When entering into business financing, security for the (re)payment of the financing is usually requested. This security is often given in the form of a lien. Are you a business owner that provides financing? If so, establishing a lien provides you with (additional) security for repayment.
Are you business owner who has given a lien as security? If so, it is important that you consult with the pledgor whenever possible regarding the enforcement of the pledge in order to avoid unnecessary damages for you.
In this article, Reinier Pijls discusses what a lien is, what assets can be pledged, how to establish it, what the benefits are and how to properly enforce it to get your money (back).
What is a lien?
The lien is one of the security rights regulated by law. This right gives a creditor security for the satisfaction of his claim against the debtor. In exchange, a debtor gives an asset (e.g. inventory, receivable) as collateral.
Priority
With a legally valid lien, the creditor - as with a mortgage right or privilege - has priority in the distribution of the net proceeds of the debtor's assets to which this right relates.
This puts the creditor in a much better position than other creditors and increases the likelihood of getting paid at the bottom line.
What goods can be pledged?
Movable property
A lien can be placed on existing and future movable property. Movable property can include, among other things, your debtor's machinery, inventory, supplies and vehicles.
Property Rights
In addition to movable property, this right can be established on:
- shares;
- Intellectual property rights (such as copyright and patent rights); and
- (future) monetary claims that your debtor has against third parties.
Thus, a lien can also be established on future monetary claims. In this case, the monetary claims must arise directly from a pre-existing legal relationship.
No pledge can be established on so-called registered property (which requires registration with a notary). These include real estate, ships and aircraft. In that case, a mortgage right must be established. Read more about this in this article by Heleen Wessel-Krijger.
How do you establish a lien?
To validly establish (create) a lien, there are a number of requirements. These apply to any type of lien (movable property, property right). For example:
- the lienholder's power of disposition;
- there is a valid title; and
- an act of establishment to be performed.
1. Power of disposition of the pledgee.
The pledger (the debtor) can establish a pledge only if he is the rightful owner of property. He must - very briefly - as a rule be the owner of the good he is pledging.
2. Valid title
There must also be a valid (legal) title. For example, a title is an agreement between two parties. In practice, this is often an agreement in which the pledgor undertakes to provide security to the pledgee.
3. Establishment act
Finally, a formal act of establishment must be performed that actually creates the lien. That act depends on the type and property on which the lien is being established.
The law distinguishes between two types of liens on movable property, namely a fist lien and a non-possessory lien.
In the case of a lien on a (money) claim , it is also referred to as a public or silent lien.
Establishment of fist lien
The establishment of a possessory lien requires that the property actually be brought under the control of the lienholder. For example, you can think of a vehicle that is temporarily stored with the pledgee until the monetary claim is repaid in full.
Establishment of non-possessory pledge
When establishing a non-possessory pledge, as the name implies, the property is not brought into the control of the pledgee. For this purpose, it is sufficient to have an authentic deed drawn up at the notary or a private deed registered with the tax authorities. Thus, a lien can also be established on a vehicle, while the debtor can actually still dispose of the vehicle.
Establishment of public lien
To establish a public lien on a claim, an authentic or private deed must be drawn up. This must be followed by a notice of the pledge to the relevant debtor.
Establishment of quiet lien
A debt can also be pledged without notifying the debtor. This is often preferred in practice. It prevents debtors from becoming aware of any liquidity problems on the part of the pledgor and causing unnecessary unrest. Establishment of an undisclosed pledge is done by drawing up an authentic or private deed.
In short, the property in question - inventory, stock, vehicles, receivable, shares, IP rights - and the method of pledge - public or silent - determines exactly how the pledge should be established.
Advantages lien
Selling & priority
The pledgee is authorized to sell the property subject to the pledge and recover the claim on a priority basis from the proceeds. The pledgee can do so as soon as the pledgor stops paying his debt.
Right of ready execution
One of the major advantages of a lien is that the lienholder can proceed directly to execution (sale). He does not have to go through the courts first. This is called the right of immediate execution.
The pledgee is bound by rules regarding the foreclosure sale, however. The basic principle is that a public sale (read: auction) takes place in the presence of a notary or bailiff.
However, with the permission of the preliminary injunction court, a deviating method of sale, such as a private sale, can also take place. Finally, the pledgor and pledgee may mutually agree on a different method of foreclosure sale once the pledgor is in default.
Separate position (seperatist) in bankruptcy
Another major advantage of a lien is that the lienholder retains his rights in the event of the lienholder's bankruptcy. The pledgee can continue to exercise his right as if there was no bankruptcy and recover from the proceeds of the pledged property. He has nothing to worry about from the trustee. So this is a great advantage over the situation of a garnishee.
Lien vs. attachment
When a creditor attaches the assets of his debtor, and the latter subsequently goes bankrupt, the bankruptcy entails that the attachment automatically (by operation of law) lapses. The distraining creditor then has to submit his claim to the trustee for verification and, as a rule, misses out. He may no longer recover the property on which he had levied an attachment because this property falls within the scope of the bankruptcy and will be liquidated by the trustee.
Conclusion
A lien can significantly strengthen a creditor's position, provided it is properly established. Establishing it in many cases is customized, where the help of an attorney or other expert is a real asset.
If you would like advice on options for obtaining or providing additional security, please feel free to contact one of our attorneys who specialize in liens.
