Ordinary account holders not within scope of Settlement Finality protections

Insolvency Bitesize - March 2019

The ECJ has held that a Latvian company could not use the Settlement Finality Directive to enforce a payment instruction given to its Lithuanian bank shortly before the bank was prohibited from carrying out transactions above €100k and entered insolvency.

The Settlement Finality Directive seeks to reduce systemic risk and ensure stability of payment and securities settlement systems by minimising disruption to such a system caused by insolvency proceedings against one of its participants. Against this background, the ECJ held in Re SIA Kipars AI (Case C-639/17) that:

  • an article 3(1) pre-insolvency "transfer order" - legally enforceable and binding on third parties in the event of a system participant's insolvency – only covers instructions entailing financial obligations given by participants in a securities settlement system, in connection with the system, to other participants responsible for executing them;
  • it does not include instructions entailing financial obligations issued by third parties, outside of such a system; and
  • the directive provides an "exhaustive list" of entities covered by the concept of "participant". These may be an "institution", a "central counterparty", a "settlement agent", a "clearing house" or a "system operator". 

The Directive did not apply to a payment instruction by an ordinary current account holder who was not a direct participant, rather an indirect one, and so the payment was not a transfer order.