In cross border financing transactions, a secured creditor should be aware of Dutch law specifics when dealing with a Dutch obligor in financial distress. Below is a highlighted list of specifics for a secured creditor planning to foreclose on its security or when seeking to improve its security position.
Improving security position
Existing Dutch security documents typically provide for possibilities for improving the position of a secured creditor in case of an event of default.
Getting a tighter grip on collateral
The secured creditor, usually by sending of a notice thereto, is:
- able to obtain voting rights attached to pledged shares
- entitled to dividends
- entitled to take physical possession over movables
- entitled to notify debtors of a pledge on receivables upon which debt-discharging payments can then only be made to the secured creditor
Where providing additional security may cause fraudulent conveyance concerns, getting a tighter grip on collateral as set out above does not bear the same risk.
Replacing management board
With 100 per cent of the voting rights a secured creditor is able to replace the management board in a shareholders meeting. In transactions with a U.S. pledgor often only 65 percent of the shares in its foreign subsidiary are pledged in connection with the U.S. Internal Revenue Code. Whether a secured creditor with only 65 per cent of voting rights can vote to replace the board depends on the articles of association of the Dutch company.
Although quick action usually is key, a minimum notice period of 15 days prior to the meeting most likely needs to be observed. The shareholders, even those who no longer vote the shares, should be called to the meeting. Furthermore, each member of the board should be able to express his or her view on the matter at the meeting. Both require a minimum notice period.
Furthermore, the articles of association may not allow a creditor with voting rights to convene the shareholders meeting. In that case, the cooperation of the board or court authorization is required to convene the meeting. This obviously makes the process more cumbersome.
Voluntarily filing for bankruptcy or suspension of payments
The management board requires the instruction of the shareholders' meeting to file for bankruptcy. Therefore, once the right to vote the shares is with the secured creditor, a bankruptcy filing requires its instruction. The management board will however generally be authorized to file for a suspension of payment without such instruction.
Dutch bankruptcy or suspension of payment does not affect the right of a secured creditor to foreclose on its security. A foreclosure may however be delayed by a so-called cooling off period of a maximum of four months if so requested by the receiver in bankruptcy or administrator in suspension of payments to allow the receiver or administrator to assess the status of the estate. The receiver in bankruptcy may furthermore set a term by which the secured creditor should have exercised its rights.
In practice, foreclosure generally occurs by way of a private sale agreed between the pledgor (or the receiver in bankruptcy) and the secured creditor. Alternatives are a public auction or a court authorised private sale.
Taking ownership of the shares
The pledgor (or the receiver in bankruptcy) and the secured creditor can agree in a private sale that the secured creditor takes ownership of the pledged shares in the company in satisfaction of its claim against the debtor. Taking ownership of pledged collateral can only be agreed upon after the moment the secured creditor is entitled to foreclose. If for any reason a private sale is not feasible, the secured creditor could consider petitioning the court to allow for the arrangement. To obtain court approval the secured creditor should submit an application to the court including a list of possible interested third parties (for instance an attaching party). The court hearing will occur within 3 to 6 weeks. Since the main issue for the petitioner is to convince the court that the price is realistic it is important to have an appraisal report available. Although difficult to predict, provided no objections are raised by interested parties, the court may take 3 to 4 weeks to render its decision.
In case of foreclosure on a pledge on shares it is likely that transfer restrictions applicable to a transfer of shares pursuant to the articles of association should be complied with. These share transfer restrictions can either provide that (a) an intended transfer requires the consent of a certain corporate body; or (b) in case of an intended transfer the shares must first be offered to the other shareholders.