Paritas creditorum or easy credit?: A report from MEPLI Talk with Anna Berlee and Willem Loof – “Regulating Security on (Future) Assets”

On 16th October 2013 the regular M-EPLI Talk took place, and on this occasion M-EPLI fellows Anna Berlee and Willem Loof spoke about their research for the upcoming M-EPLI Book. Anna and Willem’s contribution addresses the question of whether it is better for the EU or the national legal systems to legislate specifically in the area of property security law. Concretely, their focus is on the rules governing the property security right of pledge (or what the English would call the charge) in three different jurisdictions, namely England and Wales, Belgium and the Netherlands.

When a legislator intends to make rules regarding the security right of pledge, there are, according to Anna and Willem, two approaches, which he/she can take. First is the so-called ‘Credit Facilitation’ approach, whose main focus is to make credit lending as attractive as possible for the lender (usually a bank) and for the borrower (e.g. a company). In countries that adopt this approach we can see that the right of pledge has a very strong position, meaning that, for example, its scope is very broad (being applicable also to future claims). The second approach, is the so-called ‘Equality of Creditors’ approach. This approach is rather more creditor-friendly, as it leads lawmakers to enact legislation seeking to protect creditors (particularly non-secured creditors) as much as possible. As Anna and Willem explained in their presentation, it becomes clear, after analyzing the legal systems of Belgium, the Netherlands and England, that – in keeping with well-established tradition, from traffic rules to units of measurement – the English are the odd ones out, taking the opposite direction in the area of property security rights (particularly pledges) to both the Belgians and the Dutch. Whilst the Belgian and Dutch legal systems follow the ‘Credit Facilitation’ approach, the English system leans towards protecting the creditors, i.e. the ‘Equality of Creditors’ approach.

This was not always the case, however. As Anna pointed out, the English rules regarding the floating charge initially appeared more ‘Credit Facilitation’ oriented, giving the chargee a property security right (known as the ‘floating charge’) over all present and future assets of the chargor. In case the chargor went bankrupt, the chargee (usually the bank) had a property security right on all assets at the time of the ‘crystallization’ of the charge, sometimes leaving nothing for the other creditors. The change in approach of the English legislator is visible from the point of introduction by the Enterprise Act 2002 of, what Anna termed, the ‘ring fence’ of unsecured creditors. The ‘ring fence’ rule provides that in insolvency proceedings an amount of up to £600.000 of the assets of the debtor must be set aside and reserved for the claims of the unsecured creditors. This rule certainly, at least in jure, seeks to introduce a degree of equality between the creditors. So we can see the English gradually moving from the ‘Credit Facilitation’ approach closer towards the ‘Equality of Creditors’ approach. On the other hand, as Willem explained in his part of the Talk, the Dutch clearly disregard the paritas creditorum principle (stressing the equality of creditors), by giving the pledgees (the banks) a right of pledge over all assets of the debtor (a company), thus making it in some cases impossible for other creditors of the debtor to get, in the words of Anna and Willem, a ‘piece of the pie’ from its assets. This, conversely, makes the right of (silent) pledge more attractive for the banks, thereby facilitating lending on credit (i.e. the ‘Credit Facilitation’ approach). The Belgian approach is very similar to the Dutch and even more focused on facilitating credit, as in its new provisions on property security rights the Belgian Civil Code stipulates that the right of pledge applies to the totality of assets of the debtor (future claims included).

The purpose of Anna’s and Willem’s research was not, however, merely to point out the differences in Belgian, Dutch and English legal systems regarding the rules on property security rights, but rather to show that every legal system has its own ‘balanced system’ of rules on security rights. It is ‘balanced’, because it balances the interests of credit facilitation on the one hand with the protection of the creditors on the other. And, as is clear from the research undertaken by Anna and Willem, different states choose for a different ‘balance’; one giving preference to the interest of credit providers, whilst another favors protecting the creditors of the borrower. In the light of the above, the ultimate question posed by Anna and Willem in the context of the theme of the M-EPLI book is therefore: ‘Will the nationally balanced system be upset by harmonization?

In the subsequent discussion of the Talk the argument was raised that all legislation at European Union level that has as its object the harmonization of national laws must by definition upset national systems, which is of course true. The question of appropriateness of legislating on EU or national level therefore depends on the balance between the costs and benefits that it would bring. If the benefits of action on EU level (particularly for the internal market and in this case the free movement of capital) outweigh the costs of upsetting national systems, then the Union has an argument in favor of further integration. If, on the other hand the costs of upsetting national legal order outweigh the benefits, it should probably be left for member states to take action at national level. Still, the conclusion to be drawn from this remains to be seen.