Summary

Our prosperity and welfare is to a great extent embodied in claims. In particular, pecuniary claims are valuable assets which can be converted into cash by the entitled party if so desired. Given their value as assets, (pecuniary) claims have an important function in business and finance. Thus, accounts receivables of customers are often a business’s most valuable asset and one which can serve as security in order to get credit. In addition, claims are also capable of being traded. The sale of claims (i.e. bonds or corporate loans) in the secondary market makes it possible to convert them to cash before they become due or to realise price gains. The sale of a claims portfolio can moreover be a financing instrument or a way to manage risk. For this reason financial institutions and commercial enterprises make use of the possibility of trading in claims portfolios.

The research represented by this book concerns the assignment of claims. A number of core issues regarding assignment are discussed against the background of modern-day financial transactions in which claims are transferred, often on a large scale. Assignment plays a pivotal role in various financial transactions, such as securitisations, factoring and the issue of covered bonds. In this study special attention is paid to the securitisation of financial assets.

Securitisation involves the conversion of financial assets, generally claims, into tradable securities known as “asset-backed securities” (hereafter: ABS). Securitisation is a way in which businesses (originators) can get financing on the basis of the value of their claims portfolios. For financial institutions it is furthermore a method to decrease capital requirements and an instrument for managing the balance sheet and controlling risk. The lynchpin of the securitisation transaction consists in the segregation (pooling) of a claims portfolio in a ‘special purpose vehicle’. This segregation generally takes place through assignment and in favour of the investors in the ABS. Since the proceeds from the claims are the only source of payments on the securities, it has to be ensured that proceeds are for the benefit of the holders of the ABS. Furthermore, the claims portfolio provides them with the security that they will receive a repayment of their investment. The claims may no longer serve as assets on which recourse is available for other creditors. This is achieved by means of assignment. Assignment is hence the central legal concept in securitisation.

This study is divided into two parts. The first part (Chapters II and III) contains an extensive description of securitisation transactions; the second part (Chapters IV-XII) is devoted to an examination of a number of issuesthat come up with respect to the assignment of claims in present-day Dutch financial practice. The following topics are covered in this part:

In Chapter II the building blocks of a securitisation transaction are discussed. The various elements that make up the transaction, the most important parties involved in the transaction and their function, as well as the reasons for entering into securitisation, are discussed in detail. The various types of securitisation are examined as well.

In connection with the credit rating of the ABS it is generally necessary that the claims that form part of the securitisation are transferred to a bankruptcy-remote “special purpose vehicle” (hereafter: SPV). It must be ensured that the creditors of the assignor (originator) or a possible bankruptcy trustee are not capable of invalidating the transfer or of involving the SPV in the possible bankruptcy of the originator. Moreover the SPV itself and the agreements that the SPV concludes in the course of the transaction should be structured in such a way that the risk of bankruptcy of the SPV is slight. These are known as the requirements of “true sale” and “bankruptcy remoteness”. These requirements are given considerable attention, whereby the question of whether a transfer of the assets is always necessary or whether in certain cases a pledge of the claims is sufficient is examined as well.

Not only is it standing practice that the claims underlying the transaction are transferred to an SPV, but also that the claims are thereafter pledged to a security trustee by the SPV in favour of the investors in the ABS. The most common security structures are discussed.

In Chapter III an overview is provided of the risks that have to be taken into account when structuring a securitisation transaction as well as the methods that can be used to obviate or mitigate these risks. Debtor risks and structural risks can be distinguished. Debtor risks are risks linked to the securitised assets, such as the risk of non-payment, the risk of delayed re-payment and the risk of early re-payment. Structural risks are (liquidity) risks that arise from the way in which a securitisation transaction is structured. Structural risks are, depending on the type of asset underlying the securitisation and on the structure of the transaction designed for it, found in different variations. The most common structural risks are discussed, namely (i) legal risks, (ii) risks that are connected to the management and collection of the securitised assets, (iii) cash-flow risks resulting from asset-liability mismatches and (iv) counterparty risk. If one or more of these risks materialises without it having been sufficiently obviated or mitigated, then the investors in the ABS might incur losses.

The final topic in Chapter III is the “financial support” of the SPV, which is discussed in depth. Financial support entails the use of techniques the aim of which is to increase the SPV’s creditworthiness. Financial support aims at providing a certain amount of protection to the SPV and the investors in the ABS against the debtor risks associated with the securitised assets and the cash-flow risks which may result from assetliability mismatches.

Chapter IV serves as an introduction to the second part of this study. In this chapter an overview is given of a number of restrictions found in Dutch property law that may influence the simple and effective assignment of claims in modern-day financial transactions such as securitisations, factoring and covered bonds. At stake are the proprietary effects of stipulations on non-assignability, the prohibition of fiducia, the prohibition of a transfer subject to a time limit, the assignment of future claims, the passing of “all money” security rights and the possibility of holding separate funds. In the subsequent chapters most of these impediments are discussed in depth within the framework of the above-mentioned topics.

Given the interest of financial and commercial practice in a free marketability of claims, this study postulates a flexible assignment and pledge law. Dutch law should not contain any unnecessary restrictions on or impediments to converting the value underlying the claim into cash by means of assignment or pledge. A clear and compelling justification will have to be given in order to restrict a party’s autonomy to dispose over claims.

Chapter V is largely devoted to the requirements for a legally valid assignment of claims (Art. 3:94, paragraphs 1 and 3 Civil Code (BW)). Both the disclosed (“public”) and the undisclosed (“silent”) assignment are examined in detail. Dealt with, among other things, are the significance of the notification requirement; the content, form and legal effects of notification; and the legal position of the debtor after receiving notification of assignment. With respect to silent assignment, attention is paid to the significance of the rule that the assignment may only be invoked against the debtor after notification; the question who has the authority to collect the assigned claim prior to the notification of assignment; and what the consequences of the bankruptcy of the assignor are for the legal position of the assignee. Lastly, attention is paid to the requirement of a ‘deed of assignment’ whereby, among other things, the registration requirement and the requirements for conclusion, form and content are considered.

Chapter VI discusses the transferability of claims. Claims can only be validly and effectively transferred if they are transferable. Under Art. 3:83, para. 1 Civil Code (BW), rights on claims are transferable unless this is prohibited by law or the nature of the claim. On the grounds of Art. 3:83, para. 2 Civil Code, the transferability of a claim may be excluded by stipulation of creditor and debtor (no-assignment clause). Under current law, a no-assignment clause has proprietary effect, which means that a transfer of the claim in breach of the clause is not valid; the assignee will not acquire the claim. It will be clear that in financial transactions based on assignment of claims, such as factoring and securitisation, it is of vital importance that the claims underlying the transaction are transferable and therefore not subject to a no-assignment clause.

Attention is briefly paid to the non-transferability of claims due to the nature of the claim or under the law. The largest part of the chapter is devoted to the non-transferability of claims due to stipulation of creditor and debtor. This chapter goes into detail about the proprietary effect of no-assignment clauses, the drawbacks of such stipulations and the objections that can be raised to them. It is recommended to amend the law so that the proprietary effect of no-assignment clauses is annulled.

In addition, considerable attention is paid to the question whether a no-assignment clause under current law prevents a legally valid pledge o the claim. It is argued that this is not the case.

Further, an examination is made of whether and to what extent the assignee of a non-transferable claim may invoke third-party protection with respect to the assignor and/or the debtor. A number of alternative transaction structures for the securitisation of non-transferable claims are discussed as well.

Lastly, consideration is given to stipulations which only contractually limit the assignor in his rights to dispose over the claims, such as negative pledge and anti-disposal clauses in corporate loans and bond issues. In particular, the extent to which such clauses form an impediment to entering into securitisations and covered bond transactions is discussed.

The question that is central to Chapter VII is the extent to which the prohibition of fiduciary transfer (fiduciaverbod) of Art. 3:84, para. 3 Civil Code (BW) may be an impediment to a legally valid and effective transfer of a claim. Art. 3:84, para. 3 Civil Code (BW) provides that an agreement which purports to transfer an asset as security for a liability or which lacks the intention of making the transferred asset a part of the property of the transferee does not constitute a legally valid and effective title to transfer of the asset. In practice, the assignment of claims in a financial transaction may often raise the question as to whether such an assignment might be in conflict with Art. 3:84, para. 3 Civil Code (BW), certainly in cases where the transaction has the characteristics of financing.

First of all, an extensive examination is made of the object and scope of the prohibition of fiducia, by looking, among other things, at the parliamentary history and the infamous Sogelease judgment. It is then argued that it would be better to annul the fiducia prohibition in the legislation. Should annulment of Art. 3:84, para. 3 Civil Code (BW) be too far-reaching for the legislator, a partial abolition of the fiducia prohibition could be considered with respect to the assignment of claims. At present the prohibition of fiducia in particular raises questions with respect to certain financial transactions based on the assignment of claims. A total or partial abolition of the fiducia prohibition would moreover be in line with the extension of the Financial Collateral Directive to credit claims.

Secondly, the significance of the fiducia prohibition for the transfer of claims in general and for certain financial transactions in particular is examined more closely. The assignment of claims in the framework of factoring, securitisation and covered bonds is tested against the standard of Art. 3:84, para. 3 Civil Code (BW). With regard to covered bonds transactions in particular, there is a risk that the transfer of mortgage claims will be invalid because it infringes the fiducia prohibition.

In Chapter VIII the requirement of determinability (bepaaldheidsvereiste) is central. An assignment is only legally valid and effective if the claim that is being assigned has been sufficiently determined by the deed of assignment (compare Art. 3:84, para. 2 Civil Code (BW)). Considerable attention is paid to the way in which the determinability requirement has been interpreted in the case law. A number of questions that have not yet (clearly) been answered by the case law are also discussed.

In this chapter, moreover, the issue is examined whether the assignee, and also the pledgee, is entitled to receive information from the assignor/pledgor regarding the assigned/pledged claims, such as the name and address of the debtors, and whether this right may be invoked with respect to the bankruptcy trustee of the assignor/pledgor.

Lastly, the issue of whether providing and processing personal data to or by the assignee may be in conflict with the Personal Data Protection Act (Wet bescherming persoonsgegevens) is discussed.

Chapter IX deals with the assignment of future claims. By taking a look at the case law of the Netherlands Supreme Court an answer is sought to the question of what exactly distinguishes existing and future claims. This question is very important in financial practice. After all, in the case of the bankruptcy of the assignor an assignment of future claims cannot be invoked against the bankrupt estate, if the claim was acquired during the bankruptcy of the assignor (Art. 35, para. 2, Bankruptcy Act (FW)). After a discussion of the Supreme Court’s case law a new criterion is developed which will make it easier than is presently the case to distinguish between existing and future claims.

It is argued that the existence of an obligation, and thus of a claim, may generally be assumed if the essential requirements for inception of an obligation are fulfilled. This would only be otherwise if this would follow from the intention of the parties, the nature of the agreement or the law. This generally means that the claim comes into existence at the same time as the legal relationship from which it arises. Often the essential characteristics of an obligation will also be present at that time. If the essential characteristics of an obligation are present, but whether the claim is due and payable depends on an uncertain occurrence in the future, there can be said to be an existing claim with a condition precedent. In principle, any kind of future, uncertain event may be a “condition” within the meaning of Art. 6:21 Civil Code (BW). Only if the future, uncertain event concerns one of the essential characteristics of an obligation can the occurrence of the event be seen not as a “condition” but rather as a requirement for inception of the claim. This starting point holds both for claims based on acts intended to have legal effect and for statutory claims and public law relationships.

A number of objections are then put forward regarding the present system of Art. 35, para. 2 Bankruptcy Act (FW) and it is argued that an exception should be included in that provision for the assignment and pledge of claims acquired from an existing legal relationship.

Finally, an extensive examination is made of the significance and scope of what is known as the “grondslagvereiste” (requirement of a basis) with respect to silent assignment and pledge, in other words the requirement that the claim must have been acquired directly from an existing legal relationship at the time of the assignment or pledge (see Art. 3:94, para. 3 and Art. 239, para. 1 Civil Code (BW)). It is proposed to abolish the “grondslagvereiste” for both ‘silent’ assignment and ‘silent’ pledge.

Chapters X and XI deal with the transfer of ancillary rights and other rights attaching to the assigned claim. As matter of principle the assignee receives the assigned claim in the same condition and the same amount as was owed to the assignor. Art. 6:142, para. 1 Civil Code (BW) provides further that in the case of transfer of a claim the new creditor acquires by operation of law the ancillary rights attaching to it, such as pledge and mortgage rights. When structuring financial transactions on the basis of the assignment of claims, particular attention should be paid to such ancillary rights. In many cases it will be the intention that the assignee is able to exercise certain rights attaching to the claim, in particular security rights. Thus, in the case of securitisations and covered bonds it will be of great importance that the SPV to which the mortgage claims are transferred and the security trustee to whom the claims are then pledged, can make use of the mortgage rights attaching to the claims.

In Chapter X attention is paid to the concept “ancillary right” and to the question whether the transfer of ancillary rights may be excluded or postponed. Thereafter, the significance of Art. 6:142 Civil Code (BW) for the pledge of claims and for ‘silent’ assignment is analysed. Lastly, a number of rights are assessed to determine whether they may be considered to be ancillary rights and, if not, in what way the assignee could nevertheless be entitled to the respective rights. The following are dealt with in this regard: rights from “several liability” and “403” declarations, bank guarantees, credit insurance, creditors beneficial entitlement under endowment mortgages and interest reset rights.

Chapter XI discusses in detail the assignment of claims secured by bank and credit mortgage rights (bank- en krediethypotheken). In the case of the securitisation of mortgage claims and the issue of covered bonds it is of great importance, in part because of the credit rating to be given to the transaction, that the assignor (the SPV) is entitled to the mortgage rights attaching to the claim. For a long time, prevailing opinion has been that a bank or credit mortgage does not pass to the assignor in case of an assignment, unless the mortgage deed provides otherwise or the banking relationship between the assignor and debtor/mortgagor is terminated. This view has been challenged in the more recent literature. Both viewpoints are extensively discussed in this chapter and an evaluation is made as to which is correct.

It is argued that the correct view is that in case of assignment of a claim secured by a bank or credit security right, the mortgage right (partially) passes to the assignee. The consequences of such a partial transfer of the security right are then examined. The question is dealt with as to whether the starting point should be that the mortgage right is split into two mortgage rights that are of equal rank or that a common mortgage right comes into existence. With respect to the case in which the mortgage right is held in community (gemeenschap), some of the aspects of a community of security rights are highlighted. One issue is examined that is important in practice: how third-party effect can be granted to contractual ranking-order agreements with respect to the distribution of the foreclosure proceeds following the eventual foreclosure of the mortgaged property. Following some remarks on assignment, a section is devoted to the pledge of claims secured by bank and credit mortgages.

The second part of the chapter then deals with a number of structures whereby an attempt is made to obviate the uncertainty in practice regarding whether bank and credit security rights pass in the case of assignment. Particular attention is thereby paid to the structure in which there is a partial termination of the mortgage and the structure with a surety by the assignor.

Chapter XII covers assignment in private international law. In present-day financial practice the assignment or pledge of claims often takes place in an international setting. In the case of the international assignment or pledge the question arises as to which law is applicable to the various legal relationships and legal issues surrounding assignment and pledge. The applicable law has to be determined with respect to many issues. The conflict rules that apply in such cases are discussed at length. Attention is paid to, among other topics: the transferability of claims, the assignment of future claims, the contractual relationship between assignor and assignee, the property law aspects of assignment, the legal relationship to the debtor (among other things, set-off), the transfer of ancillary rights and the way in which a foreign security assignment or a foreign security right on claims fits within the Netherlands legal system.