In what order are creditors paid on a debtor's insolvency, and if more than one creditor holds the same security interest over the same real estate asset, how is that situation resolved?
As a general rule, creditors rank equally and on this basis they have recourse to all of the debtor’s assets. However, the distribution of a debtor’s property in bankruptcy deviates from this general principle of law. Ordinary claims may be, and often are, in practice subordinated if other claims have the benefit of a preferred ranking (voorrang).
A creditor’s preferred ranking may be based only on:
Of these four categories, only a mortgage right and a right of pledge are referred to as security rights. A privilege is a right that is created by statute (and cannot be created by contract).
Among creditors with a right of pledge over the same assets, the second right of pledge will rank behind the first right of pledge. However, exceptions to this rule may apply, depending on the circumstances of the particular case and the nature of the pledges.
The tax authorities are (usually) important creditors and hold a general privilege which ranks behind a possessory pledge over moveable assets and a mortgage. However, in particular the beneficiary of a non-possessory pledge over moveable assets can see its rights frustrated by means of a seizure by the tax authorities of pledged assets located on the premises of the debtor (bodemzaken). Moreover, Dutch tax law stipulates that the pledgee must first inform the Dutch tax authorities before it seeks to exercise its right of pledge on the assets located at the premises of the debtor, in which case the Dutch tax authorities will probably seize the pledged assets (and thus frustrate the rights of the pledgee). The Dutch tax authorities have a term of seven days to do this, after unused expiration of this period the pledgee can enforce its rights anyway.
Among creditors holding a privilege, those who have a privilege over specific property are preferred over creditors holding a general privilege (over all property of the debtor). Where several creditors have a specific privilege in respect of the same asset, their ranking is equal.
An example of a preferred position based on ‘other grounds provided by law’ is the right of retention. A right of retention can be exercised by a creditor, for example a building contractor, with respect to immovable property as well as movable property.
The priority of security interests is determined by a complex set of rules stipulating that the order of priorities is based on the date of creation of the security right. A distinction must, however, be made between mortgage rights and pre-judgment executory attachments (beslag) and their interrelationship. A pre-judgment executory attachment involves a district court order which gives the attaching party the right to sell the property by means of an auction.
Whereas an older mortgage right always has priority over more recently created mortgage rights (unless a change of ranking order has been agreed on between all parties), this does not fully apply to attachments. Outside of insolvency, the first attaching party is entitled to sell the property but must share the net proceeds with the other attaching parties because the principle of equality of creditors applies in the case of attachment. This means that all attaching parties have equal rights. This rule is, however, set aside if a mortgage right is created between the dates on which attachments are levied. In that case, the parties that first levied attachments will, in terms of the order of payment, have priority over a mortgage right created later and attachments levied later. All attachments on the borrower's property are automatically cancelled upon the borrower's insolvency.
If the first mortgagee forecloses on the real estate and there are several creditors, the first mortgagee can petition the court in preliminary relief proceedings to grant it first recourse to the net proceeds resulting from the auction. This request must be approved before the date on which the purchase price and the related costs are paid by the new owner of the real estate. If such a request is not filed or is not granted, a proposal regarding payment of the net proceeds will be made to all creditors. If the parties do not agree on this proposal, the district court will be asked to list the creditors in order of priority, and consequently the net proceeds can be transferred to the creditors in order of priority.
