Insolvency for Perry Sport: still room for the interests of unsecured creditors?
The recent insolvency for Perry Sport shows the advantageous position of banks in current insolvencies. One of the causes is the development of the collective deed of pledge, as accepted in Dix q.q./ING. How much room is left for the unsecured creditors?
On 23 February 2016 the sports chain stores Perry Sport and Aktiesport were declared insolvent. Only a few days later the appointed liquidator confirmed to the Dutch newspaper NRC that he had initiated a law suit against the four banks of the insolvent company. His reason being the current tendency in insolvencies: that the banks are first in line to claim their almost all-embracing security rights, giving the liquidator no other role than to sit by and watch how the insolvent company’s assets disappear. Even though in this case a settlement was eventually agreed upon, a similar case was observed previously in the Dutch Supreme Court judgment Dix q.q./ING (2012), in which the Court confirmed the advantageous position that banks hold.
Dix q.q./ING (2012)
ING Bank supplied a loan to a company and in return it created a package of security rights on the assets of the company. In addition, the company authorised the bank to pledge all its existing and future receivables. In endorsing this power of attorney the bank frequently used a so-called collective deed of pledge, a document in which both the receivables to be pledged and the pledgors were described in a general way. Unfortunately the company went into insolvency and the liquidator (Dix) was facing an almost empty insolvent estate, because most of the assets had been securitised by the bank.
In this judgment the Supreme Court looked at three questions. The first was whether the power of attorney had been agreed validly. The Supreme Court decided that this was indeed the case. There were no signs of any unlawful conflict of interest. The second question was whether the receivables referred to in the collective deed of pledge were described in a sufficiently precise manner. Lastly the Supreme Court had to decide whether all future receivables up to the day the company was declared insolvent had been lawfully pledged.
Requirement of specificity
According to Dutch law (sections 84(2) and 98, Book 3 Dutch Civil Code (DCC)), receivables have to be described in a sufficiently precise manner in order to be lawfully pledged. In earlier judgments the Dutch Supreme Court had decided that receivables themselves were allowed to be described generically in a deed of pledge by using a so-called ‘catch-all clause’. In line with this, the Supreme Court decided in the current case that the pledgors could also be described generically in the deed of pledge for the receivables to be described sufficiently precisely according to Dutch law. Therefore, the second question was answered affirmatively as well.
All future receivables?
Section 239(1), Book 3 DCC stipulates that only receivables that existed when the pledge was established or receivables that will result from a juridical relationship already existing at that moment can be pledged. Receivables that will result from a juridical relationship that is yet to exist, can therefore not be pledged in advance - for example, future rent that will be due on the grounds of lease agreements that a landlord will enter into in the future. By creating this limitation, the legislature presumably envisaged some protection for unsecured creditors, since the unpledged receivables would be available for recourse in the event of the insolvency of the debtor. The almost daily registration of collective deeds of pledge overcomes this. The Dutch Supreme Court keeps to the text of this section: the legal relationship has to exist when the pledge is established, i.e. when the collective deed of pledge is registered. Daily registration therefore means that receivables that cannot be pledged when the loan is given will still be lawfully pledged, circumventing the legal obstruction: whenever new receivables are created, these are covered by the collective deed of pledge.
All future movable assets could already be pledged in advance. Following Dix q.q. v. ING, the same is actually true for all future receivables. Up till then it was required to periodically register extensive lists of receivables to be pledged. Now, a concise collective deed of pledge suffices due to the extension of the requirement of specificity. This makes the security right more similar to the English floating charge. The Supreme Court has in effect created a generic security right, entailing that the statutory limitation from section 239(1), Book 3 DCC has lost its meaning. The Supreme Court is well aware of this, but is unable to step in, since Dutch judges are not allowed to make the necessary legal-political choices. In its annual report for 2012, the Supreme Court therefore suggests that the legislature at least considers the current position of unsecured creditors. We encourage the legislature to take into account developments in England: in 2003, the English legislature added section 176A to the Insolvency Act 1986, providing unsecured creditors with the prescribed part, a share of the realised assets that would otherwise be owed to the floating charge holder. We consider it worth investigating the incorporation of such a provision into Dutch law since this would bring the equality of creditors disadvantaged by Dix q.q. v. ING one step closer. Or is the willingness of secured creditors to provide credit deemed more important than unsecured creditors’ willingness to trade?
This contribution originated as an assignment of the master’s course Privatissimum Civil law, under the supervision of mr. Jeroen van der Weide. In this course, students were asked to write a blog text about the Dutch Supreme Court judgment Dix q.q./ING. The best blog would be published on the Leiden Law Blog. Both authors’ blogs were selected as the ‘winning blogs’. Therefore, the authors were invited to combine their blogs and publish the final blog on the Leiden Law Blog. Both authors sincerely thank mr. Jeroen van der Weide for his valuable feedback on previous versions of this blog.