The validity and enforceability of security surplus arrangements (overwaarde-arrangementen) in bankruptcy is a hot topic in Dutch legal literature and practice. Several trustees in bankruptcy have tried to contest the validity of such arrangements, but thus far they have been unsuccessful. According to two recent district court rulings, security surplus arrangements lead to valid and enforceable security in case of the bankruptcy of the security provider. The Supreme Court has been asked to issue a preliminary ruling in respect of the enforceability and validity of a security surplus arrangement in case of the bankruptcy of the security provider; its ruling is expected later this year.
So what exactly is a security surplus arrangement under Dutch law? An ordinary security surplus arrangement involves two or more lenders that:
- provide bilateral financing to a common obligor; and
- wish to have a mutual right of recourse to any surplus security proceeds which one lender receives as a result of enforcing its security over the obligor's assets (in the event that the other lender's security is insufficient to discharge the loan it advanced to the obligor).
The mechanics of a security surplus arrangement are as follows. Each lender guarantees payment of the loan granted by the other lender to the obligor by making use of a suretyship. The suretyship gives a lender the right to claim payment of the loan from the other lender(s) in the event that the obligor does not discharge its loan in full. The arrangement is usually structured in such a way that cross-defaults trigger acceleration of the loans granted by the lenders, as a result of which the security created in favour of each lender should become enforceable. A lender incurs no liability under the suretyship with respect to the loan granted by another lender beyond the net value of the proceeds of the security it holds (determined by deducting all amounts which the obligor owes to the lender under its loan from the gross security proceeds). Accordingly, the lender's right to claim payment from another lender under the suretyship is limited to the net proceeds of the security which that other lender holds.
The most important aspect of a security surplus arrangement is that the enforcing lender's recourse right with regard to the obligor (after paying the other lender under the suretyship) is treated as a secured claim under the security it holds. In this way, any payment made under the suretyship will result in a secured recourse claim which may then be repaid from the proceeds of enforcement of the security granted by the obligor.
The Supreme Court explicitly approved the validity and enforceability of security surplus arrangements in a July 9 2004 ruling.(1) Following this decision, there was little debate as to the enforceability and validity of a security surplus arrangement. However, the situation changed in April 2012, when the Supreme Court ruled that – contrary to the prevailing views in the Dutch legal literature at the time – recourse claims are future claims and come into existence only after the debtor or surety has paid its obligations with regard to the creditor.(2) This ruling raised the question of whether security surplus arrangements are still valid and enforceable if the enforcing lender pays the creditor under the suretyship (ie, the other lender) after the obligor has been declared bankrupt.
Although the majority opinion in Dutch legal literature is that security surplus arrangements are still valid where the lender acting as surety pays the other lender in its capacity as creditor after the obligor has been declared bankrupt, several trustees in bankruptcy have tried to contest the validity and enforceability of the security surplus arrangements. So far, these attempts have been unsuccessful and two Amsterdam District Court rulings have made clear that, in the court's view, the Supreme Court's 2012 ruling has not altered the effectiveness of security surplus arrangements in the event of the obligor's bankruptcy.(3)
Another district court has sought a preliminary ruling from the Supreme Court,(4) asking it to confirm whether a recourse claim that arises after the obligor's bankruptcy can still be used to take recourse against the proceeds of enforcement of the security rights which were granted by the bankrupt obligor. A related question that the Supreme Court has been asked to answer is whether the obligor must co-sign the security surplus arrangement in order for it to be valid and enforceable in the event of the obligor's bankruptcy. The answers to both questions are highly anticipated and will probably be issued later this year.
The Supreme Court is expected to uphold its 2012 ruling and to make clear that security surplus arrangements still lead to valid and enforceable recourse claims of the enforcing lender with regard to the obligor, even if those claims arise after the obligor's bankruptcy. While it might not be necessary from a strict legal perspective to have the obligor co-sign a security surplus arrangement, this will be considered to be the prudent way for a lender to act. Until the Supreme Court has issued its preliminary ruling, it is thus advisable to have the obligor co-sign a security surplus arrangement, since it may turn out that this is not only prudent, but could also be crucial for the validity and enforceability of the security surplus arrangement.
For further information on this topic please contact Jelle Hofland, Ilse van Gasteren, Erwin Bos or Guido Bergervoet at Clifford Chance LLP by telephone (+31 20 711 9000), fax (+31 20 711 9999) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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(3) Amsterdam District Court, August 27 2014, JOR 2014/318 (ING Commercial Finance/Ingwersen qq) and Amsterdam District Court, September 17 2014, JOR 2015/23 (Jongepier qq./Rabobank & De Lage Landen).