Insolvency, Finance & Collateral: case law alerts

In General: pledge and mortgage rights are strong rights

Pledge and mortgage rights are strong rights under Dutch law. If a debtor fails to meet their obligations to the pledgee or mortgagee and there is a default, the pledgee or mortgagee may enforce their right through foreclosure (executieverkoop).  Pledgees or mortgagees are entitled to recover their claim from the proceeds of the sale, with priority over other creditors. A court ruling is not required beforehand.

Pledgees and mortgagees retain this right even if the debtor is declared bankrupt. They may exercise their rights as if no bankruptcy had occurred.

It is crucial, however, that the claim for which the pledge or mortgage has been granted is properly documented and its existence can be proven.

Case Law – The Hague Court of Appeal

Listing a claim in the annual accounts is not sufficient. The existence of a mortgage-secured claim must be substantiated and explained.

The Hague Court of Appeal recently issued a judgment in a case where a bankruptcy trustee contested the existence of a mortgage-secured claim.

According to the trustee, there was no logical explanation for the creditor having a claim against the bankrupt company. Apart from the listing of the claim in the annual accounts, there was no evidence to support the existence of the alleged claim.

The District Court initially ruled that the creditor had failed to adequately respond to the trustee’s disputes. The creditor had only referred to the annual accounts, did not provide the underlying agreement, and had not otherwise clarified how the claim had arisen. The burden was on the creditor to explain the origins of the alleged claim and to provide an explanation for the trustee’s finding that only payments from the bankrupt company to the creditor existed, and not the other way around.

On appeal, the Court of Appeal upheld the District Court’s ruling and further held that the annual accounts of both the creditor and the bankrupt company were insufficient to prove the existence of the alleged claim. This was especially true because the same (indirect) director was involved in both companies and could have influenced the content of the annual accounts.

Thus, even if a mortgage-secured claim is listed in the annual accounts of both the debtor and the creditor, this alone does not provide sufficient evidence for the existence of a legitimate claim — particularly where both entities share the same management.

Reflection

It is therefore essential that claims are properly recorded and supported by documentation. Merely listing a claim in the annual accounts is not enough. A bankruptcy trustee is responsible for safeguarding the interests of all creditors and must assess all claims fairly and transparently. In assessing a pledged or mortgage-secured claim, the trustee will, and rightly so, scrutinise the existence of the underlying claim and dispute it if necessary.

GMW advocaten’s insolvency team

The insolvency team at GMW advocaten has extensive expertise in drafting clear credit documentation and loan agreements, as well as establishing and enforcing security rights such as pledges and mortgages.

We are accustomed to working with debtors, trustees in bankruptcy, and other secured or preferential creditors. Naturally, we would also be pleased to assist you with secured financing or recovery of your claim.

More Information

Do you have any questions following this blog? Feel free to contact me.