A lender will not provide a loan without security for its repayment. As security for the fulfilment of payment obligations, a lender requests security rights. Which security rights are commonly encountered in the Netherlands?

When providing financing, a lender will identify certain risks. One major risk, of course, is the chance that the payment obligations will not be fulfilled. To limit this risk, a lender will demand certain securities, collateral and guarantees in order to extend a loan. In this blog, we will discuss Dutch law mortgage rights (hypotheekrechten) and rights of pledge (pandrechten), guarantees (guaranties), joint and several liability (hoofdelijkheid), surety (borgtocht) and other aspects relating to security rights.

Mortgage right and right of pledge
Mortgage rights and rights of pledge are similar security rights that are established on goods of the debtor or of a third party (in the latter case, this is called a third-party security). The rights may be established on, for example, real estate, receivables and business assets (the encumbered asset). The party issuing a right of pledge or a mortgage right (the debtor or a third party) is called the mortgager or pledger. The party in receipt of the pledge (the creditor or the security agent) is called the mortgagee or pledgee.

If a debtor does not fulfil his payment obligations, the mortgagee or pledgee may sell the encumbered asset (enforcement/foreclosure). The mortgagee or pledgee is a secured creditor. He/she may then satisfy his rights in respect of an asset, despite possible bankruptcy, and takes precedence over other creditors. In principle, enforcement must take place by public sale (auction) but, subject to certain conditions, it may also take place privately (basically, this means reaching a mutual agreement).

Mortgage right
If a business has registered property (some examples being a plot of land, commercial building or rights of superficies), this may be encumbered with a mortgage right. The mortgage right is established by notarial deed (this must be executed by a Dutch law civil-notary), which must be filed with the Land Registry.

Right of pledge
In principle, a right of pledge can be established on all other assets, such as things (a company’s stocks, for instance), receivables and shares. We will now take a very brief look at rights of pledge. The pledging of IP rights will not be covered here.

Pledging of moveables
By ‘moveables’ (, we mean business assets, company cars, animals used by the business and inventories. This type of pledge can be established in the form of a ‘possessory pledge’ (vuistpand), whereby the moveables are then placed under the authority of the pledgee. Often, the moveables will then actually be managed by the pledgee. If the things are not placed under the pledgee’s authority, this is called a ‘non possessory pledge’ (vuistloos pand). This requires a notarial deed or a private deed, which is registered with the tax and customs administration. Often, the deed will allow the option of placing the things under the pledgee’s authority. If this happens, the non-possessory pledge becomes a possessory pledge.

Pledging of receivables
‘Receivables’ include, for example, the payments that a business receives from its customers. Where receivables are concerned, it is important to be aware that their transferability and pledgeability can be ruled out.
When receivables are pledged, a distinction is made between ‘disclosed’ (openbaar) and ‘undisclosed’ (stil) pledges. In a disclosed pledge, a deed is drawn up and the pledger’s debtor is notified. An undisclosed pledge is, in principle, established through a notarial deed or a private registered deed, which is registered with the tax and customs administration.

With an undisclosed pledge, the opportunities to pledge future receivables are more limited. Only receivables resulting directly from an existing legal relationship can be pledged on an undisclosed basis. Often, when large sums are involved in a financing arrangement, all current and future receivables of the pledger are pledged in the deed of pledge (this is often called an omnibus pledge or a master deed of pledge, but these definitions may vary). Any (new) receivables that are not pledged in the deed may then be pledged by the lender/pledgee, on the basis of a power of attorney (volmacht).

Pledging of shares
The shares in a private limited company (‘B.V.’) or a public limited company (‘N.V.’) can, in principle, also be pledged. Pledging of some or all shares can be ruled out by the company’s Articles of Association. Shares are pledged by means of a notarial deed. Often, the pledging of shares requires the consent of the shareholders. Sometimes, specific conditions may be tied to such consent. For example, it may be that consent can only be given at a meeting of shareholders. The pledging of the shares concerned must be recorded in the shareholders’ register. If the pledge is enforced, any transfer restrictions must be taken into account.

When membership rights in a cooperative or an interest in a limited partnership (‘C.V.’) are pledged, there are a number of unique factors to be considered. For instance, there is still uncertainty surrounding whether voting rights can be pledged. Usually just the receivables a partner or member may have on the cooperative or the partnership are pledged.

Joint and several liability
Often, a co-debtor or co-debtors are used in a financing arrangement (the widely-used international term is obligor or obligors). Together with the borrower, these co-debtors are often jointly and severally liable for payment of the whole debt. They jointly sign the credit agreement or sign a separate agreement in which the joint and several liability is agreed and are liable in the same manner as the ‘principal debtor’.

In the case of a surety, a guarantor gives an undertaking to a creditor (the lender) to fulfil a commitment of a debtor (the borrower). Thus the guarantor is liable only for another party’s debt, not for its own debt. The lender may only call on the guarantor if the borrower is no longer fulfilling the payment obligations. Usually, the lender must continue making some efforts to ensure that the borrower fulfils its payment obligations before the guarantor can be called upon. It may be the case, for instance, that a lender must first enforce other security rights. The surety and the protection of a guarantor are regulated by law.

A guarantee is an agreement whereby a third party undertakes (or stands guarantor) to fulfil the obligations of the borrower. Joint and several liability may also be agreed in a guarantee agreement. The parties may agree that the guarantee is dependent upon the relationship between the lender and the borrower (an accessory guarantee). In this case, the parties will agree, for example, that the guarantee can only be invoked if the borrower does not fulfil his obligations. Another type of guarantee is the abstract guarantee, which can be invoked regardless of the relationship between the lender and borrower. The distinction between a guarantee and surety is blurred. How a court will identify such a document depends more on the content of what has been agreed, rather than on the form. Thus the protection of a guarantor is regulated by law.

Exclusion of recourse
In principle, the principal debtor, co-debtors, guarantor, etc have a mutual claim against each other for the payment of the debt. This operates rather like a reciprocal liability arrangement. The ability to obtain redress is called recourse. A lender may stipulate that this right of recourse is curbed in certain cases, or even excluded. Furthermore, this right of recourse may be pledged to a lender.

Negative pledge and positive pledge
If an agreement contains a negative pledge clause, the lender and the debtors agree that they will not sell their assets (real estate, receivables, business assets, etc) or encumber them with security rights or other rights if this is not permitted by the lender.
In a positive pledge clause, however, the parties agree that the lender may demand and request additional security at any time.

This article briefly discusses mortgages, rights of pledge, guarantees, surety, joint and several liability and other aspects of security rights. Do not hesitate to contact us if you have any questions about these security rights.

By Daniël van Essen