In two recent judgments, both rendered on 16 October 2015 (which can be found here and here) the Supreme Court ruled on the sustainability of a legal construct often used by banks called the equity surplus-arrangement. A variant of the equity surplus-arrangement - and much used name - is the mutual security arrangement.
The purpose of an equity surplus-arrangement is to let a credit provider benefit from (previously established) proprietary security rights, which were provided by a borrower to another credit provider. An equity surplus-arrangement works as follows: a debtor has two credit providers, A and B. The credit of credit provider A is secured by a right of pledge, while B’s credit is unsecured. The secured obligations of the right of pledge of credit provider A extend to current and future obligations. In order to let credit provider B benefit from the right of pledge which was provided to credit provider A, A and B can agree on a so called equity surplus-arrangement. Under such an arrangement credit provider A will act as surety for B (with or without approval of the borrower) with respect to B’s claim on the borrower. This surety extends to the amount by which the enforcement proceeds of credit provider A’s right of pledge, exceed its claim on the borrower (i.e. the surplus). If in fact there is a surplus and credit provider B invokes the suretyship, pursuant to Dutch law a recourse action (in the same amount), comes into existence by which credit provider A can turn to the borrower. This recourse action should in turn be covered by credit provider A’s right of pledge. In this respect it is imperative that the wording of the secured obligations, as defined in the deed of pledge, are sufficiently broad, so that they cover current and future obligations, which ideally may derive from multiple legal relationships.
In its judgment (Bannenberg/NMB Heller) of 9 July 2004, the Supreme Court confirmed that the equity surplus-arrangement does not violate any rule or principle of Dutch property and/or insolvency law. The judgment (ASR/Achmea) of 6 April 2012 of the Supreme Court however, raised some doubts about the sustainability of the equity surplus-arrangement. One of the main questions in this judgment was when a recourse claim comes to life in light of its prescription period. The Supreme Court considered that a recourse claim of a surety comes into existence if and when the surety has a made a payment under the suretyship. The problem with this judgment, in light of having a valid and enforceable equity surplus-arrangement, is the following: at the moment that a surety makes a payment under the suretyship, the borrower will most likely be bankrupt. If the recourse claim against the borrower only arises after the borrower has been declared bankrupt, it is uncertain whether this recourse claim can be brought under the scope of an existing right of pledge previously provided by that borrower.
Since the ASR/Achmea judgment, several bankruptcy trustees have disputed the validity of the equity surplus-arrangement. On 16 October 2015 in two of these cases the Supreme Court rendered its judgment. The first of these two cases made its way to the Supreme Court by means of prejudicial questions asked by the court of first instance (De Lage Landen c.s./L.B.A. van Logtestijn). In the second case, the court of first instance ruled in favour of the credit provider, where after leap-frogging the court of appeal, the case made it directly to the Supreme Court (Pieter Ingwersen q.q./ING Commercial Finance B.V.).
In the case De Lage Landen c.s./L.B.A. van Logtestijn, the Supreme Court among other things considered the following: a creditor (i.e. a bank), cannot only enforce its right of pledge for claims that existed prior to the bankruptcy of its debtor (i.e. a borrower), but also for claims that arise after the borrower’s bankruptcy, if they derive from a legal relationship with that borrower which existed prior to its bankruptcy.
In the second case, Pieter Ingwersen q.q./ING Commercial Finance B.V., the Supreme Court explicitly opens the door for the existence of contractual recourse claims of a surety. The moment that such a contractual recourse claim arises is in principle determined by the relevant parties. This means that such a claim can come to life at the moment of agreeing to the surety, under the condition precedent of payment by the surety to its debtor.
As for now, the two judgments rendered by the Supreme Court on 16 October 2015 seem to bring an end to once lingering questions surrounding the equity surplus-arrangement. The case De Lage Landen c.s./L.B.A van Logtestijn tells us that it is advisable that parties have the borrower co-operate with the equity surplus-arrangement. If the borrower has co-signed the equity surplus-arrangement, the recourse claim (if this claim arises after the borrower is declared bankrupt) of the surety against the borrower will be a claim that can be derived from a legal relationship with the borrower which existed prior to its bankruptcy. Meaning it can validly be secured by an existing right of pledge.
The Pieter Ingwersen q.q./ING Commercial Finance B.V. case tells us that it is not necessary to have the borrower co-sign the arrangement if the recourse right of the surety is crafted as a conditional right, which arises at the moment of agreeing to the arrangement. Furthermore, the possibility to craft a recourse right of a surety as an existing conditional right has more advantages for the finance practice. In group financings, wherein group companies are jointly and severally liable towards credit providers, credit providers usually demand that possible recourse actions between group companies are subordinated vis-à-vis or pledged to the credit providers. Such a subordination or right of pledge will not be effective if it arises after the bankruptcy of the relevant debtor. However, a conditional right which exists prior to the bankruptcy of a debtor, can validly be subordinated or be made subject to a right of pledge.