When a company borrows money, it can give security to its creditor, usually a bank. Globally, there are several types of security rights on the basis of which security can be obtained. In English law a general security right is established through a floating charge. A floating charge is a security interest that covers all present and all future property of the security provider (chargor). It floats or hovers over the property of the chargor. The chargor is still entitled to deal with the secured property in the ordinary course of its business as long as the floating charge does not crystallise. Crystallisation is a conversion whereby a floating charge turns into a fixed charge. A crystallising event happens, for example, when the chargor commits a breach of contract or in the event of the chargor’s bankruptcy. Crystallisation of a floating charge has various effects. For instance, after crystallisation an administrative receiver is appointed by the creditor (chargee), who will take over the management of the business. Furthermore, the chargor is no longer free to deal with the charged assets in the ordinary course of its business. A fixed charge differs from a floating charge because a fixed charge attaches to specific types of property.
Verzamelpandakte-constructie = floating charge?
In its Legal Alert of 6 February 2012 lawyers of the Dutch law firm De Brauw Blackstone Westbroek came to the conclusion that in its ruling of 3 February 2012 the Dutch Supreme Court had accepted the floating charge in Dutch law. In this ruling, the Dutch Supreme Court approved the so-called verzamelpandakte-constructie, a ‘comprehensive security arrangement’. The verzamelpandakte-constructie is a transaction by which the bank obtains an undisclosed right of pledge on all present and future receivables by daily registration of an unspecified collective deed of pledge. By way of a previously agreed power of attorney, the bank is authorized to do so on behalf of the borrower.
There are some similarities between the English concept of the floating charge and the Dutch verzamelpandakte-constructie. First of all, they both provide the chargee with a general security right, although the floating charge covers all assets of the entire business and the verzamelpandakte-constructie usually only covers receivables. Another similarity is that the floating charge and the verzamelpandakte-constructie provide the creditor with a high level of security by pledging identifiable receivables. Therefore, in the event of bankruptcy, the secured creditor has priority over all unsecured creditors.
The main differences between the English floating charge and the Dutch verzamelpandakte-constructie relate to the pledging of future receivables, registration, publicity, the appointment of an administrative receiver and the ring fenced fund.
First of all, according to English law a floating charge covers all present and all future property and can be registered – electronically or on paper – by one single action. According to Dutch law (article 239, Book 3 Dutch Civil Code) it is not possible to create a pledge that covers receivables out of a legal relationship that does not exist at the moment the pledge is created. When a new legal relationship arises, which probably happens daily, a new pledge has to be created and registered to cover those new receivables. Since all major Dutch banks register a single comprehensive security instrument daily, which is enough to cover many thousands of new relationships entered into by many thousands of borrowers, the difference is smaller than it would appear; but it is there and can have legal consequences for e.g. priority.
In addition, under English law a registered floating charge is visible in the public register held by the Companies House and can be inspected by anyone (paragraph 876 Companies Act 2006). The main reason for this publicity principle is to counter the pretence of credit (false wealth doctrine). Under Dutch law (article 239, Book 3 DCC) the register, held by the Dutch tax authorities, cannot be accessed by the public. In Dutch law the main purpose of registration is to determine which party registered first and has priority over another party’s right.
Furthermore, according to English law the chargee, in an attempt to recover the money that is borrowed, is entitled to appoint an administrative receiver when the chargor commits a breach of contract. An administrative receiver has wide powers to deal with the charged assets. He takes over the management of the business, but is not personally liable. His job is to collect sufficient funds to cover the costs of the receivership, the preferential creditors and the charge holder. At this stage the administrative receiver does not pay the unsecured creditors. If there is a surplus at the end, a liquidator will deal with the creditors' claim. Under Dutch law, the possibility to appoint an administrative receiver does not exist (yet).
Last but not least, under English law a share of the secured assets that are subjected to a floating charge is reserved for the benefit of unsecured creditors (s176a Insolvency Act 1986). This share is known as the preserved part or as a ring fenced fund. Such legislation does not exist under Dutch law, although there have been calls for the introduction of such a form of protection for the unsecured creditors.
Although the Dutch concept of the verzamelpandakte-constructie shows similarities with the English floating charge, there are still substantial differences between the floating charge and the verzamelpandakte-constructie. Therefore it cannot be said that the Dutch Supreme Court has accepted the English concept of the floating charge in Dutch Law.