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Some Dutch legal comfort in turbulent times

  • Netherlands
  • Banking and finance - Articles


In times of economic recession and especially in the current credit crisis it is even more important for lenders to ensure that security rights granted provide as much safety as anticipated. How safe is a security right granted by a Dutch group company to a syndicate of banks which provide a credit facility to the their parent company?


If a Dutch group company (Group Company) is requested to grant security rights to a syndicate of banks (Lenders) for a credit facility (Syndicated Loan) of its holding company (Borrower), the Lenders should take into account various Dutch legal aspects which could affect the security rights provided. This newsletter gives an overview of the following aspects under Dutch law: (i) parallel debt, (ii) ultra vires, (iii) conflict of interest and (iv) fraudulent preference. Acting careless with respect to these issues may result in unenforceability of the security rights acquired.

Parallel debt

Frequently a security agent (Agent) holds security for the Syndicated Loan on trust for the Lenders as beneficiaries. Pursuant to provisions of Dutch law it is generally assumed that pledgees should be creditors under the secured obligation. Such is not the case if a (non-lending) Agent holds security for all Lenders. By creating a parallel debt in the Syndicated Loan this difficulty can be solved.

In a parallel debt structure, the Borrower acknowledges a debt to the Agent. This parallel debt is equal to the aggregate of the Borrower's obligations to the Lenders under the Syndicated Loan. Thus, an independent, separate debt is created between the Borrower and the Agent. The Borrower secures its obligations to the Agent under the parallel debt. The parallel debt is incorporated in the credit agreement.

It is contractually agreed that a payment to the Agent of an amount under the parallel debt also discharges the Borrower from the corresponding obligations to the Lenders. In this way, the parallel debt at no time exceeds the Borrower's combined obligations towards the Lenders.

As a result of the parallel debt, the security beneficiary remains the same (i.e. the Agent) even if the composition of the Lenders changes. This removes the concern that under Dutch law it is generally assumed that a security right cannot be validly created in favour of a party who is not the creditor of the secured claim.

At the time this news letter was being composed, no statutory law or case law was available on the subject matter of parallel debt or on security rights provided in that respect. Nevertheless, it is generally assumed in the Netherlands that a parallel debt validly creates a claim which can be secured and therefore the use of a parallel debt structure is common practice in the Netherlands.

Ultra vires

If a legal act performed by a Dutch company is not in the company's corporate interest, it may be nullified by the company (or its trustee in bankruptcy) on the basis of ultra vires.

Relevant circumstances

In order to determine whether a legal act can be annulled on the basis of ultra vires, Dutch case law stipulates that all circumstances have to be taken into account. The objects clause in the company's articles of association (Articles) in itself is not decisive. Other relevant circumstances to determine whether (or not) a legal act is in the corporate interest of the company may be (a) group relations, (b) reciprocity, (c) continuity of the business and (d) proportionality.

This means that if a security right is granted by a Group Company to secure a Syndicated Loan, it should be considered whether: (i) other group companies grant any security; (ii) the Group Company benefits from the Syndicated Loan (can it draw any money under the Syndicated Loan); (iii) the security is disproportionate to the Group Company's benefit of the Syndicated Loan and (iv) the continuity of the Group Company's business is endangered by the granting of the security.


The Group Company or (as the case may be) its trustee in bankruptcy may only annul the security right on the basis of ultra vires if the Lender (as counterparty) in fact knew or should have known that the security right exceeded the Group Company's corporate interest. In this respect, Dutch law does not, in principle, oblige the Lender to perform an (extensive) investigation into the corporate interest of the Group Company. However, it is argued by some legal authors that banks and professional credit institutions cannot reasonably claim good faith if they neglected to conduct any investigation.

Conflict of interest

Under Dutch law, the company's managing directors (Directors) are authorized to represent the company. If a Director has a conflicting interest with that of the company (CoI), the Director can, in principle, not validly represent the company.

Conflict of interest

In the past it was generally perceived that a CoI automatically existed if a Director had another interest in a transaction besides the company's interest. However, from recent case law one can conclude that the Dutch Supreme Court expressed the view that, within a group, the interests of a parent company and its subsidiary are assumed to be aligned and therefore, a CoI would be absent. As a result of this case law the existence of a CoI should be considered on the basis of the factual circumstances of the case at hand and not in abstracto or in theory.

Provision in Articles

The Articles can stipulate who is authorized to represent the company if a CoI exists. In addition, the general meeting of shareholders (GMS) is each time entitled to appoint a representative, irrespective of a provision in the Articles. Dutch case law determines that if a CoI exists, it is the duty of the Directors to inform the GMS thereof in order to ensure that the GMS has the opportunity to appoint a representative.

The Dutch Supreme Court recently ruled that the GMS is not obliged to exercise its right to appoint a representative. If the GMS chooses not to appoint a representative, the person(s) who is/are authorized to represent the company on the basis of the Articles remain authorized even if a CoI exists. The validity of the provision in the Articles is not subject to an (explicit) resolution of the GMS to (i) appoint the person authorized by the Articles or (ii) refrain from using its right to appoint a representative.

Fraudulent preference

In general, a claim for annulment of a legal act (e.g. granting of a security right) performed by a Group Company may be successfully based on fraudulent preference if a creditor (or the Group Company's trustee in bankruptcy) can prove that:

  1. the security right was granted voluntarily;
  2. the security right decreased the possibilities of recourse of one or more creditors at the time that the creditor claims annulment; and
  3. at the time that the security was granted, the Group Company knew or should have known that as a result thereof the possibilities of recourse of one or more of its creditors would be prejudiced.

Voluntary act

If the Group Company is not a party to the Syndicated Loan, the granting of security may be considered voluntarily, even if there exists an 'economical-obligation' for the Group Company e.g. the Lenders will not extent the Syndicated Loan if the Group Company withholds from granting a security right. A security right granted by a Group Company will generally be deemed to be involuntary if the Group Company is obliged to grant the security right on the basis of a Syndicated Loan to which it is a party.


If the security right is granted for consideration, fraudulent preference can only be successfully claimed if, besides the Group Company, the Lender (as counterparty) (a) knew or (b) should have known that granting the security right was prejudicial towards creditors.

It depends on the factual circumstances whether the Lender should have known that the act was detrimental to the interests of other creditor(s). Under certain circumstances, the knowledge of both parties is presumed (subject to evidence to the contrary). One of those circumstances is that the security right (i) is granted within one year before its annulment is invoked and (ii) consists of giving security for debts which are not due and payable.

Please note that specific rules relating to fraudulent preference in bankruptcy differ from rules relating to fraudulent preference outside bankruptcy.


Lenders should carefully consider all factual circumstances in both national and international finance transactions in order to limit the potential risks involved in the granting of security rights by a Group Company. Especially in these times of economic downfall it is important to ensure that security rights appear to be unenforceable.

What Eversheds Faasen can do for you

Eversheds Faasen can advise you on Dutch legal issues and the assessment of potential risks in national and international finance transactions and restructuring transactions. We provide legal opinions, we advise on the establishment of security rights and can together with our in-house civil-law notary team even create them.

If you would like to know more about Dutch finance and corporate law and how Eversheds Faasen can be of added value in your transactions, please feel free to contact us.