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Deed of pledge

Introduction

A deed of pledge creates a right of pledge: a limited security right over a movable asset, a claim or another transferable asset, which serves to recover a monetary claim. The deed allocates the recourse risk between two positions. The pledgee (creditor) obtains priority over unsecured creditors and the power to take recourse without the intervention of a court. The pledgor (debtor, or a third party who encumbers its own asset) surrenders an asset from its estate as collateral. The central question for every provision is whether the security holds up at the moment the claim actually has to be enforced.

The structure of the agreement

The order of a deed of pledge follows the logic of the right of pledge itself. First the underlying legal relationship is recorded, because a right of pledge cannot exist independently of a valid claim. Next the object, the secured claim and the manner of creation are described. Thereafter come the provisions that keep the security intact and that govern recourse once the debtor is in default. The full structure may look as follows:

  • Heading and recitals
  • Definitions
  • Undisclosed or disclosed pledge
  • The pledged assets
  • The secured claim
  • Notification and registration
  • Obligations of the pledgor
  • Enforcement and summary execution
  • Priority and multiple rights of pledge
  • Costs
  • Choice of law and forum

Heading and recitals

The heading sets out the title of the deed, the parties and the recitals. The parties are designated as the pledgee, the creditor of the claim to be secured, and the pledgor, the party that encumbers the asset. Where the pledge secures the debt of a third party, the pledgor and the debtor are different persons; this is recorded expressly in the recitals. The recitals describe the underlying legal relationship, such as the loan or credit agreement, from which the secured claim arises. In this way the deed contains a valid title for creation and the accessory link between the right of pledge and the claim is established.

Example recitals +

THE UNDERSIGNED: [Pledgee], having its registered office in [place] ("Pledgee");

and [Pledgor], having its registered office in [place] ("Pledgor");

WHEREAS the Pledgee has or will acquire a claim against [the Debtor] under the [credit agreement/loan] dated [date];

and the parties wish to create a right of pledge over the assets described in this deed as security for that claim;

HEREBY AGREE as follows.

For the pledgee, precise recitals anchor the title on which the right of pledge rests. For the pledgor, that same description delimits what its asset serves as collateral for, particularly where it grants security for another party's debt.

Definitions

The definitions clause describes the key terms unambiguously: the Pledged Assets, the Secured Claim, the deed itself and any underlying agreement. Precision here is a requirement of validity. For creation, the asset must be sufficiently identifiable at the moment of creation; a description that is too vague may mean that no valid right of pledge comes into being. The definitions are drafted so that they also cover future assets and claims, in so far as these are already identifiable at the moment of creation.

Example definitions +

In this deed the following terms have the following meanings: "Pledged Assets": the assets described in Schedule [X], including all related future assets in so far as sufficiently identifiable at the moment of creation;

"Secured Claim": everything that the Pledgee has or will have to claim from the Pledgor under the [Underlying Agreement], increased by interest and costs.

For the pledgee, the scope of the definitions determines whether the security also covers future positions. For the pledgor, a sharp description delimits the assets it gives up and prevents more being encumbered than intended.

Undisclosed or disclosed pledge

The deed determines whether an undisclosed or a disclosed pledge is created. An undisclosed (non-possessory) pledge over a claim arises under Section 3:239 DCC by means of a notarial or registered private deed, without notification to the debtor of the pledged claim. The pledgor remains entitled to collect until notification takes place. A disclosed pledge over a claim is created under Section 3:236(2) in conjunction with Section 3:94 DCC by a deed and notification to the debtor; from that moment the pledgee is entitled to collect. Over a movable asset, a disclosed (possessory) pledge arises by bringing the asset into the control of the pledgee (Section 3:236(1) DCC).

Example clause +

Undisclosed pledge: The Pledgor hereby pledges to the Pledgee, which accepts, the Pledged Claims as security for the Secured Claim. This pledge is made on an undisclosed basis within the meaning of Section 3:239 DCC;

notification to the debtors concerned is withheld until the Pledgee proceeds to give it. Until that moment the Pledgor remains entitled to collect.

Example clause +

Disclosed pledge: The Pledgor hereby pledges the Pledged Claims to the Pledgee. Notification of this pledge is given to the debtors concerned pursuant to Section 3:236(2) in conjunction with Section 3:94 DCC, from which moment the Pledgee alone is entitled to collect.

For the pledgee, a disclosed pledge gives direct control over the cash flow, whereas an undisclosed pledge leaves collection with the pledgor and depends on timely registration and correct notification. For the pledgor, an undisclosed pledge leaves the business operations undisturbed, whereas a disclosed pledge removes the power to collect and makes it visible to customers that the credit is encumbered.

The pledged assets

The deed describes the object: inventory (movable assets), claims registered to a named party, or shares. In the case of inventory, this concerns a changing collection of assets; the description is arranged so that assets acquired later also fall under the right of pledge, with periodic re-confirmation where future assets are concerned. In the case of claims, the reference date is decisive: an undisclosed pledge extends to claims that already exist at the moment of creation or will arise directly from a legal relationship already existing at that time. In the case of shares a heavier formal requirement applies: pledging is effected by notarial deed, with due observance of the blocking and pledge provisions in the articles of association and an entry in the shareholders' register. Susceptibility to pledge follows the transferability of the asset (Sections 3:83 and 3:228 DCC): what is not transferable cannot be pledged.

Example clause +

The pledge comprises: (a) the inventory and other movable assets as described in Schedule [X];

(b) all present and future claims registered to a named party in so far as these arise from a legal relationship already existing at the moment of creation;

(c) [the shares in [Company], to be pledged by separate notarial deed]. Pledging takes place only in so far as the assets are transferable.

For the pledgee, a check on transferability before signing determines whether the security actually has value; a contractual or statutory prohibition on transfer may hollow it out. For the pledgor, the description of the object indicates which part of its estate is placed beyond its free disposal.

The secured claim

The deed describes which claim the right of pledge covers. This may be a specific loan, but in practice a broad formulation is often chosen that covers all present and future claims arising from a credit relationship. The description determines the extent of recourse: the pledgee can take recourse only up to the amount of the secured claim, increased by interest and costs in so far as the deed and the law permit. A description that is too narrow leaves future debt positions unprotected; a description that is too broad runs up against the requirement of determinability. The accessory nature of the right of pledge means that it lapses as soon as the secured claim has been satisfied in full.

Example clause +

The right of pledge serves as security for the payment of everything that the Pledgee, according to its records, has or at any time will have to claim from the Pledgor, under [the Underlying Agreement], a loan, a suretyship or otherwise, increased by interest, penalties and costs.

For the pledgee, a description covering all present and future claims broadens the cover of the security. For the pledgor, that same breadth means that the collateral remains available for debts arising later as well, which must be weighed when determining the available credit.

Notification and registration

In the case of an undisclosed pledge over a claim, registration of the private deed is a requirement of validity: without registration with the Dutch Tax and Customs Administration, or recording in a notarial deed, no right of pledge arises. Notification to the debtor of the pledged claim is not a requirement for creation in the case of an undisclosed pledge, but it is the moment at which the power to collect passes from the pledgor to the pledgee. In the case of a disclosed pledge, notification is on the contrary constitutive. The deed records who gives the notification, when and in what form, and governs the pledgee's power to give notification itself as soon as it considers this necessary.

Example clause +

The Pledgor shall submit this deed for registration with the Dutch Tax and Customs Administration and shall provide the Pledgee without delay with evidence of registration. The Pledgee is at all times entitled to give notification of the right of pledge to the debtors concerned;

the Pledgor hereby grants an irrevocable power of attorney in advance for this purpose.

For the pledgee, demonstrable registration is decisive: without evidence of it, reliance on the security may fail. For the pledgor, notification marks the moment at which it hands over collection and contact with its customers.

Obligations of the pledgor

The deed imposes obligations on the pledgor that keep the value of the security intact. The usual ones are: providing lists of pledged claims and debtor overviews, periodically pledging newly acquired assets and future claims, a prohibition on disposing of or further encumbering the assets without consent, an obligation to insure the pledged assets, and a duty to inform in the event of threatened loss of value or attachment. For undisclosed pledged claims, the pledgor is obliged to hand over or keep separate payments received as soon as the pledgee gives notification. These stipulations turn the statutory arrangement into a verifiable security; non-performance is usually linked to the secured claim becoming due and payable.

Example clause +

The Pledgor shall provide monthly lists of pledged claims stating the claims to be pledged and shall pledge newly acquired assets in advance. The Pledgor shall not dispose of or further encumber the Pledged Assets without written consent, shall keep them adequately insured, and shall inform the Pledgee without delay of any (threatened) attachment or loss of value.

For the pledgee, these obligations maintain oversight of the collateral and give timely warning of a deterioration. For the pledgor, they entail an administrative and operational burden, the size of which must be assessed when entering into the security.

Enforcement and summary execution

In the event of the debtor's default, the pledgee is entitled under Section 3:248 DCC to summary execution: it may sell the pledged asset without a prior enforceable title, in principle by public sale in accordance with the statutory rules, or, after permission from the provisional relief judge or by a differing arrangement, in another manner. The proceeds serve to satisfy the secured claim; any surplus accrues to the pledgor or other entitled parties. In the case of an undisclosed pledge, enforcement is usually preceded by notification or conversion into a possessory pledge, so that the pledgee obtains actual control over the asset. The deed may frame the power of enforcement in more detail, but cannot contract away the statutory safeguards to the detriment of the pledgor.

Example clause +

In the event of default by [the Debtor], the Pledgee is entitled to sell the Pledged Assets in accordance with Section 3:248 DCC and to satisfy itself from the proceeds. The Pledgee is entitled to convert an undisclosed pledge into a possessory pledge by taking the assets into its possession. Any surplus remaining after satisfaction of the Secured Claim accrues to the Pledgor.

For the pledgee, summary execution is the core of the security: recourse with priority and without a prior recourse to the court, where the power of private sale and of conversion into a possessory pledge makes swift action possible. For the pledgor, the statutory enforcement rules offer protection; it can have the manner and timing of execution reviewed in preliminary relief proceedings and retains a claim to the surplus.

Priority and multiple rights of pledge

Several rights of pledge may rest on the same asset. Priority determines the order of recourse: the right of pledge created first takes precedence, unless the parties agree on a differing order of priority. The deed records whether it concerns a first or a lower-ranking right of pledge and whether the pledgor is entitled to create further rights of pledge. Where, alongside the pledge, other security rights or preferential rights also play a part, such as the bodemrecht (the statutory right of the Dutch Tax and Customs Administration over certain assets on the debtor's premises), the relationship to these is mapped out, because it can strongly affect the effective value of the right of pledge upon enforcement. A statement by the pledgor about the encumbrance of the asset is a key stipulation in this respect.

Example clause +

The Pledgor declares that the Pledged Assets belong to it in free and unencumbered ownership and that no limited rights rest on them other than those mentioned in Schedule [X]. The right of pledge created by this deed is a [first/second] right of pledge. The Pledgor shall not create any further rights of pledge without the prior written consent of the Pledgee.

For the pledgee, priority determines whether sufficient proceeds remain upon enforcement; an incorrect statement about the encumbrance affects the value of the security and is linked to liability. For the pledgor, the statement records that it has fully disclosed the existing charges and will not encumber the asset further without notice.

Costs

The deed governs who bears the costs of creation, registration and administration. As a rule, the costs of drawing up and registering the deed of pledge, and of any notarial recording in the case of a pledge over shares, are for the account of the pledgor. The costs of enforcement, valuation, auction, bailiff, legal assistance, are as a rule also passed on to the pledgor and, in so far as the law permits, recovered from the enforcement proceeds while retaining the position of priority. Amounts here are determined on a reasonable basis and against production of supporting documents.

Example clause +

The costs of drawing up and registering this deed, of any notarial recording and of enforcement, including valuation, auction, bailiff and lawyers' fees, are for the account of the Pledgor and may be recovered from the enforcement proceeds while retaining the Pledgee's position of priority.

For the pledgee, this provision ensures that the costs of recourse do not hollow out the proceeds. For the pledgor, a test of reasonableness and supporting documents limits the amounts that ultimately fall to its account.

Choice of law and forum

The deed concludes with a choice of law and forum. A choice of law may be made in respect of the contractual relationship between the parties. For the property-law aspect, however, mandatory law applies: on an asset with a Dutch situs, a movable asset located in the Netherlands, or a claim or share governed by Dutch law, Dutch property law applies. The creation, the content, the priority and the manner of enforcement of the right of pledge are therefore governed by Dutch law, regardless of any different choice of law for the contractual relationship. The choice of forum usually designates the competent Dutch court, which is consistent with the mandatory application of Dutch property law and the place of enforcement.

Example clause +

This deed and the obligations arising from it are governed by Dutch law. The property-law regime of the right of pledge is governed by Dutch law, since the Pledged Assets are located in the Netherlands or governed by Dutch law respectively. Disputes are submitted to the competent court in [place].

For the pledgee, the mandatory application of Dutch property law ensures that the security can, where there is a Dutch situs, be enforced by familiar standards. For the pledgor, that same rule prevents a choice of foreign law from altering the property-law effect of the right of pledge.

What does this mean in a dispute?

When the debtor falls into default or becomes bankrupt, the deed is tested on the points that carry the value of the security: has a valid right of pledge been created, was the deed registered in time, was the asset transferable, and has the correct order been followed upon enforcement. Disputes usually concern the question whether collection has taken place wrongly, whether summary execution may be suspended, or how priority relates to other security rights and preferential rights. A deed that unambiguously records the type of right of pledge, the moment of creation, the description of the object and the grounds for execution reduces the scope for these disputes.

See also