Pledge of Polish receivables under foreign law | In Principle

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Pledge of Polish receivables under foreign law

Can receivables governed by Polish law be effectively encumbered by a pledge governed by foreign law?

Cash receivables, often representing a significant portion of a company’s assets, may play a major role in the structuring of collateral, for example in accounts receivable financing or project-finance transactions. In financing transactions, establishing a Polish pledge on receivables or an assignment of receivables for security is a typical measure used to secure the creditor’s rights. But what if a borrower receives financing from a foreign lender? Will a foreign lender be able to obtain security governed by the law of its choice (e.g. the law of the country where the lender has its registered office) against receivables of a Polish borrower governed by Polish law? What if a foreign borrower receiving financing from a foreign lender holds receivables governed by Polish law which it wants to offer as collateral?

Choice of law by the parties

Under Art. 41 of Poland’s Private International Law, the law proper to establishment of in rem rights is the law of the place where the property is located. With respect to establishment of a pledge on receivables, the legal doctrine indicates that the law proper for such a pledge should be the law proper to the legal relationship under which the receivable arises. Thus it might seem that the parties have no choice over the law governing the establishment of a pledge on receivables.

But it is important to remember the EU’s Rome I Regulation (593/2008) governing the law applicable to contractual relations. Art. 14 of the regulation, which permits the parties to choose the law governing the assignment of a claim (par. 1 and 2), also covers establishment of pledges over claims (par. 3).

Consequently, under the Rome I Regulation the parties are free to select the law governing a pledge, but with certain limitations. Art. 14 determines how broadly the law chosen by the parties can apply. It may be concluded from an analysis of this provision that in indicating foreign law for a pledge of claims governed by Polish law, the parties are essentially choosing the law in dealings between one another (between the pledgor and the pledgee). The relations between the pledgee and the debtor of the pledged receivable will be governed by the law proper to the receivable in question—in this case, Polish law. This legal solution is dictated generally by protection of the debtor, not permitting the debtor’s legal situation to be modified exclusively as a result of actions by third parties.

Scope of application of chosen law

In this respect, it is important to examine which issues can be regulated by the law decided on by the parties and which issues are controlled by the law governing the pledged receivable.

First and foremost, the chosen law will determine the requirements for establishment of this type of security and the conditions that must be fulfilled for the security to be effective in the country whose law was chosen. Apart from this, the chosen law will also resolve issues of the scope of the security, that is, whether the pledge will secure payment only of the principal claims, or also interest and other incidentals.

Another important issue governed by foreign law will be the accessory nature of the security. Foreign law will decide whether in the case of assignment of the secured claim, the pledge passes to the acquirer together with the claim, and the consequences that would arise from assignment of the secured claim excluding the pledge.

Crucial aspects for the creditor connected with the permissible methods of satisfying the claim out of the collateral and termination of the security will also be governed by foreign law.

Scope of application of Polish law

So what should a foreign creditor bear in mind if it expects a pledge to be established under foreign law on receivables governed by Polish law? Firstly, that alienability, including the possibility of pledging a given receivable, will be decided by Polish law. Thus receivables that are inalienable under Polish law will be excluded, for example certain claims against independent public healthcare facilities (Art. 54 of the Healthcare Act of 15 April 2011) and certain claims against tax authorities.

The second important issue governed by Polish law is the conditions for the effectiveness of the pledge. This means that in additional to meeting the criteria for establishment of a pledge under foreign law, the pledgee will also have to meet the conditions arising under Polish law. It will be of primary importance to meet the conditions for effective establishment of a pledge under the Civil Code. This involves the necessity of notifying the debtor of the claim in writing of establishment of the pledge (the form of establishing the pledge will be subject to a separate statute). If this requirement is not met, there is a risk that the pledge will be deemed not to be effectively established. It is also important for the pledgor to indicate in the notice what type of pledge was established on the receivable. This will be particularly helpful in determining which regulations should be applied in analysing the effects of a performance by the debtor discharging the pledge, which under Polish law is regulated differently depending on the type of pledge.

Generally, the rules in the Civil Code governing an ordinary (civil) pledge will apply. These provide that the debtor may effectively discharge its debt by providing the performance (e.g. repaying the loan) only to the pledgor and the pledgee jointly. This solution seems to provide little comfort to the pledgee because it depends on cooperation with the pledgor.

However, in the case of establishment of a financial pledge, which is one of the financial collateral arrangements implemented pursuant to Directive 2002/47/EC on financial collateral arrangements, it may be more appropriate to refer to the Polish Act on Certain Financial Collateral Arrangements. Under those regulations, the pledgee is exclusively entitled to demand performance from the debtor, and the debtor in performing in this manner will effectively discharge its debt. This solution may provide greater comfort to the pledgee.

In summary, the question of the possibility of establishing a pledge under foreign law against Polish receivables should be answered in the affirmative, bearing in mind however that Polish law will apply to certain issues, some of them crucial for the pledgee.

Aleksandra Nalewajko, Daniel Smarduch, Banking & Finance practice, Wardyński & Partners