What is the right of pledge?
With the right of pledge (pandrecht), you give your bank or financier more certainty that they will get their money back. You do so by giving, or pledging, assets as collateral. If you cannot repay the loan, your bank has the right to sell these assets.
The right of pledge is a security right. Another well-known security right is the mortgage right. With a mortgage right you give your house as collateral for a loan from the bank. With the right of pledge, you give assets other than your home or office building as collateral.
For example, you can pledge:
- your inventory
- company stock
- company cars
- money to which you are still entitled (claims)
How does the right of pledge work?
You give your bank or lender (the creditor) the right of pledge in exchange for a loan. You agree on which assets you give the pandrecht. Are you not repaying your loan as you have agreed? The creditor may then sell the assets.
The person who pledges the assets as collateral is called the pledgor. If you give your bank the right of pledge, you are the pledgor.
The person who is allowed to sell the assets if you cannot pay the loan is called the pledgee.
You want to borrow money to buy a new machine. The bank wants to make sure that you can repay the money. So, you give the bank the right of pledge on the new machine. If you do not keep to your agreements, the bank may sell the machine.
Immediate foreclosure (sale of assets)
If you fail to comply with your agreements, the pledgee may sell the assets on which you have pledged. The pledgee does not need permission from a judge for this. This is called immediate foreclosure (parate executie).
With the proceeds, the pledgee repays as much of the outstanding debt as possible. Does the sale bring in more money than the debt? Then you (the pledgor) will receive the rest of the money. If the sale does not yield enough to pay the outstanding debt in full, the residual debt remains.
Possessory and non-possessory pledge
There are 2 types of pledge:
- Possessory pledge (vuistpand) means that the creditor receives the items as soon as you take out the loan. You can then no longer use your goods yourself. The creditor must take good care of your belongings.
- In case of a non-possessory pledge, you keep possession of the items yourself.
The right of pledge is recorded by the civil-law notary in a deed. Or you make an agreement with the pledgee. If you make the agreement yourself, you must have it registered with a civil-law notary or with the Tax Administration.
Silent or public pledge on claims
Do you want to give the right of pledge on debts that others have with you? In case you cannot repay your loan to your bank, the bank can claim the debt somebody else owes you. Then you can choose between a silent pledge or a public pledge. If you choose a silent pledge, the person who owes you money will not know you have pledged their debt. With a public pledge, the person does know.
Pledge on shares
With a pledge on shares, you give your creditor the right to sell your shares if you do not pay your interest or loan as agreed. You must agree:
- who has the voting rights on the shares in shareholders' meetings
- who gets the profit from the shares
- when the pledge ends
The articles of association of a bv state whether it is allowed to pledge shares. And what agreements are possible about voting rights and meeting rights. To give a right of pledge on shares, you must go to a civil-law notary to have a notarial deed drawn up.
The advantages and disadvantages of the right of pledge
The advantage of giving a pledge is that your bank or lender lends you money more easily. They have more certainty that the loan will be repaid. They also do not have to go to court if you do not keep to the agreements about the borrowed money.
The disadvantage of giving a right of pledge is that in some cases you are less free to decide about your assets.
Pledges in bankruptcy
If you go bankrupt, the pledgee (the bank) can claim the items you have pledged. Even if you have requested a postponement of payment or are in the process of debt restructuring, the pledgee can claim the items without the permission of the court.
A pledgee takes precedence over other creditors in bankruptcy. The pledgee may sell the pledged assets and does not have to take the bankruptcy into account.
Privilege and right of attachment of Tax Administration
There is one exception. The Dutch Tax and Customs Administration can exercise the ‘privilege and right of attachment’ (bodemrecht) in the event of a right of pledge. With the privilege and right of attachment, the Tax Administration has priority over everything that is on the business premises of the company that has been declared bankrupt.
End of a pledge
The right of pledge can end in several ways:
- If you have repaid the loan for which you have given the right of pledge, the pledge ends.
- If the pledge is waived. The pledgee and pledgor agree that the pledge no longer applies, even if the loan has not yet been repaid. You must record this agreement.
- If the pledgee sells the pledged assets and repays the loan with the proceeds.