Change in Priority of Rights of Pledge; Security over Security | Supreme Court, 9 April 2021 (Van Dooren q.q. v. R. Bontrup Holding)

If granting loans or credits to entrepreneurs financiers, as a rule, would like to have the certainty that the entrepreneurs will repay the funding received. Forms of security commonly used in the financing practice are rights of pledge (on movable property) and rights of mortgage (on immovable property), or personal securities like joint and several liability or suretyship. Should borrowers or debtors get into dire financial straits, the right of pledge or of mortgage will still offer the lenders security. Even if borrowers are declared bankrupt, those securities will remain intact, and the holders of the pledge or mortgage can exercise their rights as if no bankruptcy had occurred. In the event of the debtors’ bankruptcy those holders still have the option to levy execution against the property that is the subject of the security rights, and have recourse against the proceeds.

But what if borrowers and/or debtors have granted security rights (rights of pledge or mortgage) to several parties? Lenders do not like to see their security diluted. New financiers, however, might be willing to grant a loan only if they obtain securities that rank over securities previously granted. In principle, the order of creation of rights of pledge and mortgage decides the order of priority of those security rights. This principle (old over new) is also referred to as the priority rule. Section 3:262 Dutch Civil Code provides for the possibility to change the order of priority of existing rights of mortgage by notarial deed, ranking a right of mortgage over one or several other rights of mortgage on the same immovable property. This is possible only on condition that the deed shows that the holders of those other rights of mortgage agree. Although for rights of pledge the law does not provide for such change in priority, financing professionals felt the need to know whether changing the order of priority of such rights was a possibility.   

On 9 April 2021, the Supreme Court clarified this issue in Van Dooren q.q. v. R. Bontrup Holding B.V. (in Dutch only). The priority rule will still be the basic principle, but the statutory exception for rights of mortgage can be applied analogously to a change in priority of rights of pledge. The ruling makes it (formally) possible to determine that a right of pledge, although established later, outranks one or more other rights of pledge on the same property if it is apparent from the deed that the holders of the other rights of pledge consent.  As with the change in priority of rights of mortgage, the required consent of the holders of the rights of pledge that fall in priority must meet the same (procedural) requirements as the creation of the right of pledge in question (usually: a registered non-notarial deed or authentic deed). A change in priority can be effected upon the creation of a new right of pledge - the deed of change in priority will be included in the deed creating the right of pledge – but also at a later stage. This applies to both undisclosed pledges on registered claims and to disclosed pledges. But note: the change in priority can be enforced only against parties whose (security) rights are affected – like holders of rights of pledge that do not change priority, other holders of limited rights and attachors – if those parties (too) have consented to the change in priority (without specific formalities). The rights of parties are affected for instance, if the claim of the party with the pledge that has risen in priority outranks the claim of the party whose right of pledge has fallen in priority.

BUREN can help you cope with securities (and insecurities). Please contact us for advice.