Netherlands consults law change to simplify digital registration for security and assignments

The Dutch government is consulting the public about a legislative proposal “Modernisation of Pledge and Assignment” which amends Book 3 of the Dutch Civil Code to bring security rights more in line with current financing practice and digitalisation. It is the next step in modernising Dutch property law with regard to transferability and security of assets after the Act on the abolishment of transfer and pledge restrictions (Wet opheffing verpandingsverboden). What are the most notable proposed changes for lenders and borrowers?

Two main objectives

The new proposal has two main objectives: (1) modernising and simplifying the registration of private deeds; and (2) broadening the possibilities to create undisclosed pledges and undisclosed assignments over future claims. 
The aim is to reduce administrative burdens, increase the availability of collateral and create a more level playing field between bank and non-bank financiers. This should lead to improved access to credit, particularly for small and medium-sized enterprises. The proposal is expected to improve the position of lenders under working-capital solutions, such as factoring and borrowing-base facilities, because additional "future" assets and receivables can be included in the security package.

Modernising the registration requirement

Currently, private deeds for pledges and assignments must be registered on paper with the Rotterdam office of the Tax Administration. This system is cumbersome, not digital, and serves essentially one purpose: fixing the moment of creation or transfer, because this moment determines priority between competing rights. Registration is thus a validity requirement aimed at date-fixing, not publicity. The register of the tax authorities is not publicly available and cannot be used for collateral searches (as is the practice in other jurisdictions).
The proposal therefore replaces the requirement of a “registered private deed” with a “private deed with a fixed date”. A “fixed date” is defined as the indication of the date and time at which the deed was executed, in such a way that it can later be objectively established that this date and time have not been altered (preventing backdating).

Three ways to obtain such a fixed date are proposed: 

• by using a qualified electronic time stamp within the meaning of the eIDAS Regulation (the regulation on electronic identification and trust services);
• by using any other objective method that allows, upon later review, verification that the date and time have remained unchanged (an open, technology neutral standard, such as blockchain or a notarial escrow deed);
• by registration under the Registration Act 1970 with the Tax Administration in Rotterdam; in that case, 17:00 is deemed to be the time.

Abolition of the 'ground requirement ' for undisclosed pledges and undisclosed assignments

Currently, claims can be pledged or assigned in advance (bij voorbaat), but only to a certain extent. Claims arising from future legal relationships currently cannot be pledged or assigned in advance in undisclosed form.

In practice, Dutch banks reduce their risk under this limitation via the so called “collective deed of pledge”: based on powers of attorney from their clients, they execute and register a new private deed on every working day, by which all then existing and “single future” claims of all clients are pledged. This produces a major administrative and paper flow and improves the position of Dutch banks over other secured creditors, who find this administrative exercise too cumbersome. For Dutch banks, the unpledged “remainder” comprises mainly very short term claims (for example PIN and iDeal payments), on which it is in reality very difficult to levy and realise attachment in the short period before bankruptcy.
 

The proposal therefore abolishes:

• the requirement that the claim must exist or arise from an existing legal relationship; going forward, all future claims may be pledged in advance by one deed with a fixed date;
• the same requirement for undisclosed assignment, so that future claims against a currently unknown debtor can also be assigned in advance,
  in each case in situations where the pledgor or assignor is not a "consumer". There is no limitation on the transfer of consumer claims (claims where the counterparty is a consumer).

Osborne Clarke comment

The proposed measures are expected to make the current practice of daily collective deeds of pledge redundant, reduce costs and administrative burdens, and broaden the scope of available collateral – particularly in sectors with many short-term claims (such as retail). This should support credit provision by both bank and non-bank financiers and promote a more level playing field between financiers and between businesses.

At the same time, the proposal acknowledges that stronger and broader security and assignment rights may mean that more turnover stays outside the bankruptcy estate, contributing to the “empty estate” problem (including the funding of insolvency practitioners’ fees). The proposal states this is an insolvency law problem, which should be addressed in a separate legislative track, not within property law. Although correct, at a time where empty estates are a known challenge, it is notable that the proposal does not address how these broader security rights may affect insolvency outcomes for unsecured creditors (and potentially aggravate the issue).

As regards transitional law, the statute has in principle no retroactive effect: existing valid or invalid pledges and assignments remain as they are. If the legislation is passed, for claims that already exist at the time of entry into force, the new law would not retroactively validate earlier ineffective attempts to pledge or assign “double future” claims. For claims arising after entry into force, it would be the time of the act of delivery or creation of the pledge that determines whether the new rules apply, not the time when the deed was signed.