New Court of Appeal judgement on the validity and legal protection of pledge in trade receivables - Bergen Bunkers AS, its bankruptcy estate
News | 09.07.19Banking and Finance
Restructuring and insolvency
Litigation and Arbitration
Just under a year before the company went bankrupt, Bergen Bunkers AS (hereinafter "Bergen Bunkers") pledged its trade receivable as security for a group borrowing from a syndicate of banks represented by ING Bank N.V. (hereinafter "ING") as agent. The pledge was a part of the overall financing of an international group with the Danish company O.W. Bunker & Trading A/S (hereinafter "OWB") as parent company and Norwegian Bergen Bunkers as one of several subsidiaries.
Both the loan agreement, the security agreement and the delivery agreements, from which the pledged trade receivables originated, were subject to English law. After the commencement of bankruptcy proceedings in Bergen Bunkers, a dispute arose between the bankruptcy estate and the pledgee ING concerning the validity of the pledge and whether ING had legal protection for the pledge against the bankruptcy estate. The reason for the dispute was that ING had not perfected its pledge by registration in the Norwegian Register of Mortgaged Moveable Property, but instead by way of an e-mail notification to the customers of Bergen Bunkers, which was sent at the same time as the security agreement was entered into.
Firstly, it was a question of jurisdiction and choice of law. In case HR-2017-1297-A the Supreme Court of Norway ruled that the case should be settled by Norwegian courts and that the question should be resolved according to Norwegian law.
The material questions in the case were first dealt with by Oslo District Court, which in the judgment of 22 December 2017 principally gave judgment in favour of ING. The case was appealed to the Borgarting Court of Appeal, which came to the opposite result.
The questions to the Court of Appeal were principally whether money claims covered by a factoring agreement can obtain legal protection through notification of the pledge to the debtor, irrespective of the provision on pledging of claims in the Mortgages Act section 4-4. Furthermore, it was a question of whether such legal protection can be established for future claims through a pre-notification, or whether the notice must be given consecutively for each individual claim. Alternatively, the Court of Appeal had to consider whether the pledge had legal protection pursuant to the provisions of the Mortgages Act section 4-4 cf. section 4-5.
Notification as an alternative legal protection for claims covered by a factoring mortgage
The first question that the Court of Appeal considered was whether money claims covered by a factoring agreement can obtain legal protection through notification of the pledge to the debtor, irrespective of the provision on pledging of claims in the Mortgages Act section 4-4.
The wording of section 4-10, second paragraph, of the Mortgages Act indicates that a factoring pledge only receives legal protection through registration in the Norwegian Register of Mortgaged Moveable Property. However, by an interpretation of the Karmøy Montering Supreme Court judgment in Rt-1989-1209, the Court of Appeal concluded that claims covered by a factoring pledge can obtain legal protection through notification of the pledge to the debtor. However, this conclusion was not based on an application of the provisions of the Mortgages Act section 4-4, cf. section 4-5, but on a continuation of the earlier factoring scheme, as this existed before the introduction of the Mortgages Act section 4-10. The Court of Appeal interpreted the Supreme Court's statements so that the previous practice for factoring mortgages had not been abolished by the introduction of the Mortgages Act section 4-10. This was in line with both parties' perception.
Advance notification of future claims or consecutive notification of each individual claim
The question then became what the previous factoring scheme consisted of. Firstly, whether a mortgage can be established in future receivables. Secondly, if legal protection can be established through advance notification of future receivables, or whether each individual claim must be notified consecutively.
The Court of Appeal pointed out that section 4-4, first paragraph, second sentence of the Mortgages Act limits the right to pledge future claims through the so-called identification requirement; "claim that someone will have against a named debtor in a specifically mentioned legal relationship". The Mortgages Act section 4-10 is an exception to this rule, but only if the pledge is applicable to all money claims in the pledgor`s business or a specific part of it, cf. section 4-10 first paragraph. If the pledge comprises less than what is defined in section 4-10 first paragraph, the limitation in section 4-4 first paragraph second point applies.
The Court of Appeal further stated that under the relevant pledge scheme the debtor cessus must be notified of the individual claim, so that legal protection cannot be secured by advance notification of future claims. It was argued that if this pledge scheme opened for advance notification of future claims, this would in practice mean that the provision in section 4-4 first paragraph second sentence lost its significance.
ING's s alternative submission - the Mortgages Act section 4-4, cf. section 4-5
The Court of Appeal then considered ING's alternative submission that the pledge had legal protection under the Mortgages Act's provisions on mpledge in non-negotiable monetary claims, cf. the Mortgages Act section 4-4, cf. section 4-5.
The Court of Appeal pointed out that if the pledge applies to future claims, it is a condition that the future claim is individualized. The Court of Appeal assumed that although the individualization requirement is not strict, a minimum of individualization must be required. Hereunder, it must be clear who the debtor is and what "legal relationship" the future claim should emerge from. It is assumed in legal theory that this information must be expressed in the security agreement.
The relevant pledge contained a common description of the trade receivables, not only for all of Bergen Bunkers' debtors, but also for the other 12 subsidiaries' debtors. The wording of the pledge generally stated that all claims related to the sale of oil products are pledged, without a specific description of the debtor. The Court of Appeal considered the agreement to describe a typical factoring pledge, where the very concept is precisely that there is an en bloc pledge of all future claims without any further individualization.
The Court of Appeal therefore concluded that the pledge agreement did not identify a future "named debtor in a specifically mentioned legal relationship", cf. the Mortgages Act section 4-4, first paragraph, second sentence.
The actual result could have easily been different if ING had established a Norwegian factoring mortgage and registered this in the Norwegian Register of Mortgaged Moveable Property. This was not done, presumably because the parties assumed that the pledge would be subject to English law.
The case shows the importance of obtaining Norwegian legal advice on the structure, security package and conflict-of-law rules in all transactions with a Norwegian interface, even though the loan documentation as such is subject to the law of another country.
The judgment is not yet enforceable.