Jurisdiction and choice of law when establishing lien security across borders

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Foreign creditors with security in accounts receivables belonging to Norwegian entities must comply with the formalities laid down in Norwegian securities legislation to create a valid and legally protected security interest.

By: attorney at law Arild Gjelsvik

The Supreme Court has recently ruled on the jurisdiction of the Norwegian courts to hear a claim regarding the validity of a foreign creditor’s lien (security) in the accounts receivable of a Norwegian company and whether the security was perfected and thereby protected against third parties.

The bankruptcy estate of the Norwegian company had filed a legal action in Norway against the foreign creditor, a Dutch bank, alleging that it did not have a valid and perfected security in the accounts receivables according to Norwegian law. It also alleged that the security was avoidable, and demanded reimbursement of monies paid by the Norwegian company’s debtors directly to the bank.

The Dutch bank disputed the jurisdiction of the Norwegian courts to hear the matter on the grounds that it was incorporated in Holland, and petitioned to have the case dismissed. For the event the case was not dismissed, the Dutch bank alleged that the validity and perfection of the security were to be determined by English law since the parties had agreed on English law in the underlying security agreement.

The Supreme Court determined the question of jurisdiction based on the Lugano Convention 1988 and the exception in Article 1 no 2 for “bankruptcy, proceeding relating to the winding-up of insolvent companies”. The Court held that the exception applied both to the question whether the security was avoidable, and the question whether the security was validly created and perfected. The Court held that the question of validity and perfection of the security was so practically and legally intertwined with the bankruptcy proceedings that it should not be jurisdictionally separated from such proceedings. Moreover, since the bankruptcy was opened in Norway, there was a sufficiently close connection to Norway to give the Norwegian courts jurisdiction to determine the validity and perfection of the security.

Furthermore, the Supreme Court held that Norwegian law should be applied to determine the validity of the security and whether it had been perfected, since these matters all in all had their closest connection to Norway as the mortgagor’s domicile.

The ruling emphasizes the importance of compliance with the laws of the mortgagor’s jurisdiction to ensure a valid and perfected lien.