On the last day of February 2024, the Insolvency Law Committee (the Committee)  published its advice on the legislative proposal Act lifting prohibition on the pledging of receivables (Wet opheffing verpandingsverboden (the Proposal)). In this Insight, we will first outline the Proposal, then give a brief recap of the events leading up to the advice and, finally, we will discuss the advice itself.

Current law

Contractual freedom is a basic principle of Dutch law. Section 3:83(1) of the Dutch Civil Code (the DCC) determines that, inter alia, limited rights in rem ((beperkte rechten) such as a right of pledge) and claims ((vorderingsrechten) such as receivables) are transferable, unless the law or the nature of the right precludes such transfer. Pursuant to Section 3:83(2) DCC, it is possible to exclude the transferability and pledgeability of receivables by means of a non-transferability provision or a non-pledgeable provision, respectively, between a creditor and a debtor.

There are pros and cons to the use of subsection 2. The debtor is prevented from being confronted with unknown creditors. Further, the debtor knows at all times whom to pay. However, these receivables cannot be used by the creditor, for example as collateral for a loan. Additionally, in neighbouring countries the possibility to have non-transferability and non-pledgeable provisions in place has been limited or excluded. This leads to a disruption of the entrepreneurial level playing field, to the detriment of the Dutch entrepreneurs.

The Proposal

The idea behind the Proposal is that the cons of the prohibition to transfer or pledge receivables outweigh the pros in practice, and that this should be changed. As a result, and in an effort to give lending institutions an incentive to provide credit to companies (especially SMEs), the Minister for Legal Protection (the Minister) submitted the Proposal to the Lower House of the Dutch Parliament (the Lower House) in June 2020.

The Proposal introduces a new subsection 3 in Section 3:83 DCC. This new subsection 3 provides that the exclusion of the transferability or pledgeability is not possible in the event of a personal monetary claim that arises from the exercise of a profession or business. A provision between a creditor and a debtor that intends to exclude the transferability or pledgeability of such claim in whole or in part is void (nietig). Exemptions to subsection 3 are laid down in a proposed new subsection 4 of Section 3:83 DCC and include an exemption for monetary claims arising from a credit or loan agreement involving or set to involve multiple parties on the lender’s side. With respect to this draft provision, the Proposal specifically aims at exempting the prohibition in the event of syndicated loans and/or crowdfunding.

To meet the concern of a debtor that it is unclear whom to pay, the Proposal introduces the requirement that the debtor must be notified of the transfer or pledge in writing. As long as no written notification has taken place, the debtor is released from the payment obligation if the debtor pays the original creditor.

The Proposal indicates that the proposed changes may result in additional credit of nearly € 1 billion becoming available just for SMEs.

Due to a lack of capacity at the Ministry of Justice and Security, no progress was made for two years. In November 2022, the legislative process was resumed by the Minister submitting two memorandums to the Lower House.

The Article

In April 2023, professor R.M. Wibier published an article in the Weekblad voor Privaatrecht, Notariaat en Registratie (WPNR 2023/7410, p. 381-382) in which he expressed, in summary, the following reservations with regard to the Proposal:

1. the Proposal restricts contractual freedom;
2. a non-transferability or non-pledgeable provision protects the debtor from paying the wrong creditor. A related legitimate ground for the debtor to want to limit the transferability and/or pledgeability is the fact that there is in such case no administrative burden for the debtor to keep records whether or not a notification of a transfer or a pledge is received;
3. there is insufficient factual substantiation that the Proposal will lead to an increase of € 1 billion of additional credit; and
4. the Proposal leads to (even more) empty bankrupt estates. The existing problem of empty bankrupt estates is, in summary, that in bankruptcies there are often no assets available to pay for the costs made by, and the fees of, the trustee in bankruptcy. One of the main causes is that the assets accrue to a secured creditor.

Professor Wibier deemed the changes to Dutch (contract) law as submitted in the Proposal to be fundamental to the core of Dutch property law, and is of the opinion that these should be better substantiated than they are at present in the text of the Proposal. He added that an advantage of the postponement of the legislative process would be that the proposed change of law can be embedded in the envisaged broader revision of insolvency law, where the issue of empty bankrupt estates is explicitly being addressed.

Minister’s response

Following the publication of the article, questions were raised by the Standing Committee for Justice and Security of the Lower House (the Standing Committee), to which the Minister responded in June 2023 as follows (in summary):

1. Contractual freedom: The current practice of concluding non-transferability and/or non-pledgeable provisions also constitutes a breach of the contractual freedom. The prohibition as submitted in the Proposal is deemed to be adequately justified;
2. Administration: Notifying the debtor in writing of a transfer of pledge is standing practice. Therefore, no (special) administrative issues for the debtor are expected to arise when notification in writing becomes a legal requirement;
3. Credit space: It is impossible to give a more precise estimate of additional credit space becoming available to Dutch entrepreneurs as this depends on various circumstances, in particular on economic circumstances and the degree of credit requirement. The Minister mentioned that it is not the exact amount that counts, but that the added value of the Proposal lies in the fact that, if needed, creditors will have the possibility to limit their debt collection risk by transferring their commercial receivables to a factoring company, or to use the commercial receivables as collateral for the purpose of obtaining extra credit; and
4. Empty bankrupt estates: The Minister acknowledged that the Proposal can result in more empty bankrupt estates. The Minister pointed out that this scenario would occur only in the event of a bankruptcy, whereas one of the aims of the Proposal is to prevent unnecessary payment problems by creating the possibility of credit expansion, and, in doing so, to avert bankruptcy as a worst-case scenario.

The advice of the Committee

The Standing Committee informed the Minister by the end of June 2023 that it would request that the Committee renders its advice on the Proposal. As mentioned, the advice was rendered on 29 February.

The advice of the Committee does not regard the first two reservations. The Committee regards these as questions of general property law and considers these to have been discussed in the memorandums and the Minister’s response. The Committee does have some observations as to the other reservations, as these affect insolvency law and the insolvency law practice.

1. Credit space: Due to a lack of data, the Committee does not address the question whether the estimate of € 1 billion in extra credit space is plausible. However, the Committee does point out that although an increase in credit space can lead to the growth of SMEs, there is - to the knowledge of the Committee - no evident connection between an increase in credit space and a decrease in the risk of a company becoming insolvent.
   
   Other financial effects: The Committee points out that there are other financial effects of the Proposal that should be considered in addition to an increase in credit space. According to the Committee, the Proposal will have an impact on transaction costs and on legal costs. Transaction costs are described as the costs (including the costs of due diligence) that lenders incur in order to establish which receivables of a borrower, or potential borrower, can be transferred or pledged. If no due diligence is performed, the risk for a lender that a receivable is non-transferable or non-pledgeable is factored into the price of the credit that is extended. With respect to legal costs, the  Committee observes that under current law there is a possibility that parties go to court over the intention or meaning of the non-transferability or non-pledgeable provision entered into. Should the Proposal enter into effect, these costs are less likely to arise.

2. More empty bankrupt estates: The Committee also acknowledges that the Proposal can lead to an increase of empty bankrupt estates. If this will actually occur in a specific case depends, according to the Committee, on various other circumstances. For example, in certain industries it is standard practice to have non-transferability or non-pledgeable provisions in place, in other industries it is not. Consequently, in the latter case the Proposal is less likely to cause more empty bankrupt estates than in the current situation.

Recommendations of the Committee

The Committee offers three recommendations.

1. From an insolvency law perspective, the Committee sees no reason to recommend the postponement or the withdrawal of the Proposal for the following reasons:
   1. the extent to which the Proposal will have an effect on the problem of empty bankrupt estates depends on many other factors;
   2. the increase in credit space that the Proposal is assumed to have may lead to growth for SMEs.
2. Acceptance or rejection of the Proposal is a legal politics choice. The Committee deems itself not equipped to make such choice, and
3. As neither the situation under current law nor the Proposal offers a solution for the problem of empty bankrupt estates, the Committee recommends that high priority be given to proposals that address the problem of empty bankrupt estates in a structured and comprehensive manner.

What is next?

The Proposal is scheduled to be debated during a legislative consultation of the Standing Committee on 3 June 2024. We expect the recommendations of the Committee to be considered during this meeting as well.

We will keep you updated on this topic in future blogs.