Pledge: protection for creditors or hindrance for creditors?

What exactly is a lien?

Lien is a security right. In plain language: you give possessions as collateral to a lender (the pledgee) so that he has certainty that he will get his money back. Are you unable to meet your payment obligations? Then the pledgee can sell your assets – without the intervention of a judge. This is called foreclosure.

You can give liens on a variety of business assets such as:

• Inventory and stock
• company cars
• receivables from customers
• shares

The right of pledge is established via a deed of pledge – drawn up by a notary or (in the case of a non-possessory pledge) privately, provided it is registered with the Tax and Customs Administration.

Fist pledge versus non-possessory pledge

There are two forms of pledge:

– Fist pledge: the pledgee gets physical possession of the good (for example, an expensive piece of equipment).

– Possessory pledge: you retain possession of the good, but the pledgee has legal rights to it via the deed of pledge.

There is also a distinction between silent and public lien on receivables. Silent means that the debtor (the one who has to pay) is not aware of the pledge; public means that he or she is informed.

What if you are a creditor and file an attachment?

Suppose your customer doesn’t pay and you seize his goods. Suddenly he waves a deed of pledge. “These goods are pledged,” he says, “you no longer have any say in them.”

Panic? No need. The lien is valid against third parties (like you) only if it is properly registered. So:

– No registration? You may ignore the lien. Your attachment takes precedence.
– Well registration? Then you, the garnishee, are at the back of the queue.

This applies to non-possessory liens. It is different with fist liens, because the lienholder already owns the items – a clear signal that a lien exists.

Attention as a creditor: check the registration!

If, as a creditor, you want to attach a debtor’s movable property, always check:

1. Is there a deed of pledge?
2. Is there a non-possessory pledge?
3. Is it registered with the Tax Office?
4. Is it a non-possessory lien or fist lien?

Without registration, you may foreclose as if the lien does not exist. This prevents you from standing empty-handed at the auction.

Pledge: convenient, but be prepared

For entrepreneurs, the pledge is a powerful tool to secure financing. But at the same time, it can lead to unpleasant surprises for creditors who want to collect their claim. Make sure you know what to look out for:

• Deeds of pledge for non-possessory pledges must be registered
• Without registration, the pledgee is at a disadvantage in the event of seizure
• Checking for registration is easy – and prevents loss

But: Boss over Boss: the Tax Authority

Please note that there is one important exception to the rule that a valid lien has priority over other creditors: “”the Tax Authority’s bottom right. This means that the tax authorities have priority over movable property located on the tax debtor’s business floor – such as machinery, inventory or computers. Even if these items are pledged to a bank or other creditor, the Tax Administration can still exercise its right to these items as long as they are on the business floor.

This exception is designed to allow the Tax Administration to effectively collect outstanding tax debts. As a creditor, it is therefore important to find out where the pledged goods are located and whether the right of seizure may play a role.

Questions about liens, attachments or securities?
Our specialists at Fruytier Lawyers in Business are happy to think with you about protecting your rights as a business owner. Feel free to contact us by email, phone or fill out the contact form for tailored legal advice. We are happy to think along with you.