Financing and collateral

Financing and securities: the legal foundation of every business

Every enterprise deals with financing at some point: bank financing, leasing, factoring, subordinated loans from shareholders or investors, mezzanine financing, and related structures. Financing almost always entails security for the financier: pledge, mortgage, suretyship, joint and several liability, or a Section 403 declaration. The legal structure determines not only the position of the financier and the borrower but also the room for maneuver during a sale, refinancing, restructuring, or insolvency.

Who do we work for?

We assist entrepreneurs, directors, owner-managers, holding structures, private equity firms, and family businesses with financing issues. In addition, we advise banks and non-bank financiers, leasing companies, factoring firms, and informal lenders. Our role varies depending on the position: for the borrower, the emphasis is on limiting collateral and maintaining flexibility; for the financier, it is on securing solid security and effective recovery routes.

Credit documentation

A financing agreement regulates, among other things, the credit facility, interest rate, term, repayment schedule, covenants (financial ratios, disclosure obligations, restitution obligations), event of default, and the collateral attached to the financing. For larger financings, standardized documentation (LMA models or NVB models) is often used, followed by specific negotiations per transaction. We rigorously assess documentation for covenants that could be restrictive in the future regarding growth or strategic decisions.

Guarantees

Pledge

A pledge is the most common security right for movable property, claims, shares, and intellectual property rights. A pledge on claims is often established via a collective pledge deed with regular repetition to also cover future claims. A pledge on shares requires a notarial deed. A pledge on IP rights requires registration with the BBIE or EUIPO to achieve effect against third parties.

Mortgage right

Mortgage law is the security right on immovable property, established by notarial deed and registered in the public registers. A mortgage can be established for a specific claim or for future claims (credit mortgage or bank mortgage). The ranking among multiple mortgagors follows from the registration in the registers.

Bail

Suretyship (Article 7:850 of the Dutch Civil Code) is a form of personal security whereby a third party undertakes to pay a debt of the principal debtor if the latter defaults. In the case of private sureties, Article 1:88 of the Dutch Civil Code applies: the consent of the spouse or registered partner is required, unless the suretyship is entered into in the exercise of the guarantor's profession or business, or by a director-major shareholder for a normal ongoing business debt (Supreme Court, 14 April 2000, Soetelieve/Stienstra).

Joint and several liability and Section 403 statement

A parent company can declare itself jointly liable for the debts of its subsidiary in various ways. The Section 403 declaration (Article 2:403 of the Dutch Civil Code) grants the subsidiary, subject to conditions, an exemption from the publication requirement in exchange for joint and several liability of the parent company. The withdrawal leaves the liability in place for existing debts and, depending on the structure, also for future debts during a transitional period.

Intercreditor and subordination

When multiple financiers are involved, an intercreditor agreement regulates their mutual relationship: ranking, payment cascade, standstill periods, and rules of conduct in the event of default. Subordination can take place between specific creditors or towards all preferred creditors. Under certain conditions, subordinated loans are treated as capital for tax purposes and often play a role in financing structures involving shareholder loans.

Guarantee and Article 1:88 of the Dutch Civil Code

With regard to guarantees provided by directors and their partners, we pay close attention to Article 1:88 of the Dutch Civil Code. Violation leads to the voidability of the guarantee by the non-consenting partner within three years of becoming aware of it. In addition, banks have a duty to inform: the bank must clearly point out the risks to the guarantor, particularly in the case of non-business guarantees. In the event of impending bankruptcy of the principal debtor, the guarantor may be held liable from their own private funds, with significant financial consequences for the family.

Restructuring and refinancing

During restructuring or refinancing, all financing documents are often brought to the table again. Important questions include: can existing securities be retained or must they be re-established; how does the Pauliana boundary (Articles 42 and 47 of the Bankruptcy Act) apply when establishing securities for existing debts; and how is the release from joint and several liability of the withdrawing parent company or guarantor arranged? In WHOA processes, the position of secured creditors plays a very important role in class classification and agreement formation.

Our working method

You will not receive an abstract legal analysis, but a practical assessment of the financing structure, collateral, and risks. We rigorously review documentation for potential bottlenecks, discuss alternatives, and negotiate where necessary. In every case, we think ahead: what happens in the event of a sale, refinancing, restructuring, or impending insolvency? We build these scenarios in advance.

Alternative securities: retention of title and right of retention

Not all security comes from the bank. A supplier delivering on credit often protects themselves with a retention of title clause (Article 3:92 of the Dutch Civil Code): the delivered goods remain the property of the seller until the purchase price has been paid in full. In the event of the buyer's bankruptcy, the supplier can then repossess the unpaid goods instead of having to wait in line as an ordinary creditor. An extended or expanded retention of title clause can also cover subsequent processing or resale, but it has its limits. The right of retention (Article 3:290 of the Dutch Civil Code) grants a contractor, repairer, or custodian the right to hold goods until their invoice has been paid. For both international corporations and the baker on the corner, it is precisely these simple contractual securities that often make the difference between getting paid or not. We assess delivery and purchase terms and conditions for the proper structuring of retention of title and advise on the interaction with a pledge held by the financier.

Forms of financing: from bank credit to crowdfunding and BMKB

The legal assessment depends on the chosen financing method. In addition to traditional bank credit, entrepreneurs utilize factoring, leasing (financial and operational lease), subordinated loans, crowdfunding, mezzanine financing, and investor participation. Each method has its own specific considerations: with crowdfunding and raising funds from the public, the Financial Supervision Act (Wft) may apply; with leasing, the question of legal ownership is decisive for the position in the event of insolvency; and with factoring, everything revolves around the silent or public assignment of claims. Government schemes are relevant for SMEs: the SME Credit Guarantee Scheme (BMKB) and the Enterprise Financing Guarantee (GO) allow the government to bear part of the credit risk, making banks more willing to finance. We help entrepreneurs, from family businesses to fast-growing scale-ups, understand the legal consequences of each financing method before signing.

Banking duty of care and termination of credit

Banks and lenders have a duty of care when entering into, continuing, and terminating financing. This duty of care arises, inter alia, from reasonableness and fairness (Article 6:248 of the Dutch Civil Code) and from the contractual relationship (Article 7:401 of the Dutch Civil Code), and has been further defined in case law. A bank may not simply terminate a credit relationship: the termination must meet the requirements of proportionality and subsidiarity, particularly when the business is thereby jeopardized to remain in operation. A special duty to inform regarding the risks also rests on the bank when a personal guarantee is required. When the bank enforces collateral, invokes a covenant, or terminates the credit, we assess whether the bank has remained within the limits of its duty of care and whether there is scope to improve the position of the business or the director.

Financing and securities within corporate law

Financing and securities are inextricably linked to the broader practice of Corporate Law. A financing decision affects the governance of the company, the position of shareholders, and the liability of directors. For instance, entering into financing without the required internal company approval or without a business basis can lead to directors' liability under Section 2:9 of the Dutch Civil Code. We therefore approach financing issues in conjunction with related areas of expertise: directors' liability, restructuring, insolvency and bankruptcy , and mergers and acquisitions. Our mixed teams of lawyers and in-house counsel serve the full breadth of the market: from the international group negotiating a syndicated facility to the baker on the corner who must personally guarantee a business loan.