Financial Services Newsletter : Banking and finance

Taking security over SDE-subsidy claims

Financiers are looking to subsidies in the renewable energy sector as a source of security. Can a Dutch right of pledge be created over a sustainable energy production subsidy?

Taking security over a sustainable energy production (SDE)-subsidy (the Subsidy) is not restricted by the nature of the subsidy and likely also not in any arrangement with proprietary effect entered into between the Subsidy grantor and the beneficiary. The administrative legal framework provides for a consent requirement (for assignment) which may or may not have proprietary effect.

In our view, the better approach would be that the consent requirement does not have proprietary effect, based on the drafting of section 61 paragraph 2 of the Decree on Stimulating the Production of Renewable Energy (Besluit stimulering duurzame energieproductie) (the DSPRE Provision), the explanatory notes in respect of section 4:71 of the General Act on Administrative Laws (Algemene wet Bestuursrecht) (if forming the basis for the lower laws such as the DSPRE Provision) and other means the subsidy grantor has to avoid unwanted outcomes.

From a property law perspective, it should consequently be possible to assign (and pledge) a Subsidy. It is however not certain whether this view will prevail in the absence of authoritative case law. Therefore, a financier should consider requesting that the project developer also requests permission from the ministry of economic affairs to create security over the subsidy on an "to the extent legally required"-basis.

Introduction

SDE+ and, from 1 January 2020, SDE++ subsidies play an important role in the accelerated drive towards a sustainable approach to human energy needs. Despite the fact that a number of Dutch offshore wind farms are being constructed subsidy-free (in some form or shape), the majority of new sites still relies on subsidies to close the budget. Likewise, subsidies alone are not sufficient either. Equity and often bank financing are required as well.

For purposes of risk/reward control and to be able to seek capital relief under applicable regulatory regimes, financiers of renewable energy projects often require transaction security to be granted over the key assets and income streams of the particular project. However, especially during the construction phase income is limited and assets need to be developed. Financiers are therefore also looking for subsidies as a source of security. So can a Dutch right of pledge (pandrecht) can be created over an SDE+(+) subsidy[1] (the Subsidy)?

The Subsidy constitutes a claim of the beneficiary against the government (via RVO, Rijksdienst voor Ondernemend Nederland) and constitutes, from a property law perspective, a receivable (vordering). A receivable can be subjected to a right of pledge if it is capable of being assigned (overdraagbaar)[2]. The relevant question therefore is whether the Subsidy is capable of being assigned. Under Dutch law, a receivable is, in principle capable of being assigned, unless (a) the nature of the receivable restricts assignment, (b) the law restricts assignment or (c) assignment is restricted with proprietary effect by agreement between the debtor and the creditor of the receivable.

Does the nature of the Subsidy restrict assignment?

Receivables with a (strictly) personal nature are not capable of being assigned. An example is a subsidy awarded to a particular artist. The Subsidy, however, is connected to an asset (the relevant wind farm, solar park or other means to generate renewable energy), rather than a person. This is supported by the fact that the Subsidy is calculated on the basis of the difference between the average cost of production of renewable energy by virtue of that asset and the relevant price that can be obtained on the open market. The person or party behind the relevant wind farm or solar park is less relevant in that respect (but should of course be reputable and capable of developing the particular project for the subsidy to be awarded). Awarding the Subsidy depends on the closure of the budget and other project related conditions. The nature of the Subsidy should therefore not restrict assignment.

Does Dutch law restrict assignment of the Subsidy?

Whether the law restricts assignment of the Subsidy is a question both from civil (property) law as well as administrative law as the Dutch government is involved as grantor. The General Act on Administrative Laws (Algemene wet Bestuursrecht) provides that if determined by legal requirement (wettelijk voorschrift) or the granting of a subsidy, the consent of the administrative body will be required if the subsidy beneficiary, for instance, enters into a credit agreement or agreement to attract a loan, or enters into an agreement pursuant to which the beneficiary agrees to grant security, including the granting of security for the benefit of others or by which the beneficiary enters into suretyship or joint and several liability or otherwise gives assurance for another person (the GAAL Provision)[3]. The purpose of this consent requirement is to allow the administrative body a level of influence in respect of the exploitation deficit which is being funded by the subsidy. Although the GAAL Provision is set up broadly it does not explicitly refer to assignment of the Subsidy.

It is argued that the GAAL Provision authorises lower legislators to restrict the assignability of subsidy claims (in the context of creating security)[4]. In that view the Decree on Stimulating the Production of Renewable Energy (Besluit stimulering duurzame energieproductie) provides for a consent requirement which is based on the GAAL Provision pursuant to which a beneficiary may not, unless the ministry allows an exemption, assign the ordinance for subsidy to any third party at any time prior to the commissioning of a production facility (the DSPRE Provision)[5] [6].

There are at least two interesting points that come up with this line of reasoning in respect of the question whether the law restricts assignment of the Subsidy. As the DSPRE Provision seems to include a prohibition, does it have proprietary effect (goederenrechtelijke werking)? And, if the DSPRE Provision follows from the GAAL Provision, are the explanatory notes in respect of the GAAL Provision relevant in the context of any proprietary effect of the consent requirement in the DSPRE Provision?

As follows from the DSPRE Provision, a beneficiary may not assign its Subsidy without an exemption from the ministry. The Dutch Supreme Court has determined in the Coface/Intergamma case that non-assignments arrangements should be interpreted objectively in accordance with the Haviltex principles[7]. A starting point for such interpretation is that non-assignment arrangements (only) have obligatory effect (verbintenisrechtelijke werking), unless it follows from the drafting thereof that, as to objective measures, the parties have intended to give such arrangement (also) proprietary effect (goederenrechtelijke werking).

The difference between the two effects is that the first only applies between the parties whereas the second also has effect on third parties. Consequently, if a non-assignment arrangement (only) has obligatory effect, the creation of a right of pledge by one party in favour of its financier is still valid (provided that that party breaches a contractual arrangement for which it may be held liable). The Coface/Intergamma case is however not (directly) applicable to the question whether the law restricts assignment of the Subsidy, as the case deals with non-assignment arrangements contractually agreed between parties whereas the law is unilaterally drafted by the legislator.

In our view it may however be argued that the rules following from Coface/Intergamma could be applicable when it comes to an interpretation of laws as well, including the DSPRE Provision. In that approach the drafting "may not" in combination with a consent/exemption requirement could be interpreted as to having (only) effect between the Subsidy grantor and beneficiary. It is not certain whether this view would be followed as laws have general effect but it seems telling that certain other provisions of law which are assumed to have proprietary effect include wording such as "cannot" rather than "may not"[8]. The use of "cannot" is generally assumed to qualify the receivable and therefore have proprietary effect whereas the use of "may not" seems to suggest that an unilateral prohibition is envisaged.

The explanatory notes in respect of the DSPRE Provision do not state whether the consent requirement included therein has proprietary effect. But the explanatory notes in respect of the GAAL Provision explicitly provide that the absence of a required consent only has effect in the relationship between the subsidy grantor and beneficiary. The effect of any legal act performed without such required consent shall therefore not be withheld from any counterparty.

Consequently – and to the extent that a similar interpretation is valid under the DSPRE Provision – any right of pledge created by a beneficiary shall still be valid notwithstanding any absence of consent given by the government/subsidy grantor. This view appears to be supported by the explanatory notes in respect of the DSPRE Provision that provide as main reasons for including a consent requirement that the Subsidy grantor wishes to avoid the unnecessary reservation of (governmental) funds and the desire to avoid speculative behaviour[9].

Attracting third-party financing in consideration for the giving of transaction security is hardly speculative and actually shows that a beneficiary aims to develop and complete the project. If this line of reasoning is followed, the consent requirement under the DSPRE Provision should also only have effect in the relationship between the Subsidy grantor and the beneficiary and not affect any right of pledge created by a beneficiary in favour of its financier.

Would this matter for the purpose of protecting the governmental interests as set out in the explanatory notes? Perhaps not, as the Subsidy grantor has other means to deal with any unwanted results, for example the cancellation of any Subsidy. If a Subsidy is cancelled the right of pledge will, as "limited right" (beperkt recht) also fall away.

It should be noted that there are legal scholars arguing, in the context of a non-assignability arrangement, that even if a pledge restriction is deemed to only have effect between the parties thereto, a security taker could be held liable for knowingly allowing its borrower to breach its duties vis-à-vis the debtor of the receivable. We believe that such liability should not be easily assumed and will in any case depend on the circumstances of the case. To minimise any risk in this respect, the financier should consider asking the project developer to request permission from the ministry to create security, on an "to the extent legally required"-basis.

Is assignment restricted with proprietary effect in any arrangement between the Subsidy grantor and beneficiary?

Non-assignability can also be contractually arranged between parties[10]. So called non-assignment arrangements are often included in general terms and conditions and subject of a number of court cases, including the already referred to case of Coface/Intergamma. Despite frequent use in commercial contracts non-assignability arrangements are less likely to be relevant in the context of taking security over the Subsidy. The Subsidy originates from a subsidy ordinance (subsidiebeschikking) based on the DSPRE Provision. A subsidy ordinance provides for rules and regulations unilaterally imposed by the subsidy grantor. Any non-assignability arrangement included therein is therefore not a contractual arrangement in respect of a receivable within the meaning of the Dutch Civil Code. Sometimes a subsidy agreement is entered into but the general consensus is that a subsidy agreement may not include more onerous provisions which are not already included in the subsidy ordinance. For consent requirements included in subsidy ordinances the previous paragraphs apply.

[1] It is assumed that the legal framework for SDE++ which focuses on 'CO2 reducing alternatives' will largely follow the existing framework for SDE+.
[2] Section 3:98 jo 3:83 of the Dutch Civil Code.
[3] Section 4:71 sub (e) and (f) of the Dutch General Act on Administrative Laws.
[4] R. Mellenbergh, 'Verpanding van subsidie-vorderingen', WPNR 11 November 2017/7170.
[5] Assignment after commissioning is not subject to consent – which makes sense as the subsidy aims to complete the project and achieve commissioning. Financiers obviously would like to take security over subsidy claims at an earlier stage than that.
[6] Section 61 paragraph 2 of the Decree on Stimulating the Production of Renewable Energy.
[7] HR 21 March 2014, NJ 2015/167 (Coface/Intergamma).
[8] E.g. Section 5:91 paragraph 1 or Section 5:104 paragraph 2 of the Dutch Civil Code.
[9] Which may occur if a speculative party is holding to an Subsidy without any aim to commence construction but solely for the purpose of on-selling with a premium.
[10] Note the draft legislation to annul contractual assignment and pledge restrictions in respect of (monetary) receivables which is currently subject to advice by the Council of State.