On 3 July 2024, the Overijssel District Court ruled in a case in which two creditors, Rabobank and a bankruptcy trustee, faced each other in a dispute over the remaining proceeds from the forced sale of a property belonging to a now-bankrupt restaurant. This case shows how important it is to set out in writing, in a loan agreement, the arrangements under which you provide a loan and the conditions under which this is done. Merely mentioning the periodic repayment amount and the term of the loan in an email is no guarantee that the loan will actually be repaid.

The case in brief

The restaurant in question — whose creditors were also its directors — had been declared bankrupt due to financial problems. Rabobank, as first mortgagee, had sold the property through a forced sale and recovered its claim from the proceeds. The creditors argued that, as second mortgagees, they were entitled to the remainder of the forced-sale proceeds. They had, after all, provided a loan to the restaurant and, as security for repayment of the loan, had established a second right of mortgage on the property. The bankruptcy trustee tried to block this by arguing, in defense, that the loan agreement on which the creditors based their claim was void. This was because, as directors of the now-bankrupt restaurant, they had a conflict of interest in providing a loan to the restaurant for which they performed the management duties.

The creditors were ultimately found to be in the right, and the trustee’s defense failed. The court recognized the creditors’ claims, for purposes of dividing the remaining forced-sale proceeds, up to an amount of €231,024.16. It also recognized the priority of these claims. As a mortgagee, you have a special position (as a separatist creditor) and can immediately enforce your claim ahead of other creditors, without a bankruptcy trustee needing to be involved.

Security.

The ruling above shows the added value of establishing security. “Security” is a legal or financial guarantee that a borrower provides to a lender to ensure repayment of the loan. The fact that you state in the loan agreement itself which amount must be repaid and when does not mean that this will actually happen. By providing a limited security right over certain assets, you gain additional security in case the borrower is unable to meet their payment obligations.

Different types of business security.

There are various types of security. Rabobank and the creditors, for example, had a right of mortgage on the restaurant’s property. Because the restaurant could not meet its payment obligations under the loan agreement, Rabobank, as first mortgagee, was permitted to sell the property and recover its claim from the proceeds. The creditors, as second mortgagees, could then recover their claim from the remainder.

In addition to this right of mortgage, you can also establish a right of pledge as security. Whereas a right of mortgage relates to immovable property, a right of pledge relates to movable property, such as inventory, stock, receivables, or shares. You can establish a right of pledge on property you already own, but also on property you will acquire in the future.

Another example of security is the guarantee (suretyship). In this case, a third party guarantees the loan. If the borrower cannot pay, the guarantor must repay the loan.

Strengthening your legal position in the loan agreement.

In addition to stipulating this security, there are also other provisions conceivable that strengthen or make more attractive your legal position as a lender. Think, for example, of charging a prepayment penalty if the borrower decides to repay early.

Interest income is, after all, tax-attractive, and you don’t want to miss out on it if the borrower decides to repay earlier than intended. You can also include a provision allowing you to demand repayment of the entire loan before the end of the term under certain circumstances, for example if the borrower’s assets are seized, or if the borrower fails to meet important obligations under the loan agreement or fails to comply with other agreements.

The lawyers at The Legal Company are experts in all of the above-mentioned topics and, more broadly, specialize in corporate law, contract law, employment law, and privacy law. We are happy to help protect your business to the fullest. Feel free to contact us via info@thelegalcompany.nl or call 020-345 0152 to schedule an appointment.

Nothing changes as constantly as laws and regulations. Please note that our blogs may no longer align with current laws and regulations and may therefore be outdated. If you have questions or an issue relating to this blog, or would like legal assistance, please contact us.