Short Reads

Collection of enforcement proceeds under an undisclosed right of pledge

Collection of enforcement proceeds under undisclosed right of pledge

Collection of enforcement proceeds under an undisclosed right of pledge

19.12.2016 NL law

The District Court of Oost-Brabant: At the time of collection, if a trustee in bankruptcy has collected enforcement proceeds from receivables pledged under an  undisclosed right of pledge over receivables, the pledgee of the undisclosed right of pledge remains entitled to claim such proceeds from the trustee in bankruptcy, provided it has not collected the proceeds in its capacity as representative of the insolvent pledgor. The claim, however, only applies to proceeds which have been paid directly into the liquidation account.

District Court of Oost-Brabant 26 August 2016 (ECLI:NL:RBOBR:2016:5086)

This ruling addresses the position of a pledgee under an undisclosed right of pledge over receivables in insolvency, and more specifically the position with whether a pledgee has a claim to any enforcement proceeds collected by a trustee in bankruptcy prior to the right of pledge being disclosed - thereby notifying the relevant debtors that only payment to the pledgee and not the (insolvent) pledgor can discharge such debtor from its payment obligation.

The background of this judgment concerned two rights of pledge over receivables. The first ranking disclosed right of pledge was granted in favour of a financial institution in the Netherlands with the second ranking undisclosed right of pledge having been granted in favour of the claimant. Following insolvency of the pledgor, the trustee commenced enforcement of the first ranking right of pledge on behalf of the financial institution as pledgee by collecting the pledged receivables. Part of the enforcement proceeds was paid directly into a bank account held with the financial institution that was also pledgee under the first ranking right of pledge and was subsequently set off against the outstanding claim of the financial institution. Another part of the enforcement proceeds was paid directly into the liquidation account.

Following this collection process, the holder of the second ranking undisclosed right of pledge claimed priority in respect of the enforcement proceeds held in the liquidation account within the settlement of the order of priority of debts. The trustee argued, however, that the second ranking right of pledge was terminated by operation of law following collection of the secured receivables. This argument was based on the landmark decision of 17 February 1995 (Mulder q.q. / CLBN) of the Supreme Court – in which it ruled that that the collection by a trustee in bankruptcy of enforcement proceeds from receivables pledged under an (at the moment of collection) undisclosed right of pledge over receivables, resulted in termination of the undisclosed right of pledge over such receivables by operation of law and thereby in the pledgee obtaining the position of unsecured creditor.

In this seemingly similar case, the court ruled, however, that the undisclosed right of pledge did not terminate and that the holder of the undisclosed right of pledge maintained its priority in respect of the proceeds held in the liquidation account within the settlement of the order of priority of debts. The difference in this instance being that the trustee did not collect the receivables in its capacity as trustee of the insolvent pledgor, but rather on behalf of another pledgee as part of the enforcement of the first ranking right of pledge. The court further held that the claimant's claim only extended to the enforcement proceeds that had been paid directly into the liquidation account and not those proceeds paid directly into a bank account held with the financial institution that was also pledgee under the first ranking right of pledge.

Team

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