If you lend money to someone, you want them to pay it back. You also want them to do so if they go bankrupt or are unable to pay for other reasons. The chance that the loaned amount will actually be repaid increases considerably if you stipulate security in advance. The five most common forms of security are discussed below.
Which security is most appropriate in your situation obviously depends on the situation and the circumstances of the case.
A right of pledge can be established on goods that are not registered property. Examples include movable property such as stock and inventory, but also (trade) receivables or shares.
A right of pledge gives you two major advantages over unsecured creditors.
Firstly, you have the right of immediate execution. This means that you can execute (“sell”) the pledged property and that you can recover the money from the sales without having to go to court first.
Secondly, you are a separatist in case of bankruptcy. This means that you do not have to file your claim in the bankruptcy and that you may also proceed to execution if your debtor goes bankrupt.
2. Mortgage Right
A mortgage right can be established on registered property such as land, buildings or registered ships or aircraft. A mortgage right offers the same advantages as a right of pledge described above.
Because pledge and mortgage rights are established on different goods, there are also differences, particularly in the establishment requirements and enforcement.
For example, a notary must always be involved in the establishment and enforcement of mortgage rights, whereas this is generally not required for pledges.
In the case of both the establishment of a right of pledge and a right of mortgage, it is of course important that the underlying (execution) value of the property exceeds the amount of the claim in order to avoid having to write off part of the claim.
3. Joint and several liability
With joint and several liability, several parties are liable for repayment of the same amount.
As a creditor you can choose who you want to address. The person who is addressed must pay the full amount to you. The person who pays may try to get (part of) the amount back from one of the other joint and several debtors, but you have nothing to do with that as a creditor.
Stipulating joint and several liability can be an important advantage if one of the debtors is unable to pay or goes bankrupt. After all, you can then still appeal to the other debtors.
The most common example in practice is the joint and several liability agreement that a bank often concludes with various group companies. However, you can also use this for other agreements.
A third party can stand surety for a debt of another. A common example is the director-shareholder who stands surety for the financier (the bank) if his company cannot repay part of the loan.
The main difference with joint and several liability is that the bailiff only has to pay if the original debtor fails to pay and is in default. Only then can you claim against the bailiff.
In the case of a guarantee, a third party – often a bank or holding company – undertakes to pay you a sum of money if you claim it as the beneficiary. This is generally the case if the debtor fails to pay his debt to you.
The most common example in practice is the bank guarantee on demand.
Should you have any questions regarding the establishment of security rights, please contact Bas Jacobs