In this Part 1 edition, our team will walk you through the various types of collateral security, being rights of pledge and mortgage. In Part 2, we will elaborate on the various types of personal security and key considerations for lenders.
Part 1 - Collateral security:
Dutch law has a closed system of security interests. Dutch law recognises three forms of security interests: pledges, mortgages and financial security agreements. The latter will not be discussed. The right of pledge and the right of mortgage will be addressed below.
General Requirements for Establishment of Pledge and Mortgage
In principle, the creation of a right of pledge or mortgage over an asset is subject to the same requirements as those laid down for the transfer of that property:
- The creation of a right of pledge or mortgage in compliance with certain formalities (e.g. a deed);
- A valid title (a legal relationship that links to the creation of the security interest);
- The power of disposal of the (legal) person encumbering his property.
Right of Pledge
The right of pledge is the most common form of collateral security in the Netherlands. A right of pledge can be created over moveable assets (other than registered ships and aircraft), shares, receivables (including bank accounts and insurance receivables) and intellectual property rights (IP rights) The right of pledge is a limited right to property belonging to another person (movable property and property rights). There are two types of pledges:
- Right of possessory pledge (disclosed pledge): in the case of a possessory pledge, the object of security is brought into the possession of the pledgee. This type of pledge is not common in project finance transactions.
- Right of non-possessory pledge (undisclosed pledge): in the case of a non-possessory pledge, the object of security remains with the pledgor.
Right of pledge on movable assets
A possessory right of pledge over movable assets requires the pledgee to take possession of the pledged asset. A non-possessory right of pledge on movable assets, is created by a notarial deed or a registered private deed between the pledgor and the pledgee.
Right of pledge on shares
In principle the shares in the capital of a Dutch company can be pledged. However, the articles of association of a company can prohibit the pledging of shares. The creation of a right of pledge over shares requires a notarial deed of pledge, executed by a Dutch civil law notary. Under the deed of pledge, it can be provided that the voting rights in respect of the shares are (conditionally) transferred to the pledgee.
A right of pledge over bearer shares is created in the same manner as a right of pledge over moveable assets (e.g.: by bringing the shares into possession of the pledgee).
Shares that are transferable by means of book entries in accordance with the Securities Giro System Act can be pledged by means of a book entry in the name of the pledgee by the custodian bank responsible for the books.
Receivables
Receivables can be pledged by a disclosed pledge or a non-disclosed pledge. A disclosed pledge of receivables is created by way of a private deed entered into by the pledgor and the pledgee, with notice thereof being provided to the debtors of the pledged receivables.
An undisclosed pledge of receivables can be created by a notarial deed of pledge executed before a civil law notary or by a private deed entered into between the pledgor and the pledgee, which is subsequently registered with the Dutch tax authority (for date stamping purposes only).
Pledging of Future Assets or receivables
Future assets can be pledged in advance by way of a non-possessory pledge. With respect to future assets that are pledged in advance, the right of pledge arises at the time when the pledged property is transferred into the possession of the pledgor.
Future receivables can also be pledged in advance by way of an undisclosed pledge. However, the creation of an undisclosed right of pledge in advance is expressly limited to future claims that the pledgor will obtain directly from a legal relationship that already exists at the time of execution of the deed of pledge.
Right of Mortgage
A right of mortgage secures registered property such as immovable property, registered airplanes and registered vessels, as collateral for any claims/debt.
Requirements for the creation of a right of mortgage
A mortgage can only be created by a notarial deed executed by a Dutch civil law notary and drawn up between the parties (the mortgager and the mortgagee). Subsequently, the establishment of the mortgage right is effected by the registration of the deed in the public register provided for that purpose.
Execution of Collateral Security
In the event of a default by the debtor in respect of the secured obligations, the collateral may be enforced by the pledgee or mortgagee. The enforcement method depends on the type of collateral. In general, the assets have to be sold publicly. Private sale is only an option with the permission of the competent court.
In case of a bankruptcy of the pledgor or mortgagor, the pledgee or mortgagee may exercise their (preferential recovery) rights as if there was no bankruptcy.
Reach out to us
If you are considering entering into a facility agreement and/or security agreement, and you would like more details relating to the (security) provisions, reach out to our specialists for strategic advice and practical assistance with your transaction.
