreement (for example, a consumer can use cash credited to a bank account as collateral to obtain credit, and a bank can use a credit loan as collateral to obtain credit).

Finally, the assignment of claims is also used by companies and banks to borrow money from capital markets through the assignment of multiple similar claims to a special purpose vehicle and the subsequent securitisation of such claims as debt securities (for example, bonds).

The stakeholders directly affected by the legal risk in cross-border transactions in claims are borrowers (retail customers and companies, including SMEs), financial institutions (such as banks engaged in lending, factoring, collateralisation and securitisation), financial intermediaries that transact in claims and end investors (funds, retail investors).

Development of the conflict of laws rules on assignments of claims

With the increasing interconnectivity of national markets, assignments of claims often involve a cross-border element (for example, the assignor and the assignee, or the assignee and the debtor, are located in different countries). The laws of several countries can thus potentially apply to the assignment. Conflict of laws rules laid down at Union or Member State level must determine which national law applies to the various elements of a cross-border assignment of claims.

Conflict of laws rules on cross-border assignments of claims concern two elements: (1) the contractual element, which refers to the parties’ obligations towards each other; and (2) the proprietary element, which refers to the transfer of property rights over the claim and which can therefore affect third parties.

The Rome I Regulation on the law applicable to contractual obligations harmonised conflict of laws rules at Union level with regard to the contractual elements of the assignment of claims. The Regulation thus contains uniform conflict of laws rules with regard to (i) the relationship between the parties to the assignment contract - the assignor and the assignee 20 , and (ii) the relationship between the assignee and the debtor 21 . The conflict of laws rules of the Rome I Regulation also apply to the relationship between the original creditor (the assignor) and the debtor 22 .

In contrast, there are no conflict of laws rules at Union level with regard to the proprietary elements of the assignment of claims. 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 he 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).

The question of which law should govern the third-party effects of assignments of claims was first considered w hen the 1980 Rome Convention was being converted into the Rome I Regulation 23 and then during the legislative negotiations leading to the adoption of the Rome I Regulation. The Commission proposal for the Rome I Regulation chose the law of the assignor's habitual residence as the law that should apply to the third-party effects of the assignment of claims 24 . Ultimately, no conflict of laws rule on the third-party effects of assignments was included in the Regulation 25 due to the complexity of the matter and the lack of time to deal with it in the required level of detail.

However, Article 27(2) of the Rome I Regulation acknowledged the significance of this unresolved issue by requiring the Commission to present a report on the question of the effectiveness of assignments of claims against third parties accompanied, if appropriate, by a proposal to amend the Regulation 26 . To this end, the Commission contracted an external study 27 and, in 2016, adopted a report presenting possible approaches to the matter 28 . In its report, the Commission noted that the absence of uniform conflict of laws rules determining which law governs the effectiveness of an assignment of a claim against third parties and the questions of priority between competing claimants undermines legal certainty, creates practical problems and results in increased legal costs 29 .

• Consistency with existing policy provisions in the policy area

This proposal complies with the requirement laid down in Article 27(2) of the Rome I Regulation that the Commission should publish a report and, if appropriate, a proposal on the effectiveness of an assignment of a claim against third parties and the priority of the assignee over the right of another person. The proposal harmonises conflict of laws rules on these issues as well as the scope of the applicable law, that is, the matters that should be governed by the national law designated as applicable by the proposal.

The proposal is consistent with existing Union instruments on applicable law in civil and commercial matters, in particular with the Rome I Regulation as regards the claims covered by the scope of the two instruments.

The proposal is also consistent with the Insolvency Regulation 30 as regards the connecting factor which designates the law applicable to insolvency proceedings. The law of the assignor’s habitual residence chosen by the proposal as the law applicable to the third-party effects of assignments of claims coincides with the law applicable to the insolvency of the assignor as, under the Insolvency Regulation, the main insolvency proceedings must be opened in the Member State where the debtor has its centre of main interests (COMI). Most questions relating to the effectiveness of the assignments of claims made by the assignor arise in case of the assignor’s insolvency. The insolvency estate of the assignor will vary depending on whether or not the legal title of assigned claims has been transferred to the assignee and thus on whether or not the assignment of claims made by the assignor can be regarded as effective against third parties (for example, its creditors). Subjecting priority issues and the effectiveness of the assignments of claims against third parties, such as the creditors of the assignor, to the same law that governs the assignor’s insolvency is intended to facilitate the resolution of the assignor’s insolvency.

• Consistency with other Union policies

The aims of the initiative are coherent with Union policies on financial market regulation.

To facilitate cross-border investment, the Capital Markets Union Action Plan envisages targeted action on rules on the ownership of securities and the third-party effects of assignments of claims. The Action Plan further specifies that the Commission should propose a legislative initiative to determine with legal certainty which national law should apply to securities ownership and the third-party effects of the assignment of claims.

By reducing the legal uncertainty that may discourage cross-border assignments of claims or lead to additional costs for those transactions, this proposal will contribute to the objective of encouraging cross-border investment. By reducing the losses that might occur when market participants are not aware of the legal risk stemming from legal uncertainty, the proposal is fully consistent with the objective of investor protection set out in a number of Union financial market regulations. Finally, by harmonising conflict of laws rules on the third-party effects of assignments of claims, the proposal will provide legal certainty to parties involved in factoring, collateralisation and securitisation and thereby facilitate access to cheaper finance for SMEs and consumers.

In accordance with the Capital Markets Union Action Plan, this proposal on claims is complemented by a non-legislative initiative on the law applicable to the proprietary effects of transactions in securities. Currently, conflict of laws rules on the proprietary effects of cross-border transactions in securities are laid down in the Financial Collateral Directive, the Settlement Finality Directive and the Winding-Up Directive. As indicated, the scope of the conflict of laws rules in this proposal and the scope of the conflict of laws rules in these three Directives do not overlap as the former apply to claims and the latter apply to book-entry securities and instruments the existence or transfer of which presupposes their recording in a register, an account or a centralised deposit system 31 .

Although uniform conflict of laws rules have been adopted in respect of securities in the three above-mentioned Directives, these rules do not use identical wording and are interpreted and applied differently in Member States.

The Impact Assessment carried out in relation to both claims and securities showed that the total absence of common conflict of laws rules regarding the proprietary effects of assignments of claims is one of the factors that results in assignments of claims being made on a national rather than on a cross-border basis . In contrast, with regard to transactions in securities, the residual legal uncertainty resulting from the different interpretations of the existing Directives does not appear to hinder the development of substantial cross-border markets. This, together with the little tangible evidence of material risk in respect of securities, supported the choice of a non-legislative initiative as the preferred policy option for securities.

In short, the main difference between the areas of claims and securities is that, while there is a complete absence of EU conflict of laws rules on the proprietary effects of assignments of claims which implies a need for a legislative measure to remove the legal risk from cross-border assignments of claims, three Directives already include conflict of laws rules on the proprietary effects of transactions in securities which, even if not uniformly worded, require only the adoption of soft law measures.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The legal basis of the proposal is Article 81(2)(c) TFEU which, in the area of judicial cooperation in civil matters having cross-border implications, specifically empowers the Parliament and the Council to adopt measures aimed at ensuring “the compatibility of the rules applicable in the Member States concerning conflict of laws (…)."

By reason of Protocol No 22 to the TFEU, legal measures adopted in the area of freedom, security and justice, such as rules on conflict of laws, do not bind or apply in Denmark. By reason of Protocol No 21 to the TFEU, the UK and Ireland are also not bound by such measures. However, once a proposal has been presented in this area, these Member States can notify their wish to take part in the adoption and application of the measure and, once the measure has been adopted, they can notify their wish to accept that measure.

• Subsidiarity

The current legal uncertainty and the legal risk stemming therefrom are caused by divergent Member State substantive rules governing the third-party effects of assignments of claims. Member States acting individually could not satisfactorily remove the legal risk and barriers to cross-border assignments of claims as national rules and procedures would need to be the same or at least compatible in order to work in a cross-border situation. Action at Union level is needed to ensure that, throughout the Union, the same law is designated as the law applicable to the third-party effects of assignments of claims regardless of which Member State’s courts or authorities assess a dispute on the ownership of an assigned claim.

• Proportionality

Currently, each Member States has (i) its own substantive rules governing the third-party effects of assignments of claims, and (ii) its own conflict of laws rules designating which national substantive law governs such third-party effects. Both the substantive rules and the conflict of laws rules of the Member States are different and, in a number of cases, the conflict of laws rules are unclear or not laid down in statutory legislation. These divergences create legal uncertainty which results in legal risk, as the substantive laws of various countries can potentially apply to one cross-border assignment.

In order to provide legal certainty, the EU could propose to (i) harmonise the substantive rules of all Member States governing the third-party effects of assignments of claims, or (ii) harmonise the conflict of laws rules applicable to the third-party effects of assignments of claims. The solution proposed is to provide legal certainty through the harmonisation of conflict of laws rules. This is a more proportionate solution in line with the subsidiarity principle as it does not interfere with national substantive law and only applies to assignments of claims with a cross-border element.

Such action relating to the third-party effects of assignment of claims is suitable to achieve the objective of providing legal certainty and removing the legal risk from cross-border assignments of claims, thereby facilitating cross-border investment, access to cheaper credit and market integration, without going beyond what is necessary to achieve the aim.

• Choice of the instrument

The desired uniformity of the conflict of laws rules can only be achieved through a Regulation as only a Regulation ensures a fully consistent interpretation and application of the rules. In line with previous Union instruments on conflict of laws rules, the preferred legal instrument is thus a Regulation.

3. RESULTS OF STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENT

• Stakeholder consultations and collection and use of expertise

The Commission actively engaged with stakeholders and conducted comprehensive consultations throughout the impact assessment process. The consultation strategy set out a number of actions to be organised by the Commission, in particular an on-line public consultation; two meetings with Member State experts, one with experts on conflicts of laws and another with experts on financial markets; and a high-level Expert Group composed of academics, legal practitioners and industry members with expertise on both conflict of laws rules and financial markets. The consultation strategy also included a study contracted by the Commission and conducted by the British Institute of International and Comparative Law (BIICL) on the question of the effectiveness of assignments of claims against third parties and priority conflicts between competing claimants. The Inception Impact Assessment, published on 28 February 2017, received no feedback from stakeholders.

The study contracted by the Commission showed that the laws most commonly applied today to resolve conflicts of laws concerning the third-party effects of assignments of claims are the law of the assignor's habitual residence (for example, Belgium, France, Luxembourg in respect of securitisation), the law governing the assigned claim (for example, Spain, Poland) and the law of the contract between the assignor and the assignee (for example, the Netherlands).

The on-line public consultation opened on 7 April 2017 and closed on 30 June 2017, which complies with the standard of a minimum of 12 weeks for Commission public consultations. The objective of the public consultation was to receive input from all stakeholders concerned, in particular those involved in factoring, securitisation, collateralisation and trading of financial instruments, as well as from legal practitioners and experts on conflict of laws rules on the third-party effects of assignments of claims.

The Commission received 39 responses to the public consultation. Among the respondents were 5 governments, 15 industry associations, 4 companies, 2 law firms, 2 think tanks and 5 private individuals. From the financial sector, the interests of banks, fund managers, regulated markets, central counterparties (CCPs), central security depositories (CSDs), securities issuers and investors were represented. No replies were received from consumer organisations.

In terms of geographical coverage, responses came from different Member States: 13 responses from stakeholders located in the UK, 9 responses from France and Belgium, 3 responses from Germany and the Netherlands, 2 responses from Spain, 1 response from Finland, 1 response from the Czech Republic and 1 response from Sweden.

In general, when stakeholders were asked whether, in the previous five years, they had encountered difficulties in securing the effectiveness of cross-border assignments of claims against third parties other than the debtor, more than two thirds of the stakeholders that responded stated that they had encountered difficulties. Out of the stakeholders that responded to the question whether Union action would bring added value in addressing the difficulties encountered, 59% answered positively and 22% responded negatively.

Regarding the law that should be chosen in a Union legislative initiative, stakeholders were asked to indicate their preferences in three separate questions. Out of the stakeholders that responded to each of the three separate questions, 57% of stakeholders favoured the law of the assignor’s habitual residence, 43% favoured the law of the assigned claim and 30% preferred the law of the assignment contract. Some respondents based their replies on the conflict of laws rules applicable in their Member State, while others based their replies on the law that they apply in their current practice.

In support of the assignor's habitual residence, stakeholders argued that this law can be determined easily, would provide greater legal certainty and respect more than any other solution the economic logic of important trade practices. Stakeholders that supported the law of the assigned claim argued that this law would respect the principle of party autonomy and potentially lower transaction costs.

• Impact assessment

The options analysed in the Impact Assessment are the following:

✓ Option 1: Law applicable to the assignment contract

Under this connecting factor, the law that governs the contract of assignment between the assignor and the assignee would also govern the proprietary effects of the assignment of claims. The assignor and the assignee can choose any law to govern their assignment contract.

✓ Option 2: Law of the assignor's habitual residence

Under this connecting factor, the third-party effects of the assignment of claims would be governed by the law of the country in which the assignor has its habitual residence.

✓ Option 3: Law governing the assigned claim

Under this connecting factor, the third-party effects of the assignment of claims would be governed by the law that governs the assigned claim, that is, the credit in the original contract between the creditor and the debtor which is subsequently assigned by the creditor (assignor) to a new creditor (assignee). The parties to the original contract can choose any law to govern the contract which includes the claim subsequently assigned.

✓ Option 4: Mixed approach combining the law of the assignor’s habitual residence and the law of the assigned claim

This mixed option combines the application of the law of the assignor's habitual residence as a general rule and the application of the law of the assigned claim to certain exceptions, namely (i) the assignment of cash credited to an account in a credit institution (for example a bank, where the consumer is the creditor and the credit institution is the debtor), and (ii) the assignment of claims arising from financial instruments. This mixed option also lays down the possibility for the assignor and the assignee to choose the law of the assigned claim to apply to the third-party effects of assignments in the context of a securitisation. The possibility for parties in a securitisation to remain subject to the general rule based on the law of the assignor’s habitual residence or choose the law of the assigned claim aims at catering for the needs of both large and smaller securitisation operators.

✓ Option 5: Mixed approach combining the law of the assigned claim and the law of the assignor’s habitual residence

This mixed option combines the application of the law of the assigned claim as a general rule and the application, as an exception, of the law of the assignor's habitual residence to the assignment of multiple and future claims. Under this option, the third-party effects of the assignment of trade receivables by a non-financial company (for example, an SME) in the context of factoring would remain subject to the law of the assignor’s habitual residence. The third-party effects of the assignment of multiple claims by a financial company (for example, a bank) in the context of securitisation would also be subject to the law of the assignor’s habitual residence.

This proposal is based on option 4 , which chooses the law of the assignor's habitual residence as a general rule but with certain assignments subject, as an exception, to the law of the assigned claim and with a choice of law possibility for securitisation. Given that the proposal does not deal with relationships between the parties to a contract but with the rights of third parties, applying the law of the assignor’s habitual residence as a general rule is the most suitable option because:

-     it is the only law that can be predicted and easily found by third parties concerned by the assignment, such as the creditors of the assignor. In contrast, the law that governs the assigned claim and the law that governs the contract of assignment cannot be predicted by third parties as such laws are most of the times chosen by the parties to the contract;

-     in the case of bulk assignments of claims, it is the only law that responds to the needs of factors and smaller operators of securitisation, who are not always equipped to check ownership requirements under the various countries' laws which govern the various claims assigned in the bundle;

-     it is the only law that makes possible the determination of the applicable law when future claims are assigned, a common practice in factoring;

-     it is the only law which is consistent with the Union acquis on insolvency, that is, the Insolvency Regulation. The application of the same law to the third-party effects of assignments of claims and to insolvency facilitates the resolution of the assignor’s insolvency 32 ;

-     it is the only law which is consistent with the international solution enshrined in the 2001 United Nations Convention on the Assignment of Receivables in International Trade. This can create synergies and save legal due diligence and litigation costs for market participants who operate on a global basis.

In addition, even when, currently, the parties choose to apply the law of the assigned claim to the third-party effects of their cross-border assignment, most of the times they also look at the law of the assignor's habitual residence to make sure that the acquisition of legal title over the claims assigned will not be prevented by overriding mandatory rules of the country of the assignor's habitual residence, in particular the rules laying down publicity requirements such as the obligation to register the assignment of claims in a public register to make it known and effective towards third parties 33 .

On the other hand, the mixed nature of this option provides for an exception based on the law of the assigned claim to apply to certain specific assignments, namely the assignment of cash credited to an account in a credit institution and the assignment of claims arising from financial instruments, which accommodates the needs of market participants in these specific areas. This mixed option offers additional flexibility by laying down the possibility for the assignor and the assignee in the assignment of claims in a securitisation to choose the law applicable to the third-party effects of the assignment, thereby enabling both large and smaller operators to engage in cross-border securitisations.

A joint Impact Assessment report covering both the law applicable to the ownership of securities and the law applicable to the third-party effects of assignments of claims was submitted to the Regulatory Scrutiny Board (RSB) on 8 November 2017. The RSB issued a negative opinion on the impact assessment and made a number of common recommendations for improvements. With regard to claims, the RSB asked for more detailed information on the options that were being considered as to the law applicable to the third-party effects of assignments of claims. The impact assessment was revised and resubmitted to the RSB on 18 January 2018. On 1 February 2018 the RSB issued a positive opinion with reservations. With regard to claims, the RSB recommended that more information be provided on the one-off costs that some market participants would incur as a result of the adoption of uniform conflict of laws rules. The recommendations for improvement were taken into account in the impact assessment to the extent possible.

• Fundamental rights

The objectives of this initiative fully support the right to property enshrined in Article 17 of the Charter of Fundamental Rights of the European Union 34 . By clarifying which law governs the proprietary effects of assignments of claims, this proposal would contribute to upholding the right to property as it would diminish the risk that the ownership of investors or collateral takers over claims might be hindered.

By reducing cases of fall-outs and financial losses due to the absence of uniform provisions on the law applicable to the proprietary effects of assignments of claims, this proposal would positively impact the freedom to conduct a business set out in Article 16 of the Charter.

By harmonising the conflict of laws rules on the proprietary effects of assignments of claims, this proposal would discourage forum shopping as any Member State’s court or authority hearing a dispute would base its judgement on the same national substantive law. This would facilitate the right to an effective remedy set out in Article 47 of the Charter.

4. BUDGETARY IMPLICATIONS

The proposal will have no impact on the Union budget.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The Commission will monitor the impact of the proposed initiative by way of a questionnaire sent to key stakeholders. The questionnaire will aim at gathering information on trends in the number of cross-border assignments, trends in due diligence costs further to the adoption of a uniform conflict of laws rule, and the one-off costs related to changes in legal documentation. The impact of the proposed solution will be evaluated in a report prepared by the Commission five years after the date of application of the proposed instrument.

The monitoring of the impact of the adoption of a uniform conflict of laws rule will cover the areas of factoring, collateralisation, securitisation and the specific assignments of cash credited to an account in a credit institution and the assignment of claims arising from financial instruments such as derivative contracts.

The analysis will take into account that the volume of assignments, the transaction costs and the nature of hidden risks in cross-border assignments of claims are influenced by a number of different economic, legal or regulatory factors unrelated to legal certainty on the law applicable to the third-party effects of such assignments.

• Detailed explanation of the specific provisions of the proposal

Article 1:     Scope

This article defines the scope of the proposed Regulation taking into account existing Union legislation and, in particular, the scope of the Rome I Regulation.

Article 1(2) contains a list of exclusions from the scope of the proposed Regulation. These matters will be governed either by existing Union legislation or by national conflict of laws rules.

Article 2:     Definitions

This article first defines the main concepts on which the proposed Regulation is based, namely “assignment”, “claim” and “third-party effects”. The definition of “assignment” is aligned with that contained in the Rome I Regulation. It refers only to a voluntary transfer of a claim, including contractual subrogation. It covers both outright transfers of a claim and also the transfer of a claim as collateral or security.

The definition of “claim” in the proposed Regulation codifies the general understanding of what a claim is under the Rome I Regulation, namely a broad concept referring to a debt of whatever nature, whether monetary or non-monetary, and whether arising from a contractual obligation governed by the Rome I Regulation or a non-contractual obligation governed by the Rome II Regulation. The definition of “third-party effects” is determined by the material scope of the proposed Regulation.

The article defines “habitual residence” in line with the definition contained in Article 19(1) of the Rome I Regulation, that is, as the place of central administration for companies and as the principal place of business for a natural person acting in the course of his business activity. The proposed Regulation does not include a definition of habitual residence equivalent to the definition contained in Article 19(2) of the Rome I Regulation, that is, as the place of location of a branch, because of the uncertainty that such a rule would create if the same claim was assigned by the assignor’s central management and also by the management of a branch located in a different country.

The concept of “habitual residence” will generally coincide with the centre of main interest (COMI) used in the Insolvency Regulation.

The article defines “credit institution” in accordance with Union legislation governing credit institutions; “cash” in accordance with the Financial Collateral Directive; and “financial instrument” in accordance with MiFID II.

Article 3:     Universal application

This article establishes the universal character of the proposed Regulation by providing that the national law designated as applicable by the proposed Regulation can be the law of a Member State or the law of a third country.

Article 4:     Applicable law

This article provides for uniform conflict of laws rules on the third-party effects of the assignment of claims. The article lays down in paragraph 1 a general rule based on the law of the assignor’s habitual residence, two exceptions in paragraph 2 based on the law of the assigned claim and, in paragraph 3, a possibility for the assignor and the assignee in a securitisation to choose the law of the assigned claim as the law applicable to the third-party effects of the assignment. A rule applicable to priority conflicts between assignees arising from the application of the law of the assignor's habitual residence and the law of the assigned claim to the third-party effects of two assignments of the same claim is laid down in paragraph 4.

According to the general rule, the law that governs the third-party effects of assignments of claims is the law of the country where the assignor has its habitual residence at the material time.

The article also deals, in the second subparagraph of paragraph 1, with the so-called conflit mobile , that is, the rare occurrence in which the assignor changes habitual residence between two assignments of the same claim as, in such cases, competing assignments could be subject to different national laws. The rule on conflit mobile provides that the applicable law will be the law of the assignor's habitual residence at the time at which one of the two assignments first becomes effective against third parties; in other words, at the time at which one of the assignees first completes the requirements to make the assignment effective against third parties.

When, as in the case of a syndicated loan (a loan offered by a group of lenders - referred to as a syndicate - to a single borrower for large projects), each creditor within a group of creditors owns a share of the same claim, the law of the assignor’s habitual residence will govern the third-party effects of an assignment made by a creditor of his own share of the claim.

Paragraph 2 of the article provides that the third-party effects of certain assignments are, as an exception, subject to the law of the assigned claim. The law of the assigned claim refers to the law that governs the contract between the original creditor/assignor and the debtor from which the claim arises. With this exception the proposed Regulation lays down a conflict of laws rule which adapts to the needs of market participants involved in these specific assignments. The assignments whose third-party effects are subject to the law of the assigned claim are: (i) the assignment of cash credited to an account in a credit institution; and (ii) the assignment of claims arising from financial instruments.

On the first exception: Where an account holder (for example, a consumer) places cash in an account in a credit institution (for example, a bank), there is an initial contract between the account holder (the creditor) and the credit institution (the debtor). The account holder is the creditor of a claim against the credit institution, the debtor, for the payment of the cash credited to the account in the credit institution. An account holder may wish to assign the cash credited to his account in a credit institution to another credit institution as security to obtain credit. In such cases, the law that will govern who has ownership title over the claim once the cash has been assigned as collateral will not be the law of the habitual residence of the account holder (the assignor) but the law that governs the assigned claim, that is, the law that governs the contract between the account holder and the first credit institution from which the claim arises. For third parties such as creditors of the assignor and competing assignees, greater predictability is provided if the law applicable to the third-party effects of the assignment of the cash credited to an account in a credit institution is the law applicable to the cash claim. This is because it is generally assumed that the claim that an account holder has over cash credited to an account in a credit institution is governed by the law of the country where the credit institution is located. This law is normally chosen in the account contract between the account holder and the credit institution.

As to the second exception: The third-party effects of assignments of claims arising from financial instruments, such as derivative contracts, should be subject to the law governing the assigned claim, that is, the law governing the financial instrument such as the derivative contract. A claim arising from a financial instrument could be, for example, the amount due after the calculation of the close-out in a derivative contract. Subjecting the third-party effects of assignments of claims arising from financial instruments to the law of the assigned claim rather than the law of the assignor’s habitual residence is essential to preserve the stability and smooth functioning of financial markets as well as the expectations of market participants. These are preserved as the law that governs the financial instrument from which the claim arises, such as a derivative contract, is the law chosen by the parties or the law determined in accordance with non-discretionary rules applicable to financial markets.

The third paragraph of the article deals with the law applicable to the third-party effects of assignments of claims pursuant to a securitisation. Securitisation enables the assignor, called ‘originatorʼ (for example, a bank or a company) to refinance a set of its claims (for example, motor vehicle rents, credit card receivables, mortgage loan payments) by assigning them to a ‘special purpose vehicleʼ (SPV). The special purpose vehicle (assignee) then issues debt securities (for example, bonds) in the capital markets reflecting the proceeds from these claims. As payments are made under the underlying claims, the special purpose vehicle uses the proceeds it receives to make payments on the securities to the investors. Securitisation can lower the cost of financing because the special purpose vehicle is structured in such a way as to make it insolvency-remote. For corporates, securitisation can provide access to credit at lower cost than bank loans. For banks, securitisation is a way to put some of their assets to better use and free up their balance sheets to allow for further lending to the economy.

Currently, large assignors and assignees (for example, large banks) involved in securitisations apply the law of the assigned claim to the third-party effects of the assignment. This means that the assignee (the special purpose vehicle) will need to comply with the requirements laid down in the law that governs the assigned claims (that is, the contract between the original creditor/assignor and the debtor) to ensure that it acquires legal title over the assigned claims. This reduces costs for operators that are able to structure their securitisations such that all claims included in the package to be assigned to the special purpose vehicle are subject to the law of one same country. The special purpose vehicle must then comply with the requirements laid down in the law of only one country to ensure that it acquires legal title over the bundle of assigned claims. Given that large operators often carry out securitisations on a cross-border basis, that is, with the originators being located in different Member States, applying the law of the assignor’s habitual residence to the third-party effects of the assignment of claims in these cases would be more cumbersome for the assignee as it would need to comply with the requirements laid down in the laws of various countries, that is, the laws of each of the countries where an originator is located.

In contrast, smaller operators (for example, smaller banks and corporates) most often need to apply the law of the assignor’s habitual residence to the third-party effects of the assignment of claims in a securitisation because the claims included in the package to be assigned to the special purpose vehicle are governed by the laws of different countries. In such cases, smaller assignees could not apply the law of the assigned claim to the third-party effects of the assignment as they would not be equipped to comply with the requirements to obtain legal title over the assigned claims under each of the laws governing each of the claims included in the package. Instead, it is easier for smaller assignees to comply with the requirements under only one law, namely the law of the assignor’s habitual residence.

In short, by providing for a choice of law, paragraph 3 of this article aims at not affecting the current practice of large banks of applying the law of the assigned claim to the third-party effects of assignments in securitisations where the assigned claims are all subject to the same country's law but the assignors (originators) are located in various Member States. At the same time, paragraph 3 aims at making it possible for smaller banks and corporates to enter or strengthen their position on the securitisation market by being able to become the assignees of multiple claims subject to different countries' laws.

In any event, the flexibility offered by paragraph 3 enables securitisation operators to decide for each securitisation whether to choose the law of the assigned claim or remain subject to the general rule based on the law of the assignor’s habitual residence depending on the structure of their securitisation, in particular on whether the assigned claims are subject to the law of one or various countries, and on whether there is one or more originators and they are located in one or various countries. Paragraph 4 of this article lays down a conflict of laws rule to resolve priority conflicts between assignees of the same claim when the third-party effects of the assignment of the claim have been subject to the law of the assigned claim in one assignment and to the law of the assignor’s habitual residence in another assignment. This situation can occur (normally accidentally and in no particular order) in case a claim has been first assigned in factoring, collateralisation or a (first) securitisation in which no choice of law has been made and, subsequently, in a (second) securitisation in which the parties chose the law of the assigned claim as the law applicable to the third-party effects of the assignment. The third-party effects of assignments of claims in factoring, collateralisation or a (first) securitisation in which no choice of law has been made would all be subject to the law of the assignor’s habitual residence. In contrast, the third-party effects of assignments of claims in a (second) securitisation where the parties chose the law of the assigned claim would be subject to the law of the assigned claim. The proposed Regulation provides for an objective factor to determine which law should apply to resolve the priority conflict between assignees: the law that should apply would be the law applicable to the third-party effects of the assignment of claims which first became effective against third parties under its applicable law. This rule is consistent with the rule applicable to conflit mobile under paragraph 1 of this article and, like that rule, is based on the time at which the assignment of claims first becomes effective against third parties because the proposed Regulation concerns third-party effects.

Article 5:     Scope of the applicable law

This article harmonises a non-exhaustive list of issues that should be governed by the national substantive law designated as the law applicable to the third-party effects of the assignments of claims. This article therefore spells out the content of the concept “third-party effects” (or proprietary effects) of the assignment of claims. In general, the applicable law will determine who has acquired legal title over the assigned claim. In particular, the applicable law should govern two main issues in order to determine whether a person has acquired legal title over the assigned claim:

(i)     the effectiveness of the assignment of the claim against third parties: that is, the steps that need to be taken by the assignee in order to be able to assert his right over the claim towards third parties – for example, registering the assignment with a public authority or registry, or notifying the debtor in writing of the assignment; and

(ii)     priority issues: that is, the determination of whose right has priority in cases of conflict between competing claimants – for example, between competing assignees when the same claim has been assigned more than once, or between an assignee and another right-holder, for example a creditor of the assignor or the assignee in insolvency cases.  

The term ‘third parties’ should be understood as third parties other than the debtor, as all aspects affecting the debtor are, pursuant to Article 14(2) of the Rome I Regulation, governed by the law of the assigned claim (that is, the law that governs the original contract from which the assigned claim arises).  

The modalities for the creation of rights and the transfer of rights may vary under the legal orders of the Member States. Given that the proposed Regulation has a universal character and can therefore designate as the law applicable to the third-party effects of assignments of claims the law of any country, the proposed Regulation aims at covering a variety of possible priority conflicts between competing claimants. The proposed Regulation covers priority conflicts arising not only from assignments of claims (for example, between two assignees of the same claim) but also from legally or functionally equivalent mechanisms, in particular the transfer of a contract and the novation of a contract, which can be used to pass on a contract and thus both the rights (the claim) and obligations arising from that contract. The law designated as applicable by the proposed Regulation should therefore govern not only priority conflicts between competing assignees but also priority conflicts between an assignee and a competing claimant who has become the beneficiary of a claim further to the transfer of a contract or the novation of a contract. It should be stressed that the proposal does not designate the law applicable to the transfer of contracts or the novation of contracts (for example, the law applicable to the novation of derivative contracts), but only the law applicable to possible priority conflicts over a claim first assigned and then transferred again (the same claim or the economically equivalent claim) by means of a transfer of contract or a novation of contract. If the proposed Regulation did not cover priority conflicts between an assignee and a beneficiary of a claim further to the transfer of a contract or the novation of a contract, a situation of legal uncertainty could arise whereby both an assignee and the competing beneficiary of the claim further to the transfer or novation of a contract would require payment from the debtor and no common conflict of laws rule could apply to resolve that conflict.

Article 6:     Overriding mandatory provisions / Article 7: Public policy

These articles   provide for possibilities to apply the law of the forum instead of the law designated as the applicable law by Article 4. Overriding mandatory provisions could refer, for example, to the obligation to register the assignment of claims in a public registry.

Articles 8 to 12:     General issues of application of conflict of laws rules

These articles deal with general issues of application of conflict of laws rules in line with other Union instruments on applicable law, in particular the Rome I Regulation.

Article 10:     Relationship with other provisions of Union law

This article aims at safeguarding the application of lex specialis laying down conflict of laws rules on the third-party effects of assignments of claims in relation to particular matters.

2018/0044 (COD)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 81(2) thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Economic and Social Committee 35 ,

Acting in accordance with the ordinary legislative procedure,

(1) The Union has set itself the objective of maintaining and developing an area of freedom, security and justice. For the progressive establishment of such an area, the Union is to adopt measures relating to judicial cooperation in civil matters having cross-border implications to the extent necessary for the proper functioning of the internal market.

(2) Pursuant to Article 81 of the Treaty, these measures are to include those aimed at ensuring the compatibility of the rules applicable in the Member States concerning the conflict of laws.

(3) The proper functioning of the internal market requires, in order to improve the predictability of the outcome of litigation, certainty as to the law applicable and the free movement of judgments, for the conflict of law rules in the Member States to designate as the applicable law the same national law irrespective of the Member State of the court in which an action is brought.

(4) Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) does not cover the questions of third-party effects of assignment of claims. However, Article 27(2) of that Regulation required the Commission to submit to the European Parliament, the Council and the European Economic and Social Committee a report on the question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over a right of another person which should be accompanied, if appropriate, by a proposal to amend that Regulation and an assessment of the impact of the provisions to be introduced.

(5) On 18 February 2015 the Commission adopted a Green Paper on Building a Capital Markets Union 36 which stated that achieving greater legal certainty in cases of cross-border transfer of claims and the order of priority of such transfers, particularly in cases of insolvency, is an important aspect in developing a pan-European market in securitisation and financial collateral arrangements, and also of other activities such as factoring.

(6) On 30 September 2015 the Commission adopted a Communication with an Action Plan on Building a Capital Markets Union 37 . This Capital Markets Union Action Plan noted that differences in the national treatment of third-party effects of assignment of debt claims complicate the use of these instruments as cross-border collateral, concluding that this legal uncertainty frustrates economically significant financial operations, such as securitisations. The Capital Markets Union Action Plan announced that the Commission would propose uniform rules to determine with legal certainty which national law should apply to the third-party effects of the assignment of claims.

(7) On 29 June 2016 the Commission adopted a report on the appropriateness of Article 3(1) of Directive 2002/47/EC on financial collateral arrangements 38 focusing on the question whether this Directive works effectively and efficiently as regards formal acts required to provide credit claims as collateral. The report concluded that a proposal of uniform rules regarding the third-party effects of assignment of claims would allow determining with legal certainty which national law should apply to the third-party effects of the assignment of claims, which would contribute to achieving greater legal certainty in cases of cross-border mobilisation of credit claims as collateral.

(8) On 29 September 2016 the Commission adopted a report on the question of the effectiveness of an assignment or subrogation of a claim against third parties and the priority of the assigned or subrogated claim over the right of another person. The report concluded that uniform conflict of law rules governing the effectiveness of assignments against third parties as well as questions of priority between competing assignees or between assignees and other right holders would enhance legal certainty and reduce practical problems and legal costs relating to the current diversity of approaches in the Member States.

(9) The substantive scope and the provisions of this Regulation should be consistent with Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations (Rome II), 39 Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I), 40 Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast), 41 and Regulation (EU) 2015/848 on insolvency proceedings. 42   The interpretation of this Regulation should as much as possible avoid regulatory gaps between these instruments.

(10) This Regulation implements the Capital Markets Union Action Plan. It also fulfils the requirement laid down in Article 27(2) of the Rome I Regulation that the Commission should publish a report and, if appropriate, a proposal on the effectiveness of an assignment of a claim against third parties and the priority of the assignee over the right of another person.

(11) Conflict of laws rules governing the third-party (or proprietary) effects of assignments of claims do not currently exist at Union level. These conflict of laws rules are laid down at Member State level, but they are inconsistent and often unclear. In cross-border assignments of claims, the inconsistency of national conflict of laws rules leads to legal uncertainty as to which law applies to the third-party effects of the assignments. The lack of legal certainty creates a legal risk in cross-border assignments of claims which does not exist in domestic assignments as different national substantive rules may be applied depending on the Member State whose courts or authorities assess a dispute as to the legal title over the claims.

(12) If assignees are not aware of the legal risk or choose to ignore it, they may face unexpected financial losses. Uncertainty about who has legal title over the claims assigned on a cross-border basis can have knock-on effects and deepen and prolong the impact of a financial crisis. If assignees decide to mitigate the legal risk by seeking specific legal advice, they will incur higher transaction costs not required for domestic assignments. If assignees are deterred by the legal risk and choose to avoid it, they may forego business opportunities and market integration may be reduced.

(13) The objective of this Regulation is to provide legal certainty by laying down common conflict of laws rules designating which national law applies to the third-party effects of assignments of claims.

(14) A claim gives a creditor a right to the payment of a sum of money or the performance of an obligation by the debtor. The assignment of a claim enables the creditor (assignor) to transfer his right to claim the debt against a debtor to another person (assignee). The laws that govern the contractual relationship between the creditor and the debtor, between the assignor and the assignee and between the assignee and the debtor are designated by the conflict of laws rules laid down in the Rome I Regulation 43 .

(15) The conflict of laws rules laid down in this Regulation should govern the proprietary effects of assignments of claims as between all parties involved in the assignment (that is, between the assignor and the assignee and between the assignee and the debtor) as well as in respect of third parties (for example, a creditor of the assignor).

(16) The claims covered by this Regulation are trade receivables, claims arising from financial instruments as defined in Directive 2014/65/EU on markets in financial instruments 44   and cash credited to an account in a credit institution. Financial instruments as defined in Directive 2014/65/EU include securities and derivatives traded on financial markets. While securities are assets, derivatives are contracts which include both rights (or claims) and obligations for the parties to the contract.

(17) This Regulation concerns the third-party effects of the assignment of claims. It does not cover the transfer of the contracts   (such as derivative contracts), in which both rights (or claims) and obligations are included, or the novation of contracts including such rights and obligations. As this Regulation does not cover the transfer or the novation of contracts, trading in financial instruments, as well as the clearing and the settlement of these instruments, will continue to be governed by the law applicable to contractual obligations as laid down in the Rome I Regulation. This law is normally chosen by the parties to the contract or is designated by non-discretionary rules applicable to financial markets.

(18) Matters governed by the Financial Collateral Directive 45 , the Settlement Finality Directive 46 , the Winding-Up Directive 47 and the Registry Regulation 48 should not be affected by this Regulation .

(19) This Regulation should be universal: the law designated by this Regulation should apply even if it is not the law of a Member State.

(20) Predictability is essential for third parties interested in acquiring legal title over the assigned claim. Applying the law of the country where the assignor has its habitual residence to the third-party effects of assignments of claims enables the third parties concerned to easily know in advance which national law will govern their rights. The law of the assignor’s habitual residence should thus apply as a rule to the third-party effects of assignments of claims. This rule should apply, in particular, to the third-party effects of the assignment of claims in factoring, collateralisation and, where the parties have not chosen the law of the assigned claim, securitisation.

(21) The law chosen as a rule to apply to the third-party effects of assignments of claims should enable the determination of the applicable law where future claims are assigned, a common practice where multiple claims are assigned, such as in factoring. The application of the law of the assignor’s habitual residence enables the determination of the law applicable to the third-party effects of the assignment of future claims.

(22) The need to determine who has legal title over an assigned claim often arises when defining the insolvency estate where the assignor becomes insolvent. Coherence between the conflict of laws rules in this Regulation and those laid down in Regulation (EU) 2015/848 on insolvency proceedings is therefore desirable. Coherence should be achieved through the application as a rule of the law of the assignor’s habitual residence to the third-party effects of assignments of claims, as the use of the assignor’s habitual residence as connecting factor coincides with the debtor’s centre of main interest used as connecting factor for insolvency purposes.

(23) The 2001 United Nations Convention on the Assignment of Receivables in International Trade provides that the priority of the right of an assignee in the assigned receivable over the right of a competing claimant is governed by the law of the State in which the assignor is located. The compatibility between the Union conflict of laws rules laid down in this Regulation and the solution favoured at the international level by the Convention should facilitate the resolution of international disputes.

(24) Where the assignor changes its habitual residence between multiple assignments of the same claim, the applicable law should be the law of the assignor’s habitual residence at the time at which one of the assignees first makes his assignment effective against third parties by completing the requirements under the law applicable on the basis of the assignor's habitual residence at that time.

(25) In accordance with market practice and the needs of market participants, the third-party effects of certain assignments of claims should, as an exception, be governed by the law of the assigned claim, that is, the law that governs the initial contract between the creditor and the debtor from which the claim arises.

(26) The law of the assigned claim should govern the third-party effects of the assignment by an account holder of cash credited to an account in a credit institution, where the account holder is the creditor/assignor and the credit institution is the debtor. Greater predictability is provided to third parties, such as creditors of the assignor and competing assignees, if the law of the assigned claim applies to the third-party effects of these assignments as it is generally assumed that the claim that an account holder has over cash credited to an account in a credit institution is governed by the law of the country where the credit institution is located (rather than by the law of the habitual residence of the account holder/assignor). This law is normally chosen in the account contract between the account holder and the credit institution.

(27) The third-party effects of the assignment of claims arising from financial instruments should also be subject to the law governing the assigned claim, that is, the law governing the contract from which the claim arises (such as a derivative contract). Subjecting the third-party effects of assignments of claims arising from financial instruments to the law of the assigned claim rather than the law of the assignor’s habitual residence is essential to preserve the stability and smooth functioning of financial markets. These are preserved as the law that governs the financial instrument from which the claim arises is the law chosen by the parties to the contract or the law determined in accordance with non-discretionary rules applicable to financial markets.

(28) Flexibility should be provided in the determination of the law applicable to the third-party effects of assignments of claims in the context of a securitisation in order to cater for the needs of all securitisers and facilitate the expansion of the cross-border securitisation market to smaller operators. Whilst the law of the assignor’s habitual residence should apply as the default rule to the third-party effects of assignments of claims in the context of a securitisation, the assignor (originator) and the assignee (special purpose vehicle) should be able to choose that the law of the assigned claim should apply to the third-party effects of the assignment of claims. The assignor and the assignee should be able to decide that the third-party effects of the assignment of claims in the context of a securitisation should remain subject to the general rule of the assignor’s habitual residence or to choose the law of the assigned claim in function of the structure and characteristics of the transaction, for example the number and location of the originators and the number of laws which govern the assigned claims.

(29) Priority conflicts between assignees of the same claim may arise where the third-party effects of the assignment have been subject to the law of the assignor’s habitual residence in one assignment and to the law of the assigned claim in another assignment. In such cases, the law applicable to resolve the priority conflict should be the law applicable to the third-party effects of the assignment of the claim which has first become effective against third parties under its applicable law.

(30) The scope of the national law designated by this Regulation as the law applicable to the third-party effects of an assignment of claims should be uniform. The national law designated as applicable should govern in particular (i) the effectiveness of the assignment against third parties, that is, the steps that need to be taken by the assignee in order to ensure that he acquires legal title over the assigned claim (for example, registering the assignment with a public authority or registry, or notifying the debtor in writing of the assignment); and (ii) priority issues, that is, conflicts between several claimants as to who has title over the claim (for example, between two assignees where the same claim has been assigned twice, or between an assignee and a creditor of the assignor).

(31) Given the universal character of this Regulation, the laws of countries with different legal traditions may be designated as the applicable law. Where, further to the assignment of a claim, the contract from which the claim arises is transferred, the law designated by this Regulation as the law applicable to the third-party effects of a claim assignment should also govern a priority conflict between the assignee of the claim and the new beneficiary of the same claim further to the transfer of the contract from which the claim arises. For the same reason, the law designated by this Regulation as the law applicable to the third-party effects of a claim assignment should also apply, where novation is used as a functional equivalent of the transfer of a contract, to resolve a priority conflict between an assignee of a claim and the new beneficiary of the functionally equivalent claim further to the novation of the contract from which the claim arises.

(32) Considerations of public interest justify giving the courts of the Member States the possibility, in exceptional circumstances, of applying exceptions based on public policy and overriding mandatory provisions, which should be interpreted restrictively.

(33) Respect for international commitments entered into by the Member States means that this Regulation should not affect international conventions to which one or more Member States are parties at the time when this Regulation is adopted. To make the rules more accessible, the Commission should publish the list of the relevant conventions in the Official Journal of the European Union on the basis of information supplied by the Member States.

(34) This Regulation respects the fundamental rights and observes the principles recognised in the Charter of Fundamental Rights of the European Union. In particular, this Regulation seeks to promote the application of Articles 17 and 47 concerning, respectively, the right to property and the right to an effective remedy and to a fair trial.

(35) Since the objectives of this Regulation cannot be sufficiently achieved by the Member States and can rather, by reason of the scale and effects of this Regulation, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on the European Union. The desired uniformity of the conflict of laws rules on the third-party effects of assignments of claims can only be achieved through a Regulation as only a Regulation ensures a consistent interpretation and application of the rules at national level. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve that objective.

(36) In accordance with Article 3 and Article 4a(1) of Protocol No 21 on the position of the United Kingdom and Ireland in respect of the area of freedom, security and justice, annexed to the Treaty on European Union and the Treaty on the Functioning of the European Union, the [United Kingdom] [and] [Ireland] [have/has notified their/its wish to take part in the adoption and application of the present Regulation] [are/is not taking part in the adoption of this Regulation and are/is not bound by it or subject to its application].

(37) In accordance with Articles 1 and 2 of Protocol No 22 on the position of Denmark, annexed to the treaty on European Union and the Treaty on the Functioning of the European Union, Denmark is not taking part in the adoption of this Regulation and is not bound by it or subject to its application.

HAVE ADOPTED THIS REGULATION:

SCOPE AND DEFINITIONS

1.     This Regulation shall apply, in situations involving a conflict of laws, to the third-party effects of assignments of claims in civil and commercial matters.

It shall not apply, in particular, to revenue, customs or administrative matters.

2.     The following shall be excluded from the scope of this Regulation:

(a) assignment of claims arising from family relationships and relationships deemed by the law applicable to such relationships to have comparable effects, including maintenance obligations;

(b) assignment of claims arising from matrimonial property regimes, property regimes of relationships deemed by the law applicable to such relationships to have comparable effects to marriage, and wills and succession;

(c) assignment of claims arising from bills of exchange, cheques and promissory notes and other negotiable instruments to the extent that the obligations under such other negotiable instruments arise out of their negotiable character;

(d) assignment of claims arising from questions governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organisation or winding-up of companies and other bodies, corporate or unincorporated, and the personal liability of officers and members as such for the obligations of the company or body;

(e) assignment of claims arising from the constitution of trusts and the relationship between settlors, trustees and beneficiaries;

(f) assignment of claims arising from life insurance contracts arising out of operations carried out by organisations other than undertakings referred to in Article 2(1) and (3) of Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) 49 the object of which is to provide benefits for employed or self-employed persons belonging to an undertaking or group of undertakings, or to a trade or group of trades, in the event of death or survival or of discontinuance or curtailment of activity, or of sickness related to work or accidents at work.

Definitions

For the purposes of this Regulation:

(a) ‘assignor’ means a person who transfers his right to claim a debt against a debtor to another person;

(b) ‘assignee’ means a person who obtains the right to claim a debt against a debtor from another person;

(c) ‘assignment’ means a voluntary transfer of a right to claim a debt against a debtor. It includes outright transfers of claims, contractual subrogation, transfers of claims by way of security and pledges or other security rights over claims;

(d) ‘claim’ means the right to claim a debt of whatever nature, whether monetary or non-monetary, and whether arising from a contractual or a non-contractual obligation;

(e) 'third-party effects' means proprietary effects, that is, the right of the assignee to assert his legal title over a claim assigned to him towards other assignees or beneficiaries of the same or functionally equivalent claim, creditors of the assignor and other third parties;

(f) ‘habitual residence’ means, for companies and other bodies, corporate or unincorporated, the place of central administration; for a natural person acting in the course of his business activity, his principal place of business;

(g) ‘credit institution’ means an undertaking as defined in point (1) of Article 4(1) of Regulation (EU) No 575/2013 50 , including branches, within the meaning of point (17) of Article 4(1) of that Regulation, of credit institutions having their head offices inside or, in accordance with Article 47 of Directive 2013/36/EU 51 , outside the Union where such branches are located in the Union;

(h) ‘cash’ means money credited to an account in a credit institution in any currency;

(i) ‘financial instrument’ means those instruments specified in Section C of Annex I of Directive 2014/65/EU 52 .

UNIFORM RULES

Universal application

Any law specified by this Regulation shall be applied whether or not it is the law of a Member State.

Applicable law

1.     Unless otherwise provided for in this Article, the third-party effects of an assignment of claims shall be governed by the law of the country in which the assignor has its habitual residence at the material time.

Where the assignor has changed its habitual residence between two assignments of the same claim to different assignees, the priority of the right of an assignee over the right of another assignee shall be governed by the law of the habitual residence of the assignor at the time of the assignment which first became effective against third parties under the law designated as applicable pursuant to the first subparagraph.

2.     The law applicable to the assigned claim shall govern the third-party effects of the assignment of:

(a) cash credited to an account in a credit institution;

(b) claims arising from a financial instrument.

3.     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.

The choice of law shall be made expressly in the assignment contract or by a separate agreement. The substantive and formal validity of the act whereby the choice of law was made shall be governed by the chosen law.

4.     A priority conflict between assignees of the same claim where the third-party effects of one of the assignments are governed by the law of the country in which the assignor has its habitual residence and the third-party effects of other assignments are governed by the law of the assigned claim shall be governed by the law applicable to the third-party effects of the assignment of the claim which first became effective against third parties under its applicable law.

Scope of the applicable law

The law applicable to the third-party effects of assignment of claims pursuant to this Regulation shall govern, in particular:

(a)     the requirements to ensure the effectiveness of the assignment against third parties other than the debtor, such as registration or publication formalities;

(b)     the priority of the rights of the assignee over the rights of another assignee of the same claim;

(c)     the priority of the rights of the assignee over the rights of the assignor’s creditors;

(d)     the priority of the rights of the assignee over the rights of the beneficiary of a transfer of contract in respect of the same claim;

(e)     the priority of the rights of the assignee over the rights of the beneficiary of a novation of contract against the debtor in respect of the equivalent claim.

Overriding mandatory provisions

1.     Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum.

2.     Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a Member State for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the third-party effects of assignments of claims pursuant to this Regulation.

CHAPTER III

OTHER PROVISIONS

Public policy ( ordre public )

The application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy ( ordre public ) of the forum.

Exclusion of renvoi

The application of the law of any State specified by this Regulation means the application of the rules of law in force in that State other than its rules of private international law.

States with more than one legal system

1.     Where a State comprises several territorial units, each of which has its own rules of law in respect of the third-party effects of assignments of claims, each territorial unit shall be considered as a State   for the purposes of identifying the law applicable under this Regulation.

2.     A Member State which comprises several territorial units each of which has its own rules of law in respect of the third-party effects of assignments of claims shall not be required to apply this Regulation to conflicts of laws arising between such units only.

Relationship with other provisions of Union law

This Regulation shall not prejudice the application of provisions of Union law which, in relation to particular matters, lay down conflict of laws rules relating to the third-party effects of assignments of claims.

Relationship with existing international conventions

1.     This Regulation shall not prejudice the application of international conventions to which one or more Member States are parties at the time when this Regulation is adopted and which lay down conflict of laws rules relating to the third-party effects of assignments of claims.

2.     However, this Regulation shall, as between Member States, take precedence over conventions concluded exclusively between two or more of them in so far as such conventions concern matters governed by this Regulation.

List of Conventions

1.     By [ date of application ], Member States shall notify the Commission of the conventions referred to in Article 11(1). After that date, Member States shall notify the Commission of all denunciations of such conventions.

2.     Within six months of receipt of the notifications referred to in paragraph 1, the Commission shall publish in the Official Journal of the European Union:

(a)     a list of the conventions referred to in paragraph 1;

(b)     the denunciations referred to in paragraph 1.

Review clause

By [ five years after the date of application ], the Commission shall submit to the European Parliament, the Council and the European Economic and Social Committee a report on the application of this Regulation. If appropriate, the report shall be accompanied by proposals to amend this Regulation.

Application in time

1.     This Regulation shall apply to assignments of claims concluded on or after [ date of application ].

2.     The law applicable pursuant to this Regulation shall determine whether the rights of a third party in respect of a claim assigned after the date of application of this Regulation have priority over the rights of another third person acquired before this Regulation becomes applicable.

Entry into force and date of application

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union .

It shall apply from [ 18 months from date of entry into force ].

This Regulation shall be binding in its entirety and directly applicable in the Member States in accordance with the Treaties.

Done at Brussels,

For the European Parliament     For the Council

The President     The President

Change Number: DFARS Change 08/15/2024 Effective Date: 08/15/2024

Subpart 232.8 - ASSIGNMENT OF CLAIMS

232.803 policies..

(b) Only contracts for personal services may prohibit the assignment of claims.

(d) Pursuant to 41 U.S.C. 6305, and in accordance with Presidential delegation dated October 3, 1995, Secretary of Defense delegation dated February 5, 1996, and Under Secretary of Defense (Acquisition and Sustainment) delegation dated February 23, 1996, the Director of Defense Procurement determined on May 10, 1996, that a need exists for DoD to agree not to reduce or set off any money due or to become due under the contract when the proceeds under the contract have been assigned in accordance with the Assignment of Claims provision of the contract. This determination was published in the Federal Register on June 11, 1996, as required by law. Nevertheless, if departments/agencies decide it is in the Government's interest, or if the contracting officer makes a determination in accordance with FAR 32.803(d) concerning a significantly indebted offeror, they may exclude the no-setoff commitment.

232.805 Procedure.

(b) The assignee shall forward—

(i) To the administrative contracting officer (ACO), a true copy of the instrument of assignment and an original and three copies of the notice of assignment. The ACO shall acknowledge receipt by signing and dating all copies of the notice of assignment and shall—

(A) File the true copy of the instrument of assignment and the original of the notice in the contract file;

(B) Forward two copies of the notice to the disbursing officer of the payment office cited in the contract;

(C) Return a copy of the notice to the assignee; and

(D) Advise the contracting officer of the assignment.

(ii) To the surety or sureties, if any, a true copy of the instrument of assignment and an original and three copies of the notice of assignment. The surety shall return three acknowledged copies of the notice to the assignee, who shall forward two copies to the disbursing officer designated in the contract.

(iii) To the disbursing officer of the payment office cited in the contract, a true copy of the instrument of assignment and an original and one copy of the notice of assignment. The disbursing officer shall acknowledge and return to the assignee the copy of the notice and shall file the true copy of the instrument and original notice.

232.806 Contract clauses.

(a)(1) Use the clause at 252.232-7008 , Assignment of Claims (Overseas), instead of the clause at FAR 52.232-23, Assignment of Claims, in solicitations and contracts when contract performance will be in a foreign country.

(2) Use Alternate I with the clause at FAR 52.232-23, Assignment of Claims, unless otherwise authorized under 232.803 (d).

DFARS Parts

Dfars appendix.

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Next stage of FSG plan emerges amid 'phone call' claim for Liverpool transfer attempt

Latest Liverpool news as FSG's next plan for Anfield emerges while Jurgen Klopp is reported to have changed his mind after a transfer attempt for the Reds during his time as manager

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Liverpool are gearing up for a return to Premier League action this weekend after the two-week-long international break. The Reds will face Nottingham Forest at Anfield as they look to maintain their 100 percent start to the campaign.

Arne Slot and Co. won their first three Premier League fixtures of the season before the break and will be hoping to continue their impressive start to the campaign. Liverpool will also return to Champions League and Carabao Cup action later this month as a busy fixture schedule awaits.

Here is a round-up of the latest Liverpool evening headlines for Thursday, September 12.

FSG reveal next stage of Anfield plan

It has been confirmed that Dua Lipa will follow in the footsteps of Taylor Swift and P!ink in performing at Anfield. Liverpool announced that the singer will be performing at the club's home stadium next summer as part of her Radical Optimism Tour.

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The summer of 2023 saw Liverpool forced to abandon any plans for live music concerts due to the £80m redevelopment of the Anfield Road End, writes Dave Powell. But the summer of 2024 saw live music back with a bang thanks to three sell-out Swift gigs and two hugely successful Pink concerts followed the 2022 performances by the Rolling Stones, Elton John, and Eagles.

For Liverpool, the money that can be brought in from hosting concerts during the summer is significant, and the concerts held over the course of 2024 have delivered more than £10m in revenue for the Reds.

READ THE FULL STORY HERE .

Jurgen Klopp phone call for Liverpool

Former Bundesliga striker Max Kruse has revealed how Jurgen Klopp called him about the idea of a move to Liverpool.

Kruse, formerly of Werder Bremen, initially retired from professional football with Paderborn in December last year. A few months later, the 36-year-old had been confirmed as a new signing for Berlin District A side BSV Al-Dersimspor.

It was while Kruse was at Werder Bremen that the striker says he received a call from Klopp about potentially signing for Liverpool. However, Kruse has explained how Klopp eventually changed his mind after the Reds won the Champions League final in 2019.

“In February or March 2019 I got a phone call from Jurgen Klopp,” said Kruse on the Flatterball podcast, as quoted by Deichstube.

“It’s the truth! He said he was interested because they wanted to give up two strikers and wanted me as a backup for Mohamed Salah , Sadio Mane and Roberto Firmino."

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