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Dutch Supreme Court rules on validity of pledge over conditional ownership

Dutch Supreme Court rules on validity of pledge over conditional owne

Dutch Supreme Court rules on validity of pledge over conditional ownership

29.07.2016 NL law

In a recent judgment, the Dutch Supreme Court ruled that a party who purchases and accepts the transfer of moveable assets subject to a retention of title acquires a right of conditional ownership with respect to those moveable assets and has the power to create an unconditional right of pledge over such right of conditional ownership.

If the retention of title condition is satisfied after the bankruptcy of the purchaser, the right of conditional ownership is extended to an unconditional right of ownership and the right of pledge over the right of conditional ownership is extended to a right of pledge over the unconditional right of ownership by operation of law. Subject to certain general limitations under Dutch bankruptcy law, the holder of such right of pledge can enforce the right of pledge (by means of an enforcement sale of the moveable assets) as if there were no bankruptcy.

Dutch Supreme Court 3 June 2016 (ECLI:NL:HR:2016:1046)

A pepper nursery company purchased a cultivation system which was transferred to it subject to a retention of title until the purchase price would have been paid in full. The company was in part financed with a loan provided by a Dutch bank which was secured by, among others, a right of pledge over all the company's (present and future) moveable assets. The deed of pledge stipulated that if a moveable asset is acquired subject to a condition precedent (such as a retention of title), the right of pledge is created over the conditional ownership of that moveable asset. When the company was declared bankrupt, the purchase price for the cultivation system had not yet been paid in full. The bank agreed with the bankruptcy receiver that the bank would pay the remaining part of the purchase price, following which the bankruptcy receiver sold the company's business to a third party and paid the proceeds to the bank.

After some time the bankruptcy receiver filed a claim against the bank with the District Court of 's-Gravenhage demanding the court to rule that the right of pledge over the cultivation system had not become effective and that the bank should therefore repay the relevant proceeds. Both the District Court and the Court of Appeal 's-Gravenhage upheld the bankruptcy receiver's claim. The Court of Appeal did not acknowledge the bank's argument that the right of ownership can be split into a right of ownership subject to a condition precedent and a right of ownership subject to a condition subsequent, both of which can be validly pledged. Instead the Court of Appeal ruled that the company did not own the cultivation system at the time of its bankruptcy and hence no right of pledge was validly created over the cultivation system. Under Dutch law a right of pledge created in advance in relation to future assets will not become valid if the pledgor at the time it acquires the assets does no longer have the power to dispose (beschikken) of the assets, for instance due to its bankruptcy.

In its appeal with the Supreme Court the bank argued that the company had acquired a right of conditional ownership with respect to the cultivation system at the time of the conditional transfer which right was validly pledged to the bank and that, subsequently, when the transfer condition (i.e. payment in full of the purchase price) was satisfied, the bank became the holder of a valid right of pledge over the unconditional right of ownership with respect to the cultivation system.

The Supreme Court ruled in favour of the bank that the acquisition of moveable assets subject to a retention of title is effected by granting the possession over such moveable assets to the purchaser, as a result of which the purchaser acquires a right of conditional ownership in respect of the moveable assets that can be validly pledged to a third party. According to the Supreme Court no other acts of disposition (beschikkingshandelingen) were required for the perfection of the right of pledge and hence the right of pledge over the right of conditional ownership was immediately effective. The bankruptcy of the company did not affect the automatic substitution of the right of pledge by a right of pledge over the unconditional right of ownership upon satisfaction of the transfer condition.

Before the Supreme Court judgment it was uncertain whether a valid right of pledge could be created over moveable assets which were acquired subject to a retention of title prior to satisfaction of the transfer condition. Banks had to take into account the risk that a pledgor would be declared bankrupt prior to having obtained the unconditional right of ownership over the assets, in case of which a right of pledge purported to be created in advance over those assets would not become effective upon the pledgor acquiring full and unconditional ownership.

We expect that the Supreme Court judgment will have a positive impact on the ability of borrowers to obtain bank financing for their business, especially in industries with high levels of stock assets which are typically acquired subject to a retention of title.

Source: Banking and Finance Update July 2016

Team

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