Sharing is Caring

When separate bilateral loans are provided to a borrower by multiple lenders the following questions are often asked:

  1. How can the separate loans be most effectively secured?
  2. Would second ranking security for the second lender adequately secure their claims against the borrower?

The solution

The Dutch law solution is for different secured lenders to enter into a mutual security surplus arrangement (wederzijdse zekerhedenregeling) in which each lender guarantees the payment obligations of the borrower to it by way of a suretyship (borgtocht). The liability of each lender under the suretyship granted by it is limited to the net value of the enforcement proceeds of the security granted to it by the borrower. The lender's right of recourse (regres) to the borrower arising from the suretyship forms part of the secured obligations of that security.

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2012 Supreme Court Judgment

However the effectiveness of this approach was challenged in a landmark judgment in 2012, in which the Dutch Supreme Court ruled that recourse claims (including the type discussed above) do not come into existence on the execution of the suretyship, but at the point when the surety pays out. Following this judgment it was questioned whether a mutual security surplus arrangement (and the rights of recourse secured under it) would still be effective and enforceable against a bankrupt borrower. For this reason, the Dutch financing market began to doubt the use of mutual security surplus arrangements.

Recent Supreme Court Judgment 

More recently however, the Dutch Supreme Court ruled that mutual security surplus arrangements are bankruptcy proof, if (i) entered into prior to bankruptcy of the borrower, and (ii) the borrower is a party thereto. This ruling is likely to increase the use of mutual security surplus arrangements in the Dutch financing market. The Dutch Supreme Court further ruled that recourse claims (including claims relating to mutual security surplus arrangements) that come into existence after the borrower is declared bankrupt can be secured, but only to the extent that they arise from a legal relationship that exists prior to bankruptcy. Such clarification is good news for the Dutch financing market, as it provides lenders with further financing options.

Best Approach

Mutual security surplus arrangements should:

  1. Be entered into by the lenders and the borrower at the time the loans (and other finance documents) are executed; and
  2. Contain a confirmation from the borrower that a contractual recourse claim against it has been created, which comes into existence on execution of the arrangement.

A mutual security surplus arrangement of which the borrower is not aware, will not hold up in bankruptcy.