"Collection of items and rights" subject to a registered pledge should be interpreted in light of the economic purpose | In Principle

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"Collection of items and rights" subject to a registered pledge should be interpreted in light of the economic purpose

The Polish Supreme Court upheld a cassation appeal presented by Wardyński & Partners and held that when evaluating whether a changing collection of assets may be subject to a registered pledge, the primary consideration should be whether they serve a specific economic purpose.

Our client provided financing to a mink farm that produced furs. Loans of this type are secured by a registered pledge on a set of assets comprising animals and furs. The district court refused to enter such pledge in the pledge register as a changing collection of assets (under Art. 7(2)(3) of the Act on Registered Pledges and the Pledge Register), finding that a set of assets comprised of various species of animals and furs is not an organised collection and thus may not be classified as a collection of assets constituting an economic whole. The regional court upheld the order on appeal, based on the same reasoning. At both instances, the courts took the view that a set of items may be regarded as an organised collection of assets only when removal of certain elements of the set without replacing them with surrogates affects the functioning of the whole or the degree of organisation of the set or materially reduces its value.
On cassation appeal, the Supreme Court considered the issue at a hearing on 6 October 2010 and upheld the petitioner’s position, issuing a precedent-setting ruling concerning a pledge on a collection of assets that change over time but constitute an economic whole. Most importantly, the court held, when determining whether a given set qualifies as a collection of items and rights constituting an economic whole, the courts should not be guided by the traditional stratification of the set, requiring that it be strictly organised in the manner indicated by the lower courts. The Supreme Court stressed that in refusing to register the pledge on this basis, the lower courts imposed requirements above and beyond those set forth in the act. As the act itself indicates, a collection of assets should first and foremost constitute an economic whole, and thus treatment of the assets as a set whose composition changes over time depends on its intended use to further a defined economic purpose as part of the debtor’s operations. Finally, the court pointed out that the Act on Registered Pledges is designed to facilitate establishment of security, and in consequence provide greater access to financing. Refusal to register a pledge is thus permissible only on material grounds arising from the wording of the act itself.
The lawyers from the Banking and Finance practice group at Wardyński & Partners involved in preparing and arguing the successful cassation appeal were Łukasz Szegda, Marcin Smolarek and Patrycja Jacaszek.