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Assignment of a claim

  • Netherlands
  • Banking and finance

28-11-2008

What procedure needs to be observed in the Netherlands for transferring title or assigning a claim, which a creditor has against a debtor, to a third party? Until 1 October 2004, Dutch law always required both a deed and notice of transfer of title to the debtor for the transfer of title of a claim to be valid. If these conditions were not fulfilled, the transfer of title of the claim was not legally perfected. Almost 5 years later, this issue is still relevant.

What procedure needs to be observed in the Netherlands for transferring title or assigning a claim, which a creditor has against a debtor, to a third party? Until 1 October 2004, Dutch law always required both a deed and notice of transfer of title to the debtor for the transfer of title of a claim to be valid. If these conditions were not fulfilled, the transfer of title of the claim was not legally perfected. Almost 5 years later, this issue is still relevant.

This obligation to notify the debtor was unpopular among market players. In the case of securitisation, factoring and trade receivable financing, where claims or large groups of claims are assigned to a third party, the obligation to notify the debtor of the assignment was often viewed as impractical and, more significantly, commercially undesirable.

Practical alternatives were implemented in order to accommodate market players’ objections. In the case of securitization, for instance, the compulsory notice to the debtor was postponed. This was mostly done in conjunction with pledge arrangements to compensate for the transfer of title and with it the entire assignment not being legally perfected for as long as notice to the debtor had not taken place. An obvious risk was that the notice could take place too late, for example after the debtor concerned had already been declared bankrupt. An acquiring creditor’s right of recourse is extremely limited if the debtor becomes bankrupt. In the case of factoring, for instance, the factoring company has a significantly stronger right against the debtor if the assignment is perfected (and it is de facto ‘owner’ of the claim), than when it is in the position of a holder of an undisclosed pledge. That becomes particularly evident during the actual collection of the claim(s) concerned.

The procedure for transferring title to or assigning claims changed as of 1 October 2004. The requirement of giving notice to a debtor for a legally perfected assignment was partially abolished. Partially, because only rights that already exist at the time of the transfer of title or which will be directly acquired from a legal relationship already existing at that time,  fall under the scope of the revised procedure.

Since that date, an assignment may be validly performed simply by executing either a notarial deed or a private deed that is registered at the Dutch Tax and Customs Administration. Nevertheless, notice still remains a relevant part of assignment. The debtor is only obliged to pay the third-party acquirer after notice. Notice is the only way to prevent a debtor still lawfully paying its prior creditor.  Until it receives notice of the assignment, the debtor must be granted an acquaintance for payment to its prior creditors. After notice, the debtor may only lawfully pay to and be given an acquaintance by the acquirer of the claim.

Abolishing the obligation to notify as a requirement for a valid assignment of a claim under Dutch law has had a significant impact on Dutch financing practice. Particularly factoring companies, firms involved in securitization and other institutions involved in the bulk assignment of claims have been able to take advantage of the simplified procedure for assignment and the ensuing improved protection for large creditors.

To recap: if a creditor wishes to transfer title (and thereby assign) a claim against a debtor to a third party, a deed (a written document, signed by both the creditor and the third party, whose purpose is to transfer title of the claim against the debtor by the creditor to the third party) must be drafted. That deed must either (i) be executed before a notary, or (ii) registered at the Dutch Tax and Customs Administration, or (iii) notice of the assignment by deed must be given to the debtor. Once these requirements have been met, the claim is validly transferred (assigned). The debtor’s payment obligation will transfer only after having received notice of the transfer.

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