Bank finance and regulation. Multi-jurisdictional survey. The Netherlands. Enforcement of security interests in banking transactions.

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1 Bank finance and regulation Multi-jurisdictional survey The Netherlands Enforcement of security interests in banking transactions David Viëtor NautaDutilh, Amsterdam Part I types of security 1. What are the most common types of security in banking transactions in your jurisdiction (eg, standard security package)? Please provide a brief characteristic of each type of security. In rem security rights consist of the right of pledge and the right of mortgage. Where an in rem security right has been created on registered property (namely, land and buildings, certain ships and certain aircrafts), it is a mortgage; where it has been created on other property, it is a pledge. A right of mortgage and right of pledge are limited rights intended to provide the person holding the security recourse against certain property of the person giving the security, with preference over other creditors of that person. In rem security rights can only provide recourse for a claim for payment of a sum of money of the person holding the security, the creditor, against the person giving the security, the debtor, or against a third party (in which case the security right is called a third-party security right and the person giving the security a third-party mortgagor or third-party pledgor ). This may include existing and future claims of the creditor under a specific agreement, and can also include all claims the creditor may from time to time have against the debtor or a third party, irrespective of the basis of these claims. A right of mortgage can only be granted for a fixed amount. The parties are free to determine this amount (it is not uncommon to calculate the maximum amount of the mortgage by taking the principal amount of the debt plus a margin for interest and costs). In rem security rights are accessory to the claim they secure. In rem security rights can be created on existing and, in advance, on future property of the person giving security. There are two exceptions to this rule. The first is that registered property cannot be mortgaged in advance. The second exception is that limitations apply to a right of pledge on receivables other than to order or bearer (which type of receivables include, for instance, trade receivables), where the pledge has not been disclosed to the relevant debtors. A pledge on these receivables can only be created where it concerns existing receivables, or receivables which will be acquired immediately after the date of the deed of pledge, pursuant to a legal relationship which was in existence on the date of that deed. Some specific requirements for the various types of in rem security rights are discussed below. These specific requirements apply in addition to the following general requirements for creating in rem security rights. The first general requirement is that both the right of mortgage and the right of pledge generally require the execution of a deed. Although it is possible to combine some of the security rights described below in one document, legal

2 practice is that each type is included in a separate deed. In the case of a mortgage and a pledge on registered shares this must be a notarial deed. The right of pledge on most other property can also be effected by means of a private deed. The second general requirement is that there must be a valid obligation to create the security right. Generally, this obligation is created in the facility agreement. If its validity or enforceability is successfully contested, the security right will be invalid as well as unenforceable. The third requirement is that the person giving the security right must have authority to dispose of the property on which the security is to be created, which means that it must be the owner or proprietor of that property. The fourth requirement is that the property to be secured must be sufficiently identified. Fifthly, at the time of foreclosure of a security right, the corresponding secured obligations must be capable of being identified. Lastly, the property must be transferable. Property is transferable, unless the law or the nature of the property prohibits a transfer. Often, agreements provide that the rights under the agreement cannot be transferred (and consequently cannot be secured). 2. In relation to the following types of assets, please provide the types of security that can be created or granted in your jurisdiction and give details of any registrations required: (a) Real estate Mortgage, which needs to be registered with the Land Register. (b) Charging assets (inventory, stocks etc) Non-possessory pledge, which needs to be registered with the Tax Authorities (except where the pledge is executed in the form of a notarial deed). Possessory pledge, which does not need to be registered (but which requires that the pledgee takes possession of the collateral). (c) Movables See response to question 2(b). (d) Shares Where it concerns registered shares: a pledge, which needs to be registered in the company s shareholders register (although this is not a requirement for the valid creation of the pledge). Where it takes bearer shares: a pledge, which does not need to be registered (but which requires that the pledgee takes possession of the collateral). (e) Rights under contracts (receivables) Undisclosed pledge, which needs to be registered with the Tax Authorities (except where the pledge is executed in the form of a notarial deed). Disclosed pledge, which does not need to be registered (but which requires that the relevant debtors be notified). (f) Bank accounts See response to questions 2(e) and (j).

3 (g) Financial instruments (eg, securities) Securities (for instance, shares, or bonds) which are deposited with a custodian and included in the giro system are pledged by the registration of the right of pledge by the custodian by means of a book entry in the name of the pledgee. The pledgee will generally require proof of the book entry in the form of an acknowledgement by the custodian. Often, a private deed, containing additional provisions, is executed. See also the response to question 2(j). (h) Intellectual property Pledge. Where a register exists for the relevant intellectual property right, it is advisable to register the pledge. Registration is not necessary for a valid creation of the pledge, but a pledgee with an unregistered pledge may not be able to invoke its security rights against third parties. (i) Plant and machinery Where it concerns immovable assets: see response to question 2(a). Where it concerns movable assets: see response to question 2(b). (j) Other assets Ships/aircraft/spacecraft: A distinction must be made between registered and unregistered ships and aircraft. Registration of ships and aircraft is, in short, required where they have a certain connection with the Netherlands and they have a certain weight (aircraft) or tonnage (ships). Where the ships and aircraft are registered property, a right of mortgage can secure them. See the requirements for the creation of a right of mortgage on real estate, which apply equally to registered ships and aircraft. If the ships and aircraft are not registered property, they can be secured by a right of pledge. See the requirements for the creation of a right of pledge on movables, which apply equally to unregistered ships and aircraft. These also apply to spacecraft and satellites (as there is no register for spacecraft and satellites). Order and bearer receivables (which are, for instance, bills of exchange and cheques) can be pledged in accordance with the requirements which apply to the creation of a right of pledge on movables. Order receivables need to be endorsed. Under Dutch law a security right on a demand deposit and, provided they are easily transferable via the capital markets, certain securities could be subject to the financial collateral arrangement. This type of security is frequently used in financial transactions. The financial collateral arrangement can be distinguished in two types: (a) a financial collateral arrangement to serve as collateral; and (b) a financial collateral arrangement to serve as security transfer. Subject to certain exceptions the regular laws on security rights apply to the financial collateral arrangement. An example of a restriction is that at least one party of the financial collateral arrangement must be a public authority. The form or substance of the financial collateral arrangement is not prescribed by law. If the pledgee is not an affiliated institution within the meaning of section 1 of article 20 of the Act on the Giro Securities, a right of pledge is established by crediting the securities

4 in the name of the pledgee. If the pledgee is such an affiliated institution, a right of pledge is established by mere agreement between the pledgor and the institution. Other securities are pledged in the manner as described above under 2. See also the response to question 2(g). A right of pledge on a demand deposit is established by a deed and, and, if the pledge is disclosed, a notice to the account bank. A disclosed pledge does not need to be registered (but requires that the relevant debtors be notified). An undisclosed pledge needs to be registered with the Tax Authorities. However a undisclosed pledge on a demand deposit is not commonly used. In the near future the Dutch legislator will implement the Amendment Directive to the Collateral Directive, the Financial Collateral Arrangement Act. As a result of the implementation of the Amendment Directive credit claims become an alternative type of collateral. 3. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Is the parallel debt clause concept recognised in your jurisdiction? Dutch law does not know the concept of trust. A foreign trust may be recognised in the Netherlands, but recognition does not solve the problem that it is generally assumed that in rem security rights cannot be validly created in favour of a person which is not the creditor of the claim which the security interests purport to secure. If, for example, a syndicate of five lenders has provided a loan in the total amount of 100 million and each individual lender has an obligation to make available 20 million, it is generally assumed that security interests created in favour of the security agent (assuming that it is also acting as a lender) can only secure payment of its own claims (namely, 20 million). For this reason it is customary in financing transactions where security interests governed by Dutch law will be held by a security agent for the benefit of the lenders to use a parallel debt structure (sometimes called covenant to pay structure). Under this structure, each obligor (borrower and guarantor) undertakes to pay to the security agent in its individual capacity (namely, acting in its own name and not as agent or representative of the lenders) an amount equal to the aggregate of the amounts owed by that obligor to all lenders under the finance documents (the parallel debt). The in rem security rights are created to secure payment of the parallel debt, and are created in the name of the security agent (and not in the name of all lenders). Each lender will only have a contractual claim against the security agent for payment of an amount to be determined under an intercreditor arrangement among the finance parties out of the proceeds of the enforcement of the security interests. The parallel debt structure is a common arrangement in financing transactions in the Netherlands and the effect of the structure has become generally accepted both in legal literature and by leading law firms in the Netherlands. 4. Please explain the latest amendments to the law governing secured transactions in your jurisdiction. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of secured transactions? Please also explain recent practical developments regarding secured transactions in your jurisdiction. A bill for the Private Company Law (Simplification and Flexibilisation) Act (the Bill ), which was passed by the lower chamber of the Dutch Parliament on 15 December 2009, provides for a complete repeal of the financial assistance prohibition for BVs. This prohibition, in short, prohibits the granting of security by a company with a view to the financing of the acquisition of its shares. The prohibition also applies to its subsidiaries. The Bill, which was first

5 submitted on 31 May 2007, must still be approved by the upper chamber. The Bill is expected to enter into force on 1 July Under the proposed new regime, the question whether a BV may give financial assistance must be determined by the managing board on the same basis as any other transaction. The board must determine whether the giving of financial assistance is in the company's interest and must assess any other consequences it will have for the company's financial position. The sanction is directors' liability if the managing board has not acted with due care. Although the Bill will facilitate LBOs of Netherlands companies, some uncertainty remains in other areas. On 23 September 2009, the district court of Amsterdam granted the holder of a pledge over the shares in the capital of Schoeller Arca Systems Services B.V. authorisation for foreclosure on the pledge by way of a private sale pursuant to Article 3:251(1) DCC. Foreclosure on a pledge over Dutch shares is rare. The court decision appears to open up interesting avenues for a secured lender to either wipe out subordinated mezzanine debt or implement a loan-to-own strategy. Part II enforcement of security 1. Please explain briefly general rules of enforcement of security indicated in answer to the Question 1 in Part I above (excluding rules in a bankruptcy or insolvency proceeding see Question 3 below). In your answer please explain whether specific security may be enforced only through judicial proceedings or whether extra-judicial methods are also available. Furthermore, please provide estimate of costs (if they create significant obstacle in enforcement, including applicable taxes and any other duties/ costs) and timing for enforcing such security. Please also explain degree of difficulty (e.g. burdensome formalities, whether enforcement requires actions of a state body) in enforcing security. Also please explain whether taking security by an entity from other jurisdiction influences possibility of establishing security and its enforcement. Under Dutch law, a pledge or a mortgage can be enforced if the pledgor/mortgagor is in default (within the meaning of section 3:248 DCC) with respect to the fulfilment of the obligations that are secured by the pledge or mortgage, ie, the payment obligations secured by the right of pledge or mortgage. Security documents frequently provide (depending on the underlying credit documentation) that enforcement is possible upon a default as described above, provided that certain other events have occurred as well, for example an 'Event of Default' under the relevant credit documents or the sending of an acceleration notice. Except if the relevant security document provides that enforcement is possible after the sending of an acceleration notice, in principle no additional notice is required, although the pledgor/mortgagor may need to be granted a certain period for payment (this depends on the situation at hand). Other than court and legal fees (which can be significant), there are no significant costs such as taxes or duties. Although there obviously are certain formalities, these are generally not perceived as burdensome. Pledge: Under Dutch law, enforcement of a right of pledge must take place by way of: a public auction; a private sale agreed between the pledgor and the pledgee (provided that the pledgor and the pledgee can only agree on a private sale after the pledgee has become entitled to enforce); or

6 a court authorised private sale. A pledgee may not appropriate the collateral (see, however, response to 2(e), (f), (g) and (j) below where it concerns a pledge over claims), but a court can authorise that the collateral will remain with the pledgee as buyer for an amount to be determined by the court and the pledgee is allowed to bid or make an offer for the collateral in a public auction. As to public auctions: As a general rule, enforcement of a pledge takes place by means of a public auction in front of a bailiff or notary, in accordance with local custom and upon the usual conditions. In the case of a public auction the pledgee has the right to bid during the auction and take recourse against the proceeds. A bid by the pledgee and a bid made by a third party are treated equally in this respect. As to private sales: In practice, enforcement generally occurs by way of a private sale, either agreed with the pledgor or with the pledgor's trustee in bankruptcy if the pledgor has been declared bankrupt. The pledgor and the pledgee need to cooperate with a private sale. An agreement on a private sale between the pledgor and the pledgee requires the consent of all lower ranking secured parties (if any). This obviously is the fastest method of enforcement. As to court authorised private sales: Where the pledgor and pledgee cannot reach an agreement on a private sale, a court authorised private sale is generally preferable. In that case the pledgee requests the competent Dutch court to authorise a private sale of the collateral for an amount and on the terms and conditions to be determined by the court. The court will usually prefer the highest bid regardless of its payment terms. Legal proceedings for a court authorised sale are initiated by submitting a petition to the courts, containing (1) a draft purchase agreement with a prospective purchaser, (2) a list of received other bids, if any, (3) a list of interested parties and (4) an independent valuation of the collateral. After the petition has been submitted, a court hearing will take place which will focus on the question whether the price offered by a third party (or the pledgee itself) for the collateral is fair. Since case law gives little guidance, it is unclear under which circumstances a court will refuse its authorisation for a private sale. However, it is unlikely that a court will refuse its authorisation if the pledgee can support, for instance on the basis of a valuation or auditor's report, that the proposed sale generates a fair price. Interested parties may intervene if a court authorised sale is initiated and claim that third parties are prepared to pay a higher price for the collateral. Of course they will have to substantiate their claim. The length of this process depends on the situation, but it should be able to complete this process within two to three months. Mortgage: For a mortgage, enforcement by public auction is the rule. The public auction must be organised by a civil law notary. Enforcement by a mortgagee requires that all persons, which according to the relevant register have an interest, be notified by the enforcing mortgagee of the forced sale. A senior mortgagee can take over the enforcement initiated by a junior mortgagee. The enforcing mortgagee does not receive the purchase price himself; it is received by the civil law notary. If there are no other interested parties (for instance, senior mortgagees or junior mortgagees,

7 judgment creditor or pre-judgment creditor) the civil law notary will pay the net proceeds of the sale to the enforcing mortgagee. The balance, if any, is paid to the mortgagor. Where there are other interested parties, but the forced sale was initiated by the most senior mortgagee, the civil law notary will pay that mortgagee what it is owed. This requires that it has obtained a court approved statement of what it is owed. The balance, if any (or, in case the forced sale was initiated by a junior mortgagee, the entire amount), is paid into an account with a custodian and the interested parties may request the courts to determine an order of priority, except if these parties agree on the order of priority. All mortgages and other encumbrances charging the property sold are extinguished (and lapse) by a transfer pursuant to a forced sale and the payment of the purchase price. For the avoidance of doubt, a voluntary sale by the mortgagor does not affect the mortgage. A mortgage may also be enforced by way of a court authorised sale (see above). 2. Please explain briefly specific features (if any) of enforcement of security established over following types of assets: (a) Real Estate See response to question 1 above. (b) Charging assets (inventory, stocks etc) See response to question 1 above. (c) Fixed charge over movables See response to question 1 above. (d) Shares See response to Question 1 above. The company s share transfer restrictions and the Financial Services Act may need to be observed. (e) Rights under contracts (receivables) See response to question 1 above. In addition, the pledgee may collect the claim (and notify debtors to that extent) and seek recourse over the amount collected provided his claim is due and payable. (f) Bank accounts See response to question 2(e) above. (g) Financial instruments (eg, securities) See response to question 1 above. Where a financial collateral arrangement has been created over demand deposits or security, the pledgee may also enforce its security by appropriating the collateral.

8 (h) Intellectual property See response to question 1 above. (i) Plant and machinery See response to question 1 above. (j) Other assets See response to question 1 above. Where a financial collateral arrangement has been created over demand deposits or security, the pledgee may also enforce its security by appropriating the collateral. 3. How does a commencement of bankruptcy or insolvency proceeding influence the rights of the security holder to enforce its rights? In bankruptcy or insolvency proceedings, what are the suspect periods, is claw-back possible, and what other types of rights (tax debts, employees, etc) have preference over security granted? The most important feature of the pledge and the mortgage is that a bankruptcy or a suspension of payments of the person giving security does, in general, not affect a pledge or a mortgage. As secured creditors, the pledgee and mortgagee can enforce their rights as if there were no bankruptcy or suspension of payments (they have the right to summary execution). There are some exceptions to this rule. The first is that a right of pledge on future property will not be effective if it comes into existence at the time the pledgor or mortgagor was declared bankrupt or was granted a suspension of payments. The second is that the Dutch courts may suspend enforcement of these security rights for a period not exceeding four months. The third is that a receiver in bankruptcy may require the pledgee or mortgagee to enforce its security right within a reasonable period. If the pledgee or mortgagee fails to do so, the receiver may demand the surrender of the relevant property and sell the property himself (without prejudice to the rights of the pledgee or mortgagee to the sale proceeds). Clearly, a receiver in bankruptcy could also try to challenge the validity of the security rights on the basis of fraudulent conveyance and preference. Dutch law provides for certain preferential rights which may rank ahead of a non-possessory pledge over certain movables. In the Netherlands, there are no rules pursuant to which transactions are voidable or void merely because they took place during a particular period prior to a bankruptcy or suspension of payments. As such, there are no absolute hardening periods. There is, however, a suspicious period, which is one year. During that period, it is presumed in certain circumstances that the debtor and the other party knew or should have known that the transaction would prejudice the recourse position of the debtor's creditors (which is a requirement for a claim on the basis of fraudulent conveyance and preference to be successful). After this period the creditor must prove that its recourse position was prejudiced and that the debtor and the other party knew or should have known that the transaction would prejudice the recourse position of the debtor's creditors, which is generally very difficult.

9 Please explain briefly specific features (if any) of enforcement of security established over following types of assets in a bankruptcy or insolvency proceeding: (a) Real estate (b) Charging assets (inventory, stocks etc) (c) Fixed charge over movables (d) Shares (e) Rights under contracts (receivables) (f) Bank accounts (g) Financial instruments (eg, securities) (h) Intellectual property (i) Plant and machinery (j) Other assets 5. Are there any specific features or problems of enforcement proceedings if the security is granted to a trustee or security agent or the parallel debt structure is used? No. 6. Please explain the latest amendments to the law governing secured transaction in your jurisdiction in relation to a bankruptcy or insolvency proceeding. Are there any amendments which will be introduced in the near future (within one to two years) which might have impact on the legal framework of the enforcement of secured transactions in the light of insolvency law? Please also explain recent practical developments regarding secured transactions in your jurisdiction in relation to insolvency law.

10 A report, prepared by a government appointed committee ( the Kortmann Committee ), proposing a number of changes in the Dutch Bankruptcy Code which should result in a more rescue-oriented procedure has recently been put on hold. One of the most important proposed changes was that the secured lenders would lose their enforcement rights. It is unclear if and when the proposals of the committee will be converted in legislative proposals. With respect to certain indirect taxes, the tax authorities have a special right to seize and execute movables, which (a) must be considered inventory'; and (b) either belong to the company or belong to a third party, but which are located at the premises of the debtor unless such a third party's right can be considered as real ownership (eg, operational lease as apposed to financial lease). Such a third party (eg, a financial lessor or a creditor who has made a retention of title), cannot revindicate the asset concerned if the tax authorities invoke this special right. Recently, this right was extended to certain social premiums.