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Extension of Powers of the Secured Creditor?!

Extension of Powers of the Secured Creditor?!

A Dutch court recently ruled that the pledgor and the pledgee of a pledged claim can decide on the division of creditor's powers. Can the power to negotiate a debt settlement with the debtor of the pledged claim be attributed to the pledgee of that claim?

Legal framework

When a creditor, usually a bank, provides credit to a debtor, the creditor often requires adequate security from the debtor. In the case of receivables, under Dutch law security can be provided by way of an undisclosed pledge. If the debtor defaults or goes bankrupt, the secured creditor will have the power to enforce its security interest.

Article 3:246(1) of the Dutch Civil Code (DCC) stipulates that where a claim has been pledged, the pledgee is entitled to demand its performance judicially and extra-judicially and to receive payment. Such powers remain with the pledgor until notice of the right of pledge has been given to the debtor. As soon as the pledge has been disclosed, the pledgee not only has the power to collect the pledged claim, but he is also entitled to declare the obligation due if the claim, although not payable on demand, can be made exigible (Article 3:246(2) DCC).

Case law of the Dutch Supreme Court

In 2014 the Dutch Supreme Court (SC) ruled in the Neo-River case that Article 3:246(1) DCC contains a strict division of powers between the pledgor and the pledgee. After notification of the pledge to the debtor, the power of debt remission, the ability to make a payment arrangement and the authority to convert an action for performance into a claim for damages remains with the pledgor. The same goes for the power to terminate the agreement from which the claim arises. The Supreme Court argued that this division of powers was a deliberate choice of the Dutch legislature. The Court referred to the parliamentary history of Article 3:246 DCC and ruled that the aforementioned powers should remain with the pledgor because they profoundly affect his rights and interests. In 2016 this line of reasoning was confirmed by the Supreme Court in the Megalim Investments case. In this case, the Court referred to the Neo-River case with regard to the pledgor’s powers and further held that the ability of the pledgee to collect the pledged claim (cf. Article 3:246(1) DCC) not only includes the right to seek recourse on the debtor’s assets – e.g. by way of enforcement of any interest that exists as security for the pledged claim (see ABN AMRO v Marell, SC 18 December 2015) – but also the power to file for the debtor’s bankruptcy.

Recent developments

In a recent case (18 December 2019), where a pledgee (a Dutch bank) negotiated a debt settlement with the debtor of a pledged claim, the District Court Midden-Nederland ruled that the pledgor and the pledgee have the ability to reach an agreement on the division of creditors’ powers, since the Dutch rules on the right of pledge do not contain any specific provisions on this particular point. Although the Court emphasised the importance of the Supreme Court’s case law (i.e. Neo-River), the Court also referred to Parliamentary Papers that state that ‘in general’ the powers that profoundly affect the pledgor’s rights and interests should remain in his hands. According to the Court’s reasoning this wording (‘in general’) leaves room for deviation. For that reason the Court accepted the debt settlement between the pledgee and the debtor of the pledged claim, because the power to reach such a settlement was attributed to the pledgee by the pledgor by way of an agreement that had been made prior to the settlement.

Extension of powers

In the case of a debt settlement that was agreed upon between the pledgee and the debtor of the pledged claim, the District Court Midden-Nederland considered that there are decisive arguments to derogate from the seemingly strict rulings of the Dutch Supreme Court with regard to the rigid division of powers between the pledgor and the pledgee. After all, the Parliamentary Papers not only state that ‘in general’ the powers that profoundly affect the pledgor’s rights and interests should remain in his (the pledgor’s) hands, but also that the powers that safeguard the pledgee’s claim ‘should be granted to him’ (the pledgee). It is clearly beyond any doubt that debt settlements, final payment arrangements and the power of debt remission safeguard the pledgee’s claim and interests as soon as he is entitled to collect the pledged claim. Is it not quite obvious that under these circumstances, the power to settle a debt for less should be at the pledgee’s discretion since this will neither harm the pledgor’s position (who deliberately attributed this power to the pledgee) nor affect third parties’ interests? For these reasons, it does seem to be legitimate to grant the pledgee the power for debt remission and the ability to reach debt settlements and final payment arrangements in, for instance, the deed of pledge. In doing so, the attribution of powers to the pledgee will not only generate an obligatory, but also a proprietary effect. Under Dutch law, a so-called ‘privative’ power of attorney (cf. Article 7:423 DCC) given by the pledgor to the pledgee will further empower the pledgee’s position.

The judgment of the District Court Midden-Nederland of 18 December 2019 (in Dutch) can be found here.

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