The Modernisation of Pledge and Assignment Act: an overview of the two proposed modernisations
1. Background and objective
The Preliminary Draft Modernisation of Pledge and Assignment Act (hereinafter referred to as the “Preliminary Draft”) aims to implement two related amendments to Book 3 of the Dutch Civil Code. The first modernisation concerns the simplification of the registration requirement for private documents; The second modernisation concerns the expansion of the possibility of silently pledging and transferring registered receivables by means of the removal of the so-called basis requirement. Both amendments aim to reduce the administrative burden on financing practices and to create a more level playing field between bank and non-bank financiers, which can improve access to credit for SMEs in particular. Both modernizations are discussed below.
2. Modernisation I: simplification of the registration requirement
2.1 Core of the change
Under current law, the creation of an undisclosed pledge on registered claims, as well as the fistless pledging of movable property by private deed, requires that the deed be registered with the Tax and Customs Administration. This registration requirement is intended to prevent antedating by assigning a fixed date to the deed. The Preliminary Draft replaces the requirement of a ‘registered’ private deed with the requirement of a private deed ‘with a fixed date’. It introduces more modern and sustainable methods to determine the date and time of establishment in an objective and fraud-proof manner.
The proposed Article 3:15b of the Dutch Civil Code provides for three methods to obtain a fixed date:
- Qualified electronic timestamp (art. 3:15b paragraph 1 sub a DCC). The first method concerns the use of a Qualified Electronic Time Stamp (QTS) as referred to in Regulation (EU) No 910/2014 (the ‘eIDAS Regulation’). A QTS links electronic data to a specific point in time, providing proof that that data existed at that time. The timestamp is provided by a Qualified Trust Service Provider (QTSP) that is included in the EU Trusted List. In practice, it is usually not the entire document, but a hash – a unique digital fingerprint – of the document that is sent to the QTSP, which provides this hash with a QTS and returns a timestamp token. This token can then be linked to the original document or kept as a stand-alone piece of evidence. The QTS is independent of the type of signature on the document: a wet signature (after digitisation), a simple electronic signature (SES), an advanced electronic signature (AES) and a qualified electronic signature (QES) can be used in combination with a QTS. It should be noted that the QTS only concerns the dating of the deed and not the authenticity of the signature; The validity of the private deed as such still requires a valid signature. The distinction between the requirements for the deed (signature) on the one hand and the requirements for the fixed date (time stamp) on the other therefore remains as important as ever. Moreover, the eIDAS Regulation provides for cross-border recognition, so that not only Dutch QTSPs, but also qualified trust service providers from other EU Member States can be engaged.
- Open standard (art. 3:15b paragraph 1 sub b of the Dutch Civil Code). The second method concerns an open standard: any other objective method that makes it possible to determine that the date and time are unchanged when consulting the deed in the future. This open standard offers room for the application of alternative and future technologies. In the explanatory notes to the Preliminary Draft, possible examples include blockchain-based time stamping and notarial or bailiff ratification.
- Registration with the Tax and Customs Administration (Article 3:15b(1)(c) of the Dutch Civil Code). The third method concerns the already existing registration with the Tax and Customs Administration in Rotterdam, whereby the fictitious time of registration is 17.00 hours. This method will be phased out in due course.
2.2 Practical consequences
The main advantage of the proposed modernisation is the flexibility it offers to financing practice. Under current law, a private deed of pledge must be physically presented to the Tax and Customs Administration in Rotterdam. In financing practice, this means that when a financing transaction is closed, a courier must arrive at the Tax and Customs Administration before 17:00 in order to effect registration on the same day. If that deadline is not met, the pledge is not registered until the next working day and thus established, with all the uncertainties that entails. This rigidity restricts the parties’ freedom to determine the time of closing as they see fit. With the introduction of the qualified electronic timestamp, this restriction is no longer applicable: parties can attach a fixed date to the deed at any time – 24 hours a day, seven days a week, to the second. This significantly increases the flexibility and efficiency of the establishment process. An additional advantage is the cost savings and sustainability that the switch to electronic timestamps entails. Under the current system, approximately 150,000 deeds are physically delivered to the Tax and Customs Administration every year, with associated courier and shipping costs.
3. Modernisation II: removal of the basic requirement
3.1 Substance of the change
Naar huidig recht kan een toekomstige vordering op naam alleen rechtsgeldig bij voorbaat stil worden verpand of gecedeerd, indien die vordering rechtstreeks wordt verkregen uit een ten tijde van de registratie van de akte reeds bestaande rechtsverhouding (art. 3:239 lid 1 en 3:94 lid 3 BW). Dit zogenoemde grondslagvereiste is in de wet opgenomen ter bescherming van de verhaalsmogelijkheden van concurrente schuldeisers, al bestaat in de literatuur discussie over de vraag of het grondslagvereiste deze doelstelling daadwerkelijk effectief bereikt. Het Voorontwerp schrapt dit vereiste, waardoor het mogelijk wordt om met één enkele akte alle huidige en toekomstige vorderingen – ook uit toekomstige rechtsverhoudingen – bij voorbaat stil te verpanden of te cederen.
The legal basis requirement is maintained under the Preliminary Draft insofar as the assignor is a natural person who is not acting in the exercise of a profession or business. This exception is motivated by the desire to protect consumers against the far-reaching consequences of an unlimited assignment in advance of all their future claims.
3.2 Consequences for financing practice
The most striking change is that the currently common collective pledge deed construction will become superfluous. Under current law, banks pledge all claims of their borrowers to themselves on a daily basis on the basis of a power of attorney issued by the pledgor by means of so-called collective deeds of pledge. With the removal of the basis requirement, this daily registration is no longer necessary: a single deed with a fixed date is sufficient to pledge all current and future claims in advance. The construction that has thus become superfluous, which has already been criticized in the literature as a purely formalistic mechanism without substantive importance, is thus dropped.
The removal also contributes to a more level playing field between bank and non-bank financiers. Under current law, non-bank and foreign financiers in particular – who are less well equipped to work with a system of daily collective deeds of pledge – are at a disadvantage compared to the major Dutch banks. By removing the basis requirement, these financiers can also obtain certainty about all future claims of their borrower with a one-off deed, which can promote competition in the credit market.
A separate point of attention concerns the financeability of short-term receivables. In sectors where receivables only exist for a very short time – such as shop and webshop sales that are paid by means of PIN or iDeal/Wero payments – it is practically impossible under current law to silently pledge these receivables. The lifespan of such claims is so short that they are already paid before a collective deed of pledge can be presented for registration. Moreover, the requirement of a basis precludes pledging in advance, since these claims often do not arise from a legal relationship that already existed at the time of registration. As a result, under current law, there is an uneven playing field between companies that invoice for their services – and whose receivables do lend themselves to pledging – and companies that mainly work on the basis of cash settlement. By removing the basis requirement, it will be possible to pledge these short-term receivables in advance, which will improve the financeability of the latter companies. Moreover, because financiers have better collateral in this way, they may be inclined to continue financing for longer with higher credit limits, which also benefits other creditors and employees.
Finally, the removal of the basis requirement simplifies the structuring of international financing operations. Follow-up acts will become superfluous, so that Dutch law is more in line with other jurisdictions that do not have the legal basis requirement. This is particularly relevant in the case of receivables, purchase and securitisation programmes in which borrowers from multiple jurisdictions participate.
4. Relationship between Modernisation I and Modernisation II
The two modernisations are closely linked. The simplification of the registration requirement makes it possible to attach a fixed date to a deed 24 hours a day, seven days a week. Without the simultaneous removal of the basis requirement, this could lead to financiers issuing collective pledge deeds with a fixed date with extremely high frequency – possibly every second – in order to ensure that they obtain a first-class pledge on all claims. This is undesirable and would greatly detract from the purpose of modernising the registration requirement. By removing the requirement of a basic basis, a one-off pledge or assignment in advance will suffice, which will overcome this problem. Modernisation I (fixed date) and Modernisation II (deletion of the legal basis requirement) thus go hand in hand.
5. Conclusion
The two modernisations proposed in the Preliminary Draft complement each other and form a coherent whole. Modernisation I digitises and makes the registration practice more flexible by replacing the requirement of physical registration with the Tax and Customs Administration with the requirement of a fixed date. Modernization II puts an end to the need for the daily collective pledge construction and creates a more level playing field between bank and non-bank financiers. It should be emphasized that the introduction of the Preliminary Draft will hardly improve the position of the major Dutch banks compared to what is already the practice. Non-bank and foreign financiers, on the other hand, are put in a better position, because they can now obtain security with a one-off deed on claims that were practically not pledgeable for them under current law. These changes are particularly important for small and medium-sized enterprises: SMEs tend to be more dependent on loan financing, more often have short-term claims that are not pledged under current law, and benefit from a wider choice of financiers and the associated competition in the credit market.