Privileges

The main rule is that creditors can recover from the entire assets of their debtor (Article 3:276 of the Civil Code) and that they have an equal right among themselves to be paid from the net proceeds (of the execution) of their debtor’s assets (Article 3:277(1) of the Civil Code). Exceptions to this main rule only follow from the law. Thus, the creditor and debtor cannot mutually determine that the creditor’s claim will be recoverable on a priority basis over other claims. The reverse is possible, however; the debtor and creditor can mutually stipulate that the creditor’s claim will be subordinated.

Rank

If the debtor cannot pay all his debts, as often happens in bankruptcies, what matters is the mutual rank of the different creditors. That is where privileges become interesting. A privilege gives a higher rank in the distribution. Privileges only follow from the law and are divided into special privileges that give the creditor a higher rank only on the proceeds of a particular asset, and general privileges that give the creditor a higher rank on all the debtor’s assets.

Examples of special privileges:

– a claim for payment of costs incurred to preserve an object is privileged on the object so preserved (Article 3:284 of the Civil Code);
– a claim for the preservation of goods under a construction contract is (subject to conditions) preferred over those goods (Article 3:285 of the Civil Code); and
– a claim of the association against a flat owner is privileged on the flat right (Article 3:286 of the Civil Code).

Examples of general privileges:

– a claim in connection with costs of the application for bankruptcy if bankruptcy is declared on the application (Article 3:288 sub a of the Civil Code)
– a claim by an employee against his employer in connection with pension instalments that have already expired (Article 3:288 sub c of the Civil Code); and
– a claim of an employee against his employer in connection with salary arrears (Article 3:288 sub e of the Civil Code).

In practice, it regularly happens that privileges run together with other rights to which priority is attached, such as pledge or mortgage, lien and other privileges. A complete overview of which creditor has which rank is beyond the scope of this blog (there are manuals written all over the place about that). Roughly speaking, the following order of precedence applies – note that there are many exceptions:

1. right of retention (subject to conditions; Articles 3:291 and 3:292 of the Civil Code);
2. pledge and hyptheque
3. special privilege
4. general privilege; and
5. other creditors.

If you are faced with your debtor’s bankruptcy, it is possible that you may rank higher than other creditors, for example because your claim has a privilege attached to it. It can certainly pay to investigate this. We will be happy to assist you.

This blog is part of the Security Rights Series.

Questions?