The Supreme Court provides clarity about the possibility of changing the rank of the rights of pledge, equivalent to the regime of changing the rank of rights of mortgage

Introduction

The Supreme Court issued a judgment on 9 April 2021 in which the possibility of changing the rank of rights of pledge is clarified. The Supreme Court meets the interests of legal practice by making it possible changing ranks of rights of pledge. The law already provides for this possibility in respect of rights of mortgage; section 3:262 paragraph 1 of the Dutch Civil Code states that a right of mortgage can have a higher rank in comparison with one or more other rights of mortgage on the same property than it would in principle have according to the sequence of establishing those rights of mortgage (in accordance with the priority rule; see below) of that right of mortgage, provided that the notarial deed shows that those entitled to the other mortgage(s) consented thereto.

When determining the ranking of rights of pledge, the priority rule serves as the starting point. According to this priority rule, the time of establishment of the right of pledge is decisive in determining its rank. Pursuant to the priority rule, a previously established right of pledge has a higher rank than right of pledge that has been established on the same asset at a later stage. If the other requirements for the establishment of the right of pledge are fulfilled, a right of pledge is established as soon as the act of establishment is completed.  

Changing ranks of rights of pledge

The right of pledge and the right of mortgage are similar security interests (see also section 3:277 paragraph 1 Dutch Civil Code). Although in practice there is also a need for the possibility to change the ranks of multiple rights of pledge, this possibility is not expressly laid down in Dutch law. According to the Supreme Court, however, it is in line with the legal system and also in line with the cases regulated by law to assume that changing ranks of rights of pledge is also possible. Therefore, the Supreme Court ruled in this judgment that the section 3:262 of the Dutch Civil Code, which applies to rights of mortgage only, can be applied analogously to rights of pledge.

This means that it is possible to determine that a right of pledge in comparison to one or more other rights of pledge on the same property can have a higher rank than it would in principle have (in accordance with the priority rule) at the time of its establishment, provided that it appears from the deed (or from one or more individual deeds that must be read in conjunction with this) that those entitled to the other rights of pledge consent thereto. The consent by these pledgees must be given in the same manner as applies to the establishment of the relevant right of pledge. Consequently, a change of rank of a right of pledge can be accomplished on the occasion of the creation of a new right of pledge – in which case the deed concerning changing the ranks can be included in the deed that is used for the establishment of the new right of pledge – and also afterwards.

This changing of ranks can only be invoked against others whose legal position in respect of the pledged property is affected by the changing of ranks, such as other pledgees whose rank is not lowered by the ranking, other parties who have limited rights in respect of the property and garnishees, if they agree with the changing of ranks. This consent can be granted at any time without having to take into account any formal requirements. The Supreme Court states in its judgement (paragraph 3.1.6) an example to clarify the situation in the case of four rights of pledge with subsequent rank.

Finally, the Supreme Court also refers to its earlier judgment of 18 December 2015 (see in that context our previous newsletter). The Supreme Court notes that, if a pledged receivable in turn is secured by a right of pledge on another receivable, the pledgee of the first right of pledge is also authorized to exercise its enforcement rights as set out in section 3:246 paragraph 1 of the Dutch Civil Code in respect of the latter right of pledge, irrespective of the amount of the receivables for which the rights of pledge have been granted. The Supreme Court thus reverses (in part) its previous judgement of 18 December 2015 (paragraph 3.5.2, last phrase), that the pledgee may only exercise its enforcement rights in respect of the right of pledge that is established to secure the receivable that is pledged to the pledgee up to the amount of its receivable on the pledgor.

Consequences in practice

This judgment is relevant for parties who intend to pledge assets or who already granted rights of pledge in respect of assets. Rights of pledge subsequent in rank can be subject to a change of rank without first cancelling these rights of pledge and subsequently establishing those rights of pledge in a different order. This will save time and effort. If you are such a party and if you have questions about the implications of the above judgment, please feel free to contact the banking & finance specialists at Ploum.