Trade receivables as collateral for corporate financing
A very large percentage of SMEs (figures 2022; 82%) have financing from a bank. Naturally, a financing bank wants security that the credit provided will be repaid. An important form of security is the provision of a pledge on trade receivables. By law, pledging of receivables is possible if a receivable is transferable.
Transferability of receivables
The premise of the law is that all receivables can be transferred – and therefore pledgeable – unless the nature of the receivable or the law prohibits it. An example of an untransferable receivable is the NOW subsidy. This subsidy was intended to enable employers to keep employees in permanent employment. It was, as it were, a concession on the employee’s salary. The subsidy is thus intended for the employee, and then by its nature this subsidy claim is non-transferable, and the employer cannot transfer the NOW claim to a third party. With this, the NOW claim is also not subject to pledge.
Exclude transferability
There is another important category of nontransferable receivables; these are those where the parties themselves have agreed that a receivable is nontransferable. Many parties are often unaware that a receivable is nontransferable. The non-transferability then appears to be included in the general terms and conditions declared applicable to the contract.
Why exclude transferability and pledge
When a receivable is transferred or pledged, there can be ambiguity about to whom payment should be made. It is also possible that a payment has just crossed a notice to pay to another or even that the notice to pay to another is missed altogether. As a result, payment may be made to a creditor while the receivable has been transferred to a third party. Payment is then made to the wrong address and the debtor runs the risk of having to pay again. Whether these are good reasons to exclude the transferability of a receivable is questionable, but often parties have no choice, especially if the non-transferability is included in general terms and conditions.
Consequences of non-transferability of claims
If a receivable cannot be transferred, the receivable cannot be pledged either. This affects a company’s ability to obtain financing from a bank. The introduction states that a large majority of SMEs have financing from a bank. It makes a difference to the size of the financing and the price of the financing (risk premium) whether a company can pledge receivables (as security for repaying the bank) or not. A simple calculation example: if a bank is willing to finance up to 50% of the debtor balance, a company with a debtor balance of 500 has a borrowing capacity of 250. If at the same company 20% of the trade receivables are not susceptible to pledge, the bank will not count those receivables as collateral. The receivable balance to be pledged is then only 400 and the borrowing capacity drops to 200. Another form of business financing is factoring. Then the receivable is transferred directly to a factoring company. This form of financing is not possible if the parties have agreed that a receivable is non-transferable.
Thus, companies have an interest in minimizing restrictions on the transferability (and pledgeability) of receivables.
Law on lifting pledge bans
The disadvantages of a pledge ban have long been known and the government has set itself the goal of improving financing based on trade receivables. The idea is that lifting pledge bans will provide SMEs with up to €1 billion in additional financing space. This could lead to an investment boost. Already in 2018, the internet consultation on the preliminary draft of the Act on lifting pledge bans was launched. Several market participants responded to preliminary draft of the law. In June 2020, a bill was submitted to the 2e chamber and on June 11, 2024, the 2e chamber passed the bill. On March 4, the bill was passed by the 1e chamber of parliament.
New arrangement
Two new paragraphs are added to art. 3:83 Dutch Civil Code which stipulate that exclusion of transferability and pledgeability of money receivables in name arising from the exercise of a profession or business is not possible. Some receivables are legally excluded from the law and for those receivables it remains possible to exclude transferability or pledgeability. Consider, for example, the balance of a g-account. Contractual clauses to that effect are null and void. The expected effective date is July 1, 2025. As of this date, nullity applies to new clauses. For existing agreements, there is a short transition period. Old stipulations will be void as of 3 months after the law enters into force.
Negative estate issue
The removal of pledge bans has an important effect on the resolution of bankruptcies. It is a problem that in many bankruptcies there are no or insufficient assets available to meet the trustee’s costs for performing legal duties (legality investigation). Currently, in many bankruptcies, the proceeds of unpledged claims are an important source of income. From these proceeds the costs of the bankruptcy can (partly) be paid. This act removes the restriction on pledges, and this results in fewer assets flowing into a bankruptcy estate. As a result, the negative estate issue increases. While recognizing the urgency of the negative estate problem and that this act bill will affect the negative estate problem lemma, no solution is offered. The solution would have to come from other ongoing studies and subsequent measures. The estimated benefit of broadening financing in SMEs is considered to outweigh this disadvantage. For the trustees who now must perform work in a negative estate for which no remuneration is paid, this is unpleasant.
Looking for a corporate law attorney?
eeWould Do you like to know more about the Law on lifting pledge bans? Feel free to contact Rob Steenhoek of LVH Advocaten. He specializes in insolvency and corporate law and will be happy to assist you.
