REALWorld Law

Real estate finance

Effect of borrower's insolvency

Are any security interests created by a borrower in favour of a lender made void if the borrower becomes insolvent? Are there any other effects?



Generally, a borrower's insolvency does not affect the security rights of secured creditors. Mortgagees and pledgees are referred to as ‘separatists’ under Dutch law, which means that if insolvency proceedings are commenced in respect of a debtor, the secured creditors may still enforce their security rights without regard to these insolvency proceedings.

However, a trustee in bankruptcy (faillissementscurator) can try to annul the security rights on the basis of the so-called actio pauliana or fraudulent conveyance if:

  • the creation of the security rights was a voluntary act rather than a legal obligation;
  • the creation of the security rights was prejudicial to other creditors of the bankrupt debtor; and
  • the debtor (and, in the event that the relevant legal act was performed for consideration, the debtor and its counterparty) either knew, or should have known, of the prejudicial nature of the legal act concerned.

For the purposes of annulment of the relevant legal act, it suffices for the trustee in bankruptcy to declare the annulment. In practice, however, the trustee in bankruptcy will petition the court to order the beneficiary of the annulled legal act to undo the performance or benefit it received as a consequence of the legal act.

Additionally, please refer above, which sets out several conflicts under general Dutch law that might affect the validity of security rights and which can be evoked by the trustee in bankruptcy.

Finally, the rights of a pledgee or mortgagee to claim or seek recourse against an asset (goed) which belongs to an insolvent estate and in respect of which such pledgee or mortgagee has a security right may be suspended by any competent court in insolvency proceedings for a period of not more than four months. During this period, the pledgee or mortgagee of such asset may not without the court's consent exercise such rights.

If a pledgee or mortgagee of an asset belonging to the bankrupt estate fails to sell an asset after having been given a reasonable period by the trustee in bankruptcy to exercise its rights, such trustee may, after expiration of such period, claim such asset and sell it, without prejudice to the pledgee's or mortgagee's entitlement to the proceeds after deduction of bankruptcy costs and taking into account its rank.