Recently, the Dutch Supreme Court has given an interesting ruling relating to the consequences of commingling (vermenging) of multiple objects for a security right created over one of those objects.
Dutch Supreme Court 14 August 2015 (ECLI:NL:HR:2015:2192)
The central question in this ruling was: has a right of pledge become extinct by the commingling of two objects which are held by one and the same owner, one of which is encumbered with said right of pledge? The Supreme Court ruled that in such a case, a new right of pledge is created by operation of law over a share in the new object which has been created by the commingling.
When Zalco, an aluminium company, was declared bankrupt on 13 December 2011, a quantity of fluid aluminium was present in its smelting furnaces. A few weeks earlier, a right of pledge had been created over this in favour of Glencore, a commodity trading company. When production ceased shortly after the bankruptcy date, the aluminium in the smelting furnaces solidified. Glencore claimed that it had a right of pledge over a share in the (solidified) aluminium. Two other creditors, NB and ZSP, took the position that such right of pledge had become extinct by accession (natrekking) to the smelting furnaces or the factory or by commingling (vermenging) of the aluminium with other quantities of aluminium prior to its solidification.
The judge in preliminary relief proceedings considered these facts and decided that the aluminium had become a part of the factory, in other words an immovable object, by accession. According to Dutch law, a right of pledge cannot validly exist over an immovable object, and thus the right of pledge had become extinct. The Court of Appeal reached a similar conclusion, reasoning that the right of pledge had become extinct as a result of commingling the pledged objects with the other objects. However, the Supreme Court disagreed with the decision of the Court of Appeal. The Supreme Court held that in such cases, a new right of pledge is created by operation of law over a share in the object resulting from the commingling in favour of the previous holder of the right of pledge.
This judgment is relevant for the Dutch finance practice because it removes much uncertainty about the status of a right of pledge in the situation described above. Before this judgment, in cases of commingling of objects, a discrepancy was perceived between the status of objects supplied subject to retention of title and the status of a right of pledge. It could previously be argued that, upon commingling of the objects, a retention of title arrangement would grant the supplier a right of co-ownership in the new object proportionate to his original quantity, whereas a right of pledge would become extinct. This judgment harmonises both security interests, in the sense that a new right of pledge is created by operation of law over the new object, the size of which corresponds with the relative size of the extinct object.
This judgment is also relevant because it confirms that a new right of pledge is created by operation of law, which means that the bankruptcy of the owner whose objects are commingled does not preclude the valid creation of such right of pledge after bankruptcy of the person who had created the original right of pledge.
The Supreme Court ruling provides a new rule where the Dutch Civil Code is silent. In the Supreme Court's own words: "Although this is not explicitly regulated in said provisions, it is consistent with the content and meaning of those provisions that they also cover the case at hand of commingling of similar objects, one of which is encumbered with a right of pledge."
This article was published in the Banking and Finance Update of December 2015.