Vol 4 (2007) - Issue 5

Article preview

Review of the New Security Instrument in Denmark: ‘Company Pledge’

1. Introduction

1.1 Considerations behind the new pledge instrument

In 2002, the Danish Ministry of Business and Industry issued a report regarding the possibility of introducing a new financial instrument under Danish Law entitled ‘company pledge’ in the form of a floating charge available for business entities. Traditionally, Danish pledge instruments aim mainly on mortgaging specific collaterals, not providing an opportunity to create floating charges. As a consequence, current assets of a business are generally left free of charges or prove very hard or expensive to secure for financial purposes. Thus, the concept of floating charges, widely accepted in jurisdictions outside of Denmark, has not been possible in Denmark.

The rationale behind the adoption of a floating charges in Denmark was the wish of the government to base its policy on a growth-oriented industrial development policy. Thus, the introduction of the instrument aim to providing Danish companies with financial opportunities not yet available. The government based its intentions on the assumption that, namely banks, would increase loans to companies if such financial instruments were made available. Another argument in favour of the introduction of this instrument was the strengthening of the competitive abilities of Danish enterprises vis-á-vis foreign enterprises, which enjoy the advantages of a floating charge.

Calculations of the Ministry of Finance showed that the part of current assets in Danish companies equalled approximately 45% of the aggregated assets in the companies. Based on comparisons with Sweden, the Danish government calculated that Danish businesses had an additional financial potential of approximately DKK 100 billion, (approx. EUR 13,3 billion).

In financial circles it was further believed that the introduction of the new pledge instrument would become a more cost-effective way of providing security, namely for small and middle-sized companies. It was also presumed that personal collaterals and suretyships from the owners of such companies would cease to be relevant securities for banks.

1.2 Status

In June 2005, the parliament decided the introduction of the floating charge under the name ‘company pledge’. The new financial instrument was introduced into Danish law and became effective as of 1 January 2006 by way of adding specific additional clauses to the existing Land Registration Act (tinglysningsloven), the Bankruptcy Act (konkursloven) and other relevant acts.

It was introduced in two forms: (i) a company pledge (virksomhedspant) regulated in the Land Registration Act (tinglysningsloven), Section 47C, and (ii) a regulated receivables pledge (fordringspant) in the Land Registration Act, Section 47D.

Section 47C of the Land Registration Act introduces a floating charge by way of a mortgage deed for a limited amount (skadesløsbrev) providing security in the assets of a company such as receivables, stock of goods, new vehicles, operating equipment, goodwill, domain names and certain other intellectual property rights.

Section 47D of the Land Registration Act introduces a floating charge by way of a mortgage deed for a limited amount, however only with respect to receivables of a company, without individual third party notice being necessary for perfecting the security. The new instrument has now been in effect for approximately 1½ years. At present it appears that the pledge instrument does not enjoy the popularity that was believed or hoped. The main banks in Denmark suggest that this is the result of the strong Danish economy and business cycle as the main reasons for this. Others consider that the increase of competition in the financial markets and between Danish banks, a market where it may prove difficult for the financial institutions to demand a pledge with such huge implications for the businesses as the company pledge.