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A pledge agreement (pledge deed) establishes a right of pledge on goods, ensuring that in the event of default, a creditor is paid from the proceeds of those goods before other creditors. It can be a possessory pledge (the pledgee holds the goods) or a non-possessory pledge (the goods remain with the pledgor, via a registered private or notarial deed). Pledging provides a creditor with greater security, for example in lending.
A pledge agreement — also called a pledge deed or pledging agreement — is used to pledge goods. This creates a right of pledge: if the debtor fails to pay, the creditor with the right of pledge has priority over the pledged goods. The proceeds of the sale go to him first; only what remains goes to other creditors.
Types of pledge
The creditor with priority is called the pledgee or pledge holder; the owner of the pledged asset is called the pledgor. A right of pledge can be established on virtually all assets, except for registered property (such as a home or land, on which a mortgage may rest). In practice, this often involves inventory, receivables, and shares.
There are two versions:
- Possessory pledge: the pledgee takes possession of the asset (for example, a car in his garage) and does not return it until payment is made. Not always practical — certainly not for inventory, which the pledgor must be able to use to generate income.
- Non-possessory (non-possessory) pledge: the property remains with the pledgor. A private or notarial deed is required for this. A private deed must be registered with the Tax and Customs Administration; with a notarial deed, this is not necessary, and furthermore, you do not need permission from the court to sell the property — but such a deed does cost more.
Why do I need a pledge agreement?
Pledging provides a creditor with greater security and is often agreed upon in the context of lending, payment deferral, or installment plans. Moreover, the pledge agreement proves the existence of the right of pledge — and only with that proof does the pledgee stand in a strong position vis-à-vis other creditors. For the pledgor, it is a way to gain trust; for the pledgee, to obtain financial security.
What is stated in a pledge agreement?
The agreement contains the details of the pledgor and the pledgee, a statement that the parties commit to the pledge, and a clear description of the pledged asset. Furthermore, it states the purpose of the pledge and what may or must be done with the asset — for example, that the pledgor takes good care of it and, if applicable, must insure it. Also consider agreements regarding costs, the right or prohibition of re-pledging, the termination of the right of pledge, and the applicable law.
Frequently Asked Questions
What is the difference between a possessory pledge and a non-possessory pledge?
In a possessory pledge, the pledgee holds the property; in a non-possessory pledge, it remains with the pledgor, by means of a registered private or notarial deed.
On which assets can I establish a pledge?
On virtually all assets, except registered assets such as a home or land. In practice, often on inventory, receivables, and shares.
Why a notarial deed?
With a notarial deed, you do not need to register with the Tax Authorities and you do not need permission from the court to sell the property. However, there are additional costs.
Have a custom pledge agreement drafted
A pledge agreement is custom-made: the terms depend on the pledged assets. The legal experts at MKB Juristen draft the pledge agreement for you. View our expertise in corporate law or schedule a free consultation .
