Right of pledge is a low-cost, easy to use legal tool that can help an exporter reduce his exposure to credit risk with importers and trading partners not covered by credit insurance. ABLD can help you set up and execute this surety on your behalf.

Business transactions in international trade take a number of forms. Often exporters do not receive full payment before delivering goods to his customer, the importer. In these transactions, the exporter provides credit to his importer and as a result the exporter assumes the risk that the importer may not make payment on time or according to their agreement. In the Netherlands exporters can protect their interests and minimize this risk by negotiating a pledge with the importer.

What is a pledge?

A pledge is such a guarantee that provides a privileged position to the exporter in the event of the bankruptcy and default of the importer.

Moveable assets and economic or pecuniary rights (e.g. accounts receivable, shares in limited partnerships and insurance benefits) can be pledged under Dutch law. A pledge is comparable to a mortgage but is not tied specifically to real property.

A pledge can be either possessory or non-possessory. Non-possessory pledges provide attractive risk management solutions in international trade, as they protect the exporter's interests in their products while simultaneously protecting the privacy of the importer.

How to use a pledge in international business?

Any exporter who wants to ensure the performance (payment for the goods) of an importer may negotiate a right of pledge as collateral. The procedure for pledging is not complicated and the costs are minimal. Furthermore, if it is a non-possessory pledge, it has no practical implications on normal business operations of both the exporter and the importer.

AgriBusiness Legal Desk, through the Secure Payment Program™, offers a complete service to establish such collateral. Completing a pledge only requires that the exporter act before the importer is declared bankrupt.

Possessory pledge

Under a possessory right of pledge the importer would hand over to the goods to the exporter as security until he performs his obligations. Obviously, this would hinder the ordinary course of business, as the importer would no longer be able to use the goods he purchased.

Additionally, a possessory right of pledge for receivables would entail the importer informing his customers that any payment for goods delivered by him would be due to the exporter. While the purpose is to ensure the performance of the importer, a notification by the importer to his customers would complicate business transaction and might put in question the creditworthiness of the importer as a supplier to his customers.

As a result of these practical complications, a possessory right of pledge is typically only desirable when the bankruptcy of the importer is imminent. As long as that is not the case, a non-possessory right of pledge is more appropriate.

Non-possessory pledge

A non-possessory right of pledge provides a security interest to the exporter without the importer losing the unhindered use of the goods or having to inform his customers. A non-possessory right of pledge is easily established by an agreement between the exporter and the importer that is subsequently registered.

Furthermore, a non-possessory right of pledge may be converted into a possessory right in the event of default or the bankruptcy of the importer.

Pledge in bankruptcy

Once an importer has been declared bankrupt, the trustee will be informed that the exporter has a pledge related to the importers' receivables. The trustee is obliged to inform the exporter of the names and addresses of customers that have outstanding invoices. Using this information, the exporter may proceed to inform and instruct the customers of the now bankrupt importer that, by law, he is now entitled to collect payment on the outstanding invoices.