If you lend money, supply goods on credit or invest in another business, you want certainty that you will get paid. Dutch law offers several ways to obtain that certainty, known as financial security: several liability, suretyship (also called escrow), guarantee, a 403-statement, mortgage and pledge. Which one fits your situation depends on what you can offer as collateral and how much protection you need. Without financial security, a creditor is simply an unsecured creditor: if the debtor cannot pay, or goes bankrupt, an unsecured claim usually competes with many other claims and is often only partly paid, if at all. The forms discussed below either add another party who can be addressed for payment, such as several liability, escrow and guarantee, or give the creditor a right in specific property of the debtor, such as a mortgage or a pledge.
For entrepreneurs, obtaining financial security is very important. When you enter into an agreement with another party, you want to make sure that the counterparty fulfils its contractual payment obligations. If you provide financing or make investments for the benefit of another person, you also want a guarantee that the amount you have provided will eventually be repaid.
In other words, you want to obtain financial security. Obtaining financial security ensures that the lender has a collateral when he notices that his claim is not going to be fulfilled. There are various possibilities for entrepreneurs and companies to obtain financial security. In this article, we discuss several liability, suretyship (escrow), (parent company) guarantee, the 403-statement, mortgage and pledge.
What is several (joint) liability?
Several liability, also called joint liability (hoofdelijke aansprakelijkheid), means that a creditor can claim the full debt from any one of several co-debtors, instead of only a proportional share. It derives from article 6:6 Dutch Civil Code.
In the case of several liability, there is strictly speaking no guarantee that is issued, but there is a co-debtor who assumes responsibility for other debtors. Examples of several liability within corporate relationships are the partners of a partnership who are severally liable for the debts of the partnership, or the directors of a legal entity that, under certain circumstances, can be held personally liable for the debts of the company. Several liability is often established as security in an agreement between parties.
The rule of thumb is that, when a performance deriving from an agreement is due by two or more debtors, they are each committed for an equal share. They can therefore only be obligated to fulfil their own part of the agreement. However, several liability is an exception to this rule. In the case of several liability, there
is a performance that has to be performed by two or more debtors, but where each debtor can individually be held to perform the entire performance. The creditor is entitled to fulfilment of the entire agreement from every debtor. Therefore, the creditor can choose which of the debtors he wishes to address and can then demand the full amount due from this one debtor. When one debtor pays the entire amount, the co-debtors do not owe the creditor anything anymore.
How does the right of recourse work?
A debtor who pays the full debt can recover his share from the co-debtors internally; this is called the right of recourse. The debtors are liable to pay each other, so the debt that was paid by one debtor must be settled among all debtors. When a debtor is severally liable for paying a debt and he pays the full debt, he obtains the right to recover this debt from his co-debtors.
If a debtor no longer wishes to be severally liable for the financing he has entered into together with other debtors, he may request the creditor in writing to discharge him from the several liability. An example of this is the situation where a debtor has entered into a joint loan agreement with a partner, but wishes to leave the company. In this case, a written dismissal of several liability must always be drawn up by the creditor; an oral commitment from your co-debtors that they will pay the debts is not sufficient. If your co-debtors cannot or do not fulfil this oral agreement, the creditor can still claim the entire debt from you.
When do you need your spouse’s consent?
The marital or registered partner of a severally liable debtor is protected by law. According to article 1:88 paragraph 1 sub c Dutch Civil Code, a spouse requires consent from the other spouse to enter into contracts that are binding on him as severally liable co-debtor, other than in the normal business activities of a company. This is the so-called requirement of consent, intended to protect spouses from legal actions that may entail a major financial risk.
When a creditor holds a co-debtor severally liable for the entire claim, this can also have consequences for the spouse of the co-debtor. However, there is an exception to this requirement of consent. According to article 1:88 paragraph 5 Dutch Civil Code, consent is not required when the director of a public or private limited liability company (Dutch N.V. or B.V.) entered into the agreement, while this director is, alone or together with his co-directors, owner of the majority of the shares, and the agreement was concluded on behalf of the normal business activities of the company.
In other words, two requirements must both be met: the director is managing director and majority shareholder, or owns a majority of the shares together with his co-directors, and the agreement was concluded on behalf of the normal business activities of the company. When these requirements are not both met, the requirement of consent applies.
What is suretyship (escrow)?
Suretyship, on this site referred to as escrow, is a way to secure that a monetary claim will be paid. It derives from article 7:850 Dutch Civil Code. We speak of escrow when a third party commits himself to a creditor for a commitment that another party (the principal debtor) has to fulfil. This is done by concluding an escrow agreement. The third party that provides security is called the guarantor. Under Dutch law, there are in fact two distinct security rights that are often loosely translated as “guarantee” in English; to avoid confusion, this article reserves the word escrow for this first one, and guarantee for the independent commitment discussed further below.
The guarantor assumes an obligation towards the creditor of the principal debtor. The guarantor therefore does not accept liability for a debt of his own, but for the debt of another party, and personally provides security for the payment of this debt with his entire assets. An escrow can be agreed for fulfilment of obligations that already exist, but also for future obligations.
Under article 7:851 paragraph 2 Dutch Civil Code, these future obligations must be sufficiently determinable at the moment the escrow is concluded. If the principal debtor cannot fulfil his obligations, the creditor can address the guarantor to fulfil them. According to article 7:851 Dutch Civil Code, the escrow is dependent on the obligation of the debtor for which purpose it was concluded. Therefore,
the escrow ceases to exist when the debtor has fulfilled his obligations under the principal agreement. A creditor cannot simply address the guarantor to pay the debt: the principle of subsidiarity plays a role in escrow, so the creditor cannot immediately appeal to the guarantor for payment. The guarantor may not be held liable for payment before the principal debtor has failed to fulfil his obligations. This derives from article 7:855 Dutch Civil Code, and means a guarantor can only be held liable after the creditor has first addressed the principal debtor.
The creditor must have done everything necessary to establish that the debtor, for whom the guarantor has committed himself, failed to fulfil his payment obligation. In any case, the creditor must send a notice of default to the principal debtor. Only if the principal debtor still fails to comply after receiving this notice, can the creditor appeal to the guarantor for payment. The guarantor can also raise the same defences the principal debtor has, such as suspension, remission or an appeal on non-conformity. This derives from article 7:852 Dutch Civil Code.
How does recourse work in escrow?
A guarantor who pays the debt of a debtor can reclaim this amount from the debtor: the right of recourse also applies to escrow. In escrow, a special form of the right of recourse applies, namely subrogation. The principal rule is that a claim ceases to exist once it is paid; subrogation is an exception to this rule, because the claim is transferred to another owner. In this case, another party than the debtor pays the claim of the creditor.
In escrow, the claim is paid by a third party, namely the guarantor. By paying the debt, the claim against the debtor is not lost, but is transferred from the creditor to the guarantor who paid it. After payment, the guarantor can recover the amount from the debtor for whom he entered into the escrow agreement. Subrogation is only possible in cases regulated by law; for escrow this follows from article 7:866 in conjunction with article 6:10 Dutch Civil Code.
Is it a business or a private escrow?
There is a difference between business and private escrow. Business escrow is concluded in the exercise of a profession or business; private escrow is concluded outside that context. Both a legal entity and a natural person can conclude an escrow agreement.
Examples are a holding company that concludes an escrow agreement with the bank for the financing of its subsidiary, or a parent who concludes an escrow agreement to ensure that their child’s mortgage interest is paid to the bank. An escrow does not always have to be concluded with a bank; it is also possible to conclude escrow agreements with other creditors.
Most of the time it is clear whether a business or a private escrow was concluded. If a company enters into an escrow agreement, it is a business escrow. If a natural person enters into an escrow agreement, it is generally private. However, ambiguity may occur when a director of a public or private limited liability company concludes an escrow agreement on behalf of the legal entity.
Article 7:857 Dutch Civil Code sets out what is meant by private escrow: an escrow concluded by a natural person who did not act in the exercise of his profession, nor for the normal business of a public or private limited liability company of which he is a director holding, alone or together with fellow directors, a majority of the shares. Two criteria are important:
– the guarantor is the managing director and majority shareholder, or owns the majority of the shares together with his co-directors;
– the escrow is concluded on behalf of the normal business activities of the company.
In practice, it is often a managing director and majority shareholder who enters into an escrow agreement, because the bank may not want to provide financing to the company without one. In addition, the escrow agreement concluded by the managing director and majority shareholder must also have been concluded for the purpose of normal business activities.
This is assessed per situation, since the law does not define “normal business activities”. When both criteria above are met, a business escrow is concluded. When the director is not the managing director and majority shareholder, or the escrow was not concluded for normal business activities, a private escrow is concluded.
Additional rules apply to private escrow. The law protects the marital or registered partner of the private guarantor: the requirement of consent also applies to private escrow. According to article 1:88 paragraph 1 sub c Dutch Civil Code, a spouse needs consent from the other spouse to enter into an agreement that binds him as a guarantor.
Consent of the guarantor’s spouse is therefore required for a valid private escrow agreement. However, article 1:88 paragraph 5 Dutch Civil Code provides that this consent is not required when the escrow is concluded by a business guarantor. The protection of the guarantor’s spouse therefore only applies to private escrow agreements.
What is a guarantee?
A guarantee is another way of securing payment of a claim. It is a personal security right, where a third party assumes an independent obligation to fulfil a commitment between the creditor and the debtor: the guarantor undertakes to pay the debt if the debtor cannot or will not pay. The guarantee is not regulated by law, but is concluded in an agreement between parties. The term “guarantor” is used both for escrow and for a guarantee, but what it actually means for that guarantor depends on which of the two security rights was agreed.
The main practical difference with escrow is that a guarantor under an abstract guarantee generally cannot fall back on the defences that the principal debtor could have raised, while a guarantor under escrow can. A guarantee therefore tends to be less favourable for the guarantor, and more favourable for the creditor, than escrow.
What is an accessory guarantee?
An accessory guarantee is dependent on the relationship between the creditor and the debtor. At first sight it is very similar to escrow, but the difference is that the guarantor does not commit to the same performance as the principal debtor, but to a personal obligation with a different content.
An illustrative example: the guarantor commits himself to deliver tomatoes to the creditor if the debtor does not fulfil his obligation to deliver potatoes. The content of the guarantor’s obligation is different from the content of the debtor’s obligation, but that does not alter the close connection between the two.
The accessory guarantee is additional to the relationship between the creditor and the debtor, and will often function as a safety net: only when the principal debtor does not fulfil his obligations is the guarantor called upon to perform.
Although the accessory guarantee is not explicitly mentioned in the law, article 7:863 Dutch Civil Code implicitly refers to it: the provisions on private escrow also apply to agreements where a person commits to a particular service if a third party fails to comply with a different obligation towards the creditor. So the provisions on private escrow also apply to an accessory guarantee concluded by a private person.
What is an abstract guarantee?
Unlike the accessory guarantee, the abstract guarantee is an independent commitment of the guarantor towards the creditor, impartial from the underlying relationship between creditor and debtor. The guarantor commits to an independent obligation to perform for the debtor, under certain conditions, not tied to the underlying agreement. The best-known example is the bank guarantee.
Once an abstract guarantee is concluded, the guarantor cannot invoke defences from the underlying relationship: when the conditions for the guarantee are met, he cannot prevent payment, because the guarantee derives from a separate agreement between the creditor and the guarantor. This means the creditor can address the guarantor directly, without first sending a notice of default to the debtor. A guarantee therefore gives the creditor a high degree of certainty that the debt will be paid. A guarantor under an abstract guarantee does not have a right of recourse by law.
However, parties can include protective measures in the guarantee agreement. The legal effects of an abstract guarantee do not derive from statutory rules but can be arranged by the parties themselves. Although the guarantor has no statutory right of recourse, he can arrange his own means of recovery, for example a counter-guarantee with the debtor or a deed of indemnity.
What is a parent company guarantee?
A parent company guarantee means a parent company commits to comply with the obligations of a group subsidiary if the subsidiary itself cannot meet them. This can only be agreed for companies that are part of a group or holding structure. In principle, a parent company guarantee is an abstract guarantee.
However, there is normally no “first pay, then talk” concept, where the guarantor immediately pays the debt without first checking whether there is indeed a demandable claim against the debtor. Because the debtor is the guarantor’s own subsidiary, the parent company will usually want to check this first. Nevertheless, a “first pay, then talk” construction can be built into a guarantee agreement.
Parties can structure the guarantee according to their own wishes: whether it only covers payment, or also other obligations (a performance guarantee), and its scope, duration and conditions. A parent company guarantee can provide a solution if the subsidiary goes bankrupt, but only if the parent company does not collapse together with its subsidiaries.
What is a 403-statement?
Within a group of companies, a so-called 403-statement is often issued. It derives from article 2:403 Dutch Civil Code. By issuing a 403-statement, the subsidiaries belonging to the group are exempt from drafting and publishing separate annual accounts; instead, a consolidated annual account of the parent company is drafted, including the results of the subsidiaries.
This reflects that subsidiaries, although often operating relatively independently, ultimately fall under the management and supervision of the parent company. A 403-statement is a unilateral legal act, from which an independent commitment for the parent company arises: it is a non-accessory commitment.
A 403-statement is not only issued by large international groups; small groups, for example two private limited liability companies, can also use one. A 403-statement must be registered with the Trade Register of the Chamber of Commerce, and indicates which debts of the subsidiary are covered by the parent company, and from which date.
With a 403-statement, the parent company declares that it is responsible for the obligations of its subsidiary, and becomes severally liable for debts arising from legal acts of the subsidiary. A creditor of the subsidiary may then choose which entity to address for fulfilment of his claim: the subsidiary with which he concluded the agreement, or the parent company that issued the 403-statement. This compensates the creditor for the limited insight he normally has into the subsidiary’s financial position.
Whereas the other forms of financial security discussed above only create liability towards the counterparty to the contract, the 403-statement creates liability towards all creditors of the subsidiary. There may be many creditors who can address the parent company. The potential liability is therefore substantial: if a subsidiary covered by a 403-statement goes bankrupt, this may affect the entire group.
How do you withdraw a 403-statement?
A parent company that no longer wishes to be liable for a subsidiary’s debts, for example because it wants to sell the subsidiary, must follow the procedure of article 2:404 Dutch Civil Code. This consists of two steps. First, the 403-statement is revoked: a declaration of revocation is deposited with the Trade Register. From that moment, the parent company is no longer liable for debts of the subsidiary that arise after the declaration is filed.
The parent company remains liable for debts arising from legal acts concluded before the 403-statement was revoked, including agreements concluded after the 403-statement but before the declaration of revocation. This protects creditors who may have entered into an agreement relying on the 403-statement.
It is possible to also terminate liability for those earlier legal acts, through the additional procedure of article 2:404 paragraph 3 Dutch Civil Code. Several conditions apply to this procedure:
– the subsidiary may no longer be part of the group;
– a notification of the intention to terminate the 403-statement must have been available for inspection at the Chamber of Commerce for a set period;
– a further period must have passed since the announcement of that intention in a national newspaper.
Creditors can still oppose the intended termination; the 403-statement is only terminated once no timely opposition has been lodged, or a lodged opposition has been declared unfounded by a court. Only once both the revocation and the termination conditions are met is the parent company no longer severally liable for the subsidiary’s debts. Because errors here can leave a parent company liable for the debts of a subsidiary sold years earlier, we recommend having this procedure checked carefully before you rely on it.
What is the difference between a mortgage and a pledge?
Financial security can also be obtained by establishing a mortgage or a pledge. The two closely resemble each other, but apply to different kinds of property and work slightly differently in practice.
Both a mortgage and a pledge give the creditor a right in a specific asset, rather than only a claim against another person. That normally makes them a stronger form of security than several liability, escrow or a guarantee, because the creditor does not depend on the solvency of a third party: he can turn directly to the asset itself if the debtor fails to pay.
What is a mortgage?
A mortgage (hypotheek) is a property right a creditor can obtain over the debtor’s property, to secure repayment of a loan. If the debtor cannot repay, the creditor can have the property sold to satisfy his claim. The best-known example is a homeowner who agrees with the bank that the bank will grant a loan, using the house as security for repayment.
A mortgage does not have to run via a bank; other companies and individuals can also grant one. The terminology can be confusing: in everyday speech we say a bank “provides” a mortgage, but from a legal perspective the borrower is the mortgage provider (hypotheekgever) and the party granting the loan is the mortgage holder (hypotheekhouder). The bank is the mortgage holder; the person buying a house is the mortgage provider.
A mortgage cannot be established on every kind of property: according to article 3:227 Dutch Civil Code, it can only be established on registered property. When registered property is sold, the transfer must be registered in the public registers before the buyer actually obtains it. Examples of registered property are land, houses, boats and aircraft; a car is not registered property. A mortgage can only be established for a sufficiently determinable claim.
This follows from article 3:231 Dutch Civil Code: it must be clear for which claim the mortgage is established, particularly if the creditor has more than one claim against the debtor. The owner of the mortgaged property remains the owner; ownership does not pass by establishing a mortgage right. A mortgage is always established by notarial deed.
If the debtor does not fulfil his payment obligations, the creditor can exercise his mortgage right by having the property sold. No court order is required for this: this is called immediate execution and derives from article 3:268 Dutch Civil Code. The creditor may only sell the property to satisfy his claim; he may not simply keep it for himself. This is explicitly prohibited by article 3:235 Dutch Civil Code.
An important feature of the mortgage is that the mortgage holder ranks ahead of other creditors who also want to claim the property. This follows from article 3:227 Dutch Civil Code. During a bankruptcy, the mortgage holder does not have to wait for other creditors, but can simply exercise his mortgage right and is the first to be paid from the proceeds of the sale.
What is a pledge?
A pledge (pandrecht) is a security right comparable to the mortgage, but it cannot be established on immovable property. It can, however, be established on practically any other property, such as movable goods, rights to bearer or order, and even a usufruct of such property or right, meaning it can cover both cars and amounts still to be received from debtors. A creditor establishes a pledge to obtain security that a claim will be paid.
An agreement is concluded between the creditor (the pledge holder) and the debtor (the pledge provider). If the debtor does not fulfil his payment obligations, the creditor may sell the pledged property and satisfy his claim from the proceeds, immediately and without a court order, under article 3:248 Dutch Civil Code (immediate execution).
As with a mortgage, the creditor may not simply keep the pledged property for himself; he may only sell it and satisfy his claim from the proceeds. This follows from article 3:235 Dutch Civil Code. In principle, a pledge holder ranks ahead of other creditors in a bankruptcy or suspension of payment, but this can depend on whether it is a possessory or an undisclosed pledge.
Possessory pledge or undisclosed pledge: what is the difference?
A possessory pledge (vuistpand) exists when the pledged property is brought under the control of the pledge holder or a third party, under article 3:236 Dutch Civil Code. The property is transferred to the creditor, who actually holds it while the pledge continues, and who must take care of it and carry out any necessary maintenance. These maintenance costs must be reimbursed by the
debtor. Besides the possessory pledge, there is the undisclosed pledge (stil pandrecht), also called a non-possessory pledge, under article 3:237 Dutch Civil Code. When an undisclosed pledge is established, the property stays with the debtor, but a deed recording the pledge is drawn up.
This can be a notarial deed or a private deed; a private deed must be registered with the tax authority or a notary. Undisclosed pledges are often used for company assets such as machinery, since bringing the machine into the creditor’s possession would stop the company from operating.
A possessory pledge gives a stronger security right than an undisclosed pledge, because the creditor already holds the property. With an undisclosed pledge, the creditor must ask the debtor to hand over the property if he wants to sell it, and if the debtor refuses, enforcing the transfer may require going to court. This difference also plays a role in a bankruptcy or suspension of payment.
As explained above, the creditor has the right of immediate execution and can sell the property straight away. Pledge holders generally rank ahead of other creditors in a bankruptcy, but there is a difference between a possessory and an undisclosed pledge: holders of a possessory pledge also rank ahead of the tax authorities when the debtor goes bankrupt.
Holders of an undisclosed pledge do not automatically rank ahead of the tax authorities; in some cases the tax authorities’ claim can prevail over that of an undisclosed pledge holder during a bankruptcy. A possessory pledge generally offers more certainty in this respect than an undisclosed pledge.
In practice, the choice is rarely purely legal: a bank or investor will also weigh how quickly a security right can be enforced, how it affects the debtor’s ability to keep operating, and what it costs to set up and register. An undisclosed pledge on machinery, for example, lets the company keep using the machinery, while a possessory pledge would not. A mortgage suits a long-term financing on a building, while several liability or a guarantee from a director is often used alongside other security, as an extra incentive for the director to keep the company solvent.
Summary
- Dutch law offers several routes to financial security: several liability, escrow (suretyship), guarantee, a 403-statement, mortgage and pledge.
- Several liability and escrow both make a third party answerable for someone else’s debt, but escrow requires the creditor to address the principal debtor first; an abstract guarantee does not.
- A 403-statement makes a parent company liable for a subsidiary’s debts towards all its creditors, and withdrawing it safely requires following a strict two-step procedure.
- A mortgage secures registered property such as land or a building; a pledge secures almost anything else, from machinery to receivables.
- Consent from a spouse can be required for several liability or a private escrow, and the ranking of a pledge can depend on whether it is possessory or undisclosed.
Frequently asked questions
Which form of security offers the creditor the most certainty?
An abstract guarantee, such as a bank guarantee, generally offers the creditor the most certainty, because the guarantor cannot rely on defences from the underlying relationship between creditor and debtor.
Do I need my spouse’s consent to stand surety for a company?
Usually yes, unless you are, alone or together with your co-directors, managing director and majority shareholder, and the escrow or several liability was entered into for the normal business activities of the company.
What happens if I do not withdraw a 403-statement correctly?
The parent company can remain liable for the subsidiary’s debts, even years after selling the subsidiary, if the revocation and termination procedure of article 2:404 Dutch Civil Code was not followed correctly.
Can I combine several forms of financial security in one deal?
Yes. It is common, for example, for a bank to ask for a mortgage on the business premises, a pledge on inventory and receivables, and a several liability or guarantee from the director, all in the same financing agreement.
Does a pledge or mortgage need to be registered somewhere?
A mortgage always requires a notarial deed, which is registered in the public registers. A pledge can be established by private deed, but an undisclosed pledge on future receivables, for example, is usually registered with the tax authority to fix its date.
Unsure where you stand? Tell us about your situation. We will let you know your options within one working day.
How Law & More can help you with this is explained on our corporate lawyer page.
