New financing potential through removal of pledge bans

The Abolition of Pledge Prohibitions Act was recently passed by the House of Representatives. It is important for you to know that this new law may bring new opportunities for your company to obtain financing. It also helps creditors, who can more easily accept receivables as collateral.

In this article, I explain the background of the will to lift pledge bans and explain why this change in the law is one that could have a serious impact on your business operations.

Background

Under our current legal system, when entering into a loan agreement, or delivering on credit, it is possible to agree with each other that it is forbidden to assign and/or pledge the claim arising therefrom as security for a loan.

This possibility has traditionally existed to protect the borrower from an unknown creditor. It may be the preference of parties to limit the portability of the claim for this reason, was the thought of the legislature.

By agreeing to a prohibition of pledge and/or assignment, the transferability of the claim is excluded. It is then really no longer possible to transfer or pledge the claim.

Social disadvantages of pledge prohibitions

In commercial practice, however, there appeared to be a disadvantage, on reflection, more serious than the anticipated benefit. The benefit was small. After all, the only issue here is to whom the debtor must pay; he must pay anyway.

In business dealings, it appeared that assignment and pledge bans were often enforced by the more powerful party in negotiations without any real thought. Thus, relatively more powerful parties included assignment and pledge prohibitions in their general terms and conditions and it became a matter of automatism.

This while such prohibitions do have a negative effect on the creditor’s ability to use his asset, the claim. A pledge prohibition prevented the borrower from borrowing money himself with the claim against the original creditor as collateral. In general, this reduced the velocity of circulation of money, something that weighs on economic growth.

A common case is that large customers imposed assignment and pledge bans on their suppliers in general purchase conditions. If such a prohibition is imposed, it is not possible, for example, to obtain financing through a factoring company for the invoices to the customer in question.

Change

Fortunately, it seems that the legislature realized that this little-known legal quibble unintentionally and undesirably inhibited the economy. The Abolition of Pledge Prohibitions Act is intended to at once change the pre-existing situation between all parties who have agreed to such a clause by including in law that such clauses are null and void.

Furthermore, in the current form of the law, that nullity will start to apply to existing clauses after the expiration of 3 months from the entry into force of the law. When exactly that will be is not yet clear, as the proposal has yet to be passed by the Senate.

Be prepared and have your receivables (invoices) inventoried

Being able to obtain financing is one of the main priorities for real entrepreneurs. Once enacted, this bill will create additional opportunities for a lot of businesses. Therefore, contact us immediately and let us map out now what will change for you when the bill will take effect! Then you will be at the front of the queue with lenders and factoring providers.

Be ahead of the competition; you certainly won’t be the only one!

Get advice

Do you have any questions? Then contact one of our lawyers by mail, telephone or fill in the contact form for a free initial consultation. We will be happy to think along with you.