The Norwegian Supreme Court clarifies the legal perfection requirements for floating charges over trade receivables
The case is a follow-up of the Supreme Court’s ruling in HR-2017-1297-A that the legal perfection requirements had to be determined pursuant to Norwegian law, despite that the security agreement in question was subject to English law. Thus, the question arose whether the legal perfection for a floating charge carried out in accordance with English law also was sufficient pursuant to Norwegian law.
In its ruling rendered the 20th of April 2020 (HR-2020-837-A), the majority of three justices held that a floating charge over trade receivables cannot obtain legal perfection by prior notification to the trade debtors. The majority held that this type of security interest only obtains legal perfection by registration on the assignor’s sheet in the Norwegian moveable property register (Nw: Løsøreregisteret).
The minority, consisting of two justices, held that the LA section 4-5 (1), which establishes legal perfection by prior notification, is an independent provision not limited in scope to perfection of assignment of individual monetary claims under LA section 4-4. With this reasoning the minority concluded that prior notification is sufficient to obtain legal perfection also for non-individualised (future) claims subject to a floating charge over trade receivables.
The facts of the case
The Danish company O.W. Bunker & Trading A/S (“OWB”) was the parent company of a large group of companies, primarily trading in bunker oil. One of the subsidiaries was the Norwegian company Bergen Bunkers AS. In 2013, OWB entered into a Multicurrency Revolving Borrowing Base Facilities Agreement (“the Loan Agreement”) with a banking syndicate. The Dutch ING Bank N.V. was both a lender and the agent (“the Lender”). A number of OWB’s subsidiaries furnished guarantees under the Loan Agreement, including Bergen Bunkers AS, through a separate Security Agreement (“the Security Agreement”). The guarantee obligations of each individual subsidiarity were secured by way of a floating charge over their respective trade receivables. The Security Agreement also contained a choice of law clause, determining English law.
After the breakdown of the group in 2014, Bergen Bunkers AS filed for bankruptcy in Norway. The Lender filed a secured claim with the bankruptcy estate of Bergen Bunkers AS (“the Estate”) of roughly MUSD 653 based on the floating charge over the trade receivables. However, the Estate objected that the security was not legally perfected and that the claim thus did not rank above the unsecured claims filed with the Estate. In HR-2017-1297-A, the Supreme Court decided that the Norwegian courts had jurisdiction over the case, and that the question concerning legal perfection should be determined pursuant to Norwegian law.
Thus, the question decided by the Supreme Court was whether the legal perfection carried out in accordance with English law was also sufficient pursuant to Norwegian law.
The Supreme Court’s decision
The majority of the Supreme Court presupposes that legal perfection by prior notification to the trade debtors in accordance with LA section 4-5 (1) is limited to receivables that can be individualised pursuant to LA section 4-4. This implies that a floating charge over (non-individualised) trade receivables can only be legally perfected by being registered on Bergen Bunkers AS’ sheet in the Norwegian moveable property register.
The key reasoning of the majority is based on a review of LA chapter 4, with a main focus on the structure of the Act and the wording of sections 4‑4 and 4‑5 vs section 4‑10. The majority held that the perfection requirements in section 4-5 must be seen in conjuncture with the individualisation requirements in section 4-4. The individualisation requirements do not pertain to the perfection of the security interest, but to the validity of the (underlying) assignment of (individual) monetary claims. Nevertheless, the majority underlined that assignment pursuant to section 4-4 only obtains legal perfection by notification to the debtor in accordance with section 4-5, whereas the validity and perfection of floating charges were regulated by a separate provision, namely section 4‑10. Thus, the structure of the LA and the wording of said provisions imply that sections 4-4 and 4-5 are inseparable. The fact that the security interest in question was valid pursuant to section 4-10 was insignificant.
The majority emphasised that the rules on security interest are characterised by their need for foreseeability through strict interpretation of the applicable wording in the relevant Act. Further, the majority argued that the relevant case law and judicial literature did not alter the conclusion, when following such a necessary strict interpretation of the wording in the Act. It should be noted that the majority also stated that perfection by prior notification for floating charges would significantly increase the risk of legal disputes, in contrast to perfection by registration, which does not leave any doubt as to which claims are subject to the floating charge.
Unlike the majority, the minority did not consider LA section 4-5 (1) to be limited to receivables that meet the requirements of individualisation under LA section 4-4. The minority’s reasoning was primarily based on a provision in section 4‑10 that states that registration does not perfect the floating charge towards competing creditors who in good faith have obtained a security interest in the same receivables. Thus, the minority argued that this provision indirectly states that perfection can be obtained through other measures than registration. Thus, the conclusion had to be that a prior notification to the debtor was sufficient perfection when the security interest as such was valid pursuant to section 4-10. The minority found support for this solution both in the LA preparatory works and other sections throughout the Act. This conclusion was also in the minority’s view in accordance with previous case law as well as being clearly presupposed in all relevant judicial literature.
The Supreme Court judgement shows that the structure and the wording of the LA are decisive for the validity and perfection of security interests, despite underlying agreements governed by foreign law. The assignee cannot combine elements of validity and perfection from provisions dealing with different security interests, which imply that non-individualised (future) claims subject to a floating charge over trade receivables cannot be perfected through notification to the trade debtor.
One question that arises, however, is how competing creditors in the same receivables can get their security perfected in “good faith” as presupposed by LA section 4‑10 (2). Following the Supreme Court’s decision a floating charge over trade receivables can only obtain perfection by registration in the movable property register. However, it is difficult to see how the competing creditor could be in good faith when the floating charge is in fact registered. Review of publicly available registers is normally considered an “absolute” requirement for establishing good faith.