The European Commission has named its new creation, somewhat un-snappily, “Accelerated Extrajudicial Collateral Enforcement” or “AECE” for short
1. EUs Accelerated Extrajudicial Collateral Enforcement
Concerns around the high NPL ratios found in several EU countries continue to dominate the European agenda on banking stability and prudential measures and appear to be a key contributing factor in the shaping of European restructuring and insolvency legislative reforms.
One of the key pillars to the EUs response to the 2008 financial crisis, and the euro crisis that ensued, has been the Banking Union project which includes a raft of initiatives designed to create a safer financial sector, including stronger prudential requirements for banks, improved protection for depositors and rules for managing failing banks. The continued existence of large swathes of NPLs in some member states continues, unsurprisingly, to have a destabilising effect on their banks and consequently an action plan to reduce them has been produced under the umbrella of the Banking Union project.
The European Central Bank is also introducing regulatory measures to tackle the future accumulation of NPLs designed to make their retention by sellers an increasingly costly and complex affair. The Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral is cited by most respondents (27%) as being the measure that will have the biggest impact on the European market. When asked specifically about the directive, more than 61% believe it will have a positive effect on the European NPL market.
One of the key measures contained in the proposed Directive published on 14th is a new enforcement right for secured creditors to provide a more efficient method of value recovery from secured loans in default.
For those familiar with English law, the AECE bears resemblance to an English mortgagees power of sale. It might behave in much the same way except it is intended that this right is not available for consumer loans or where the collateral is the borrowers primary residence. Enforcement can be by way of private sale or public auction (at the choice of the implementing member state) but not, it would seem, by appointing a receiver.
The right is described as an expedited and efficient out-of-court enforcement mechanism which enables secured lenders to recover value from collateral granted solely by companies and entrepreneurs to secure business loans
The AECE is supposed to help with NPLs because it will address one of the problems common to many of those member states where enforcement through the courts is too slow and/or too difficult to provide a workable solution. Hence why the Commission has come up with the idea of a contractual, out-of-court, collateral enforcement method for secured creditors.
The initiative is definitely to be welcomed as it aims to create a more level playing field when it comes to the perceived attractiveness of individual EU jurisdictions from an ease of enforcement perspective, will likely open up previously unattractive jurisdictions to certain NPL investors and will be conducive to creating a more vibrant European secondary NPL market.
This initiative is also quite interesting in policy terms. For years, the EU has been pushing the rescue agenda, not an enforcement agenda. And where rescue has not been possible, the focus has been on court-driven collective insolvency procedures (i.e. for the benefit of all creditors), not self-help secured installment loans in Wyoming creditor contractual remedies (i.e. for the benefit of one creditor).
This reflects a global trend. In the UK, for example, administrative receivership (an enforcement procedure) used to be the insolvency process of choice until the early 2000s, when the government legislated to mostly replace it with administration (a collective procedure). Despite being promoted as a complement to the restructuring framework draft directive discussed above, the Commissions proposal for the AECE seems to row back against the main direction of travel, but as mentioned, the main driver is to facilitate a swifter enforcement solution in connection with NPLs and where a rescue of a going concern is not a commercially viable option.