Short Reads

Dutch Supreme Court: the holder of a disclosed right of pledge over a receivable is entitled to file for bankruptcy of the debtor of such receivable

Dutch Supreme Court: the holder of a disclosed right of pledge over a receivable is entitled to file for bankruptcy of the debtor of such receivable

Dutch Supreme Court: the holder of a disclosed right of pledge over a receivable is entitled to file for bankruptcy of the debtor of such receivable

06.04.2017 NL law

In its judgment of 9 December 2016, the Supreme Court ruled that once the debtor of a receivable has been notified of a right of pledge over that receivable, the holder of the right of pledge not only has the power to collect the amount due under the receivable but also is entitled to file for the debtor's bankruptcy if the debtor fails to pay this amount.

Dutch Supreme Court 9 December 2016 (ECLI:NL:HR:2016:2833).

An investment company leased business space to a lessee. The lease receivables had been pledged to a third party, the pledgee. Following the investment company's failure to meet its payment obligations towards the pledgee, the pledgee notified the lessee of the right of pledge and demanded payment from the lessee of the lease receivables. When the lessee failed to pay, the pledgee filed for the lessee's bankruptcy.

The question that was put to the Supreme Court was whether the right to file for bankruptcy of the debtor of a pledged receivable remains with the pledgor or whether it is transferred to the pledgee upon notification of the right of pledge to the debtor. Unlike the District Court and the Court of Appeal, the Supreme Court ruled that the right to file for bankruptcy of the debtor of a claim which is subject to a disclosed right of pledge is transferred to the holder of such right of pledge. The Supreme Court reasoned that the right of a pledgee to collect the receivables pledged to it includes the right to take recourse on the assets of the debtor of those receivables and that this purpose is served by, amongst other things, filing for the debtor's bankruptcy. Given the close connection between the right to collect a receivable and the right to file for a debtor's bankruptcy, such right will transfer to the pledgee upon notification of the right of pledge to the debtor.

The judgment is broadly in line with existing case law. In 2015, the Supreme Court ruled that when a pledgee becomes entitled to collect receivables pledged to it, the pledgee may use all means of recovery that were previously available to the pledgor, including the enforcement of any security rights existing as security for those receivables. It also follows a well-established trend in the Supreme Court's case law to strengthen the rights of secured creditors (such as pledgees) by giving an extensive interpretation of such rights in enforcement scenarios.

As a result of this judgment, the pledgor of a disclosed right of pledge over a receivable does not have the right to file for bankruptcy of the debtor of that receivable without prior authorisation from the pledgee or alternatively a competent court. Thus, the position of the pledgor is weakened and the positioned of the pledgee is further strengthened.

Team

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