Introduction

In our last month’s blog we introduced the various types of security interests under Dutch law. Under Dutch law, obligations (claims) can be secured by collateral security (pledge or mortgage) or via personal security (guarantee or suretyship). As we outlined collateral security in last month’s Part 1, in this Part 2 we will elaborate on the various types of personal security and key considerations for lenders.

Part 2 – Personal Security and key considerations for lenders:

Personal security

Unlike collateral security, personal security does not give a (direct) title to (the proceeds of) the debtor’s assets, but adds an object of recourse for the creditor. Personal security is based on recovery of a debt/claim from a party other than the “original debtor”, for example by a guarantee issued by a third party (a party other than the debtor). Such a document describes the ways in which security interests are created and provides a clear explanation of the possibilities for obtaining security and their legal requirements.

Under Dutch law, there are different forms of personal security. The most common forms are joint and several liability, suretyship and guarantee. These forms of personal security all have in common that a third party is liable for the debt of the principal debtor.

Joint and several liability

Joint and several liability means that two or more debtors are liable for paying the same debt. Each debtor is liable for the entire debt, even if there are several debtors. The creditor can thus claim his debt from any debtor who has issued the joint and several liability. Fulfilment of the debt by one of the debtors also releases its co-debtors. In principle, this debtor can then recover from each of his co-debtors his ‘share’ of the debt, a recourse claim. This recourse claim is based on the mutual relationship of the debtors. The amount of each person’s share depends on the particular circumstances of the concrete case and can also be agreed upon between debtors by an internal agreement. This internal agreement between debtors does not affect the creditor’s right to claim the full amount from any debtor, but only regulates how debtors share the debt internally afterwards.

Suretyship Agreement

In case of a suretyship agreement, a third party, the surety, undertakes to pay the debt of the principal debtor to the creditor when the debtor is unable to meet its obligations. Suretyship creates secondary liability for the creditor and is therefore subsidiary in nature. Creditors must first seek performance from the principal debtor before approaching the surety. This is an important difference from joint and several liability, where the creditor can demand payment from all parties (debtors) directly. The surety can invoke defenses that the principal debtor has against the creditor, potentially complicating recovery efforts. A distinction can be made between a corporate surety and a private surety. This distinction is important because private surety is subject to a number of additional mandatory legal requirements, such as written consent and, in some cases, spousal approval.

Guarantee

A guarantee is a contract to pay an amount of money if certain conditions are met. Under Dutch law there is no legal framework for a guarantee, it is an innominate contract. Unlike a suretyship, a guarantee does not depend on the principal debt and can exist separate from the principal debt. A guarantee can be either accessory (dependent on the principal obligation) or abstract (independent of the underlying obligation). The nature of the guarantee determines the guarantor’s liability and the conditions under which the creditor can invoke the guarantee. A common form is a bank guarantee. The bank guarantee usually gives the beneficiary the right to invoke the guarantee if a number of precisely defined conditions are met. Invoking the bank guarantee obliges the guarantor to pay the guaranteed amount.

Advantages of different types of security interest

• Non possessory pledge / undisclosed pledge: Flexible for movable assets or receivables; allows continued use of assets and receivables by the debtor.
• Mortgage: Provides strong security for high-quality immovable property.
• Personal security: provides for an additional party to demand payment from (a debtor/surety/guarantor). Simple to implement.
• Joint and several liability: the creditor can choose which debtor to address.
• Guarantee: when the conditions as set out in the guarantee are met, the creditor can address the guarantor irrespective of the performance of the principal debtor.

Key Considerations for Lenders

1. Due diligence

Before creating security interests, a thorough due diligence should be conducted to ensure that:

• The pledgor or mortgagor has a clear title to the assets/property.
• The assets/property are/is free from previous encumbrances.
• Registration and notarization requirements are adhered to.

2. Enforcement and priority

Collateral security grants the proprietor (‘pledgee’ and/or ‘mortgagee’) the title to recover his financial debt/claim from the sale proceeds of the encumbered asset prior to most other creditors of the person to whom the encumbered asset belongs.

• Ensure timely registration to maintain priority.
• Personal security can be enforced vis-a-vis the (legal) person who provided the security.

3. Explicit Documentation

Clearly outline the terms, conditions, and nature of the personal security in written agreements to ensure enforceability and reduce potential legal challenges.

4. Regarding personal security

Clearly consider which type of personal security is suitable for the situation. For example whether it is required that performance from the principal debtor is firstly sought, or it is desired to address a guarantor directly.

5. Costs

Consider the costs associated with:

• Notarization and registration.
• Legal fees for drafting and due diligence.

Reach out to us

If you are considering entering into a facility agreement and/or security agreement, and you would like more details relating to the (security) provisions, reach out to our specialists for strategic advice and practical assistance with your transaction.

Sanne Hebbink-Swinkels

Rob van Houts

Max Frederiks

Dirkzwager legal & tax

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