Where security is being held by a security trustee for the
benefit of a group of financiers, a natural sentiment of these
financiers is to want to be sure that the proceeds of the
security will come their way in an enforcement scenario. The
very term security trustee inspires trust that this will be the
case. Recent developments, such as the collapses of Lehman
Brothers and Landsbanki, have led financiers to look more
closely at financing and security arrangements using an agent
or trustee, and the risk financiers may run if these parties
are no longer capable of performing their obligations. Can the
rights of financiers be affected if a security trustee is
declared bankrupt? And if so, to what extent?
The position under Dutch law on this point is uncertain.
Although the term security trustee is widely used in the
Netherlands, Dutch law does not have a trust concept. The
existence of a separate fund (afgescheiden vermogen)
is not recognised. Accordingly, security and any proceeds of
security held by a security trustee become part of the
trustee's bankrupt estate, if the trustee is declared bankrupt.
Furthermore, the prevailing view is that financiers, for whose
benefit the security has been given, do not have a special
right to the security or proceeds held by the security trustee.
Therefore, if the security trustee acts in breach of its
obligations towards the beneficiary financiers, the financiers'
remedies do not go beyond those available to an ordinary
contracting party for breach of contract.
A number of different methods can be used to minimise the
risk of a security trustee becoming insolvent. In practice, the
most common method is to use a special purpose vehicle (SPV).
This is a legal entity that, according to its objects clause in
its articles of association, only has the authority to perform
the specific acts necessary for the particular task to which it
is appointed that of security trustee. A Dutch law SPV
usually takes the form of a Dutch law foundation
(stichting) or private limited company (besloten
vennootschap met beperkte aansprakelijkheid).
However, some amount of extra time, effort and costs will be
involved in incorporating or finding a suitable SPV and
residual risk remains. There is always a possibility, although
remote, that the SPV will become insolvent or otherwise does
not comply with its obligations. Under Dutch statutory law, an
act performed by the SPV that is outside its corporate objects
cannot be annulled if the party with whom the vehicle was
dealing was not, and need not, have been aware of this.
Furthermore, an SPV will inevitably incur some liability
vis-à-vis third parties (such as management fees,
registration fees and legal costs), even if it does not act in
accordance with the restrictions contained in its articles of
Despite these drawbacks, the use of an SPV is the most
straightforward and conventional way to minimise the risk of a
security trustee's insolvency under Dutch law. However, an SPV
as security trustee will often not be practical in other types
of finance transactions. For example, in a secured syndicated
loan facility, participants traditionally consider the use of
an SPV as security trustee to be too much hassle and a strong
borrower may not be willing to bear the costs involved.
It remains to be seen whether this will change in light of
market circumstances, although most loan agreements are now
drafted to include a right of the lenders and sometimes the
borrower to replace a security trustee if the trustee becomes
or threatens to become insolvent. Legislation dealing with this
issue is not expected. A solution would therefore have to come
from case law. But as the Dutch courts have so far been
reluctant to recognise a separate fund without an express
statutory basis, it seems unlikely that they will make an
exception where security trustees are concerned.