Many companies cannot survive without a credit arrangement provided by a bank. Businesses use the credit arrangement to fulfil their payment obligations. This means that the entrepreneur becomes dependent on a bank to a certain extent. However, the combination of the credit crunch and the stricter capital requirements for banks imposed in European treaties mean that banks have started to review their outstanding loans with a more critical eye. In recent years, this has caused the banks to terminate many of their credit arrangements. In most cases, this applies to customers who have been transferred to Special Assets.
The bank informs the entrepreneur that the credit arrangement has been terminated, either immediately or subject to a period of notice. In addition, the bank demands immediate payment of the total debt or imposes a strict repayment schedule. As a result, the entrepreneur finds himself in a very difficult position because no funds are available in most cases and the bank will exercise its rights attaching to collateral. If the bank holds a pledge or right of mortgage, it can force an execution sale or seize assets such as your accounts receivable. What options are still open to you in this situation? This article explains what we can do for you if you have been notified of (a planned) termination of your credit arrangement.
When is the bank entitled to terminate a credit arrangement?
The bank agrees a number of things with an entrepreneur when the two parties enter into a credit agreement. To some extent, these agreements result from the General Banking Terms and Conditions (ABV) which the bank has declared to be applicable. These terms and conditions state all kinds of rights and obligations in respect of both parties. If you, as the entrepreneur, default in respect of one of those obligations, the bank is entitled to demand payment of the total amount owed by terminating the credit arrangement, unless this would be inappropriate in view of the small size of the amount involved. According to clause 35 of the ABV 2017, both you and the bank can terminate a credit arrangement before the agreed maturity and the bank can even do so if you have not defaulted in respect of any obligation, as long as it gives adequate consideration to its duty of care. However, the banks cannot simply make up their own rules.
Case law identifies the requirements with which the bank must comply when terminating a credit arrangement. Furthermore, the courts have determined that banks have a duty of care. In 2003, the Court of Arnhem identified factors which play a role when a bank gives notice of its intention to terminate a credit arrangement:
- The duration, degree of exclusivity, size and complexity, and the historical details of the credit arrangement;
- a significant decline in creditworthiness and/or a significant increase in the bank’s credit risk, in which case consideration is also given to whether the collateral already provided (or which can be provided) offers adequate coverage;
- the conduct and reliability of the borrower and the degree and timeliness with which the borrower informs/has informed the bank of all the circumstances that are relevant to the credit arrangement, both now and in the past;
- whether the borrower has failed culpably, and to what extent;
- the likelihood that the borrower’s business will survive, either in its current form or after a reorganisation or relaunch, and the degree to which the borrower has started to reorganise;
- the period of time granted to the borrower to find a different source of finance and the seriousness of the financial problems faced by the borrower if an alternative source of finance cannot be found in the near future;
- the bank's decision-making procedure prior to giving notice and the way in which it has engaged in consultation with the borrower;
- whether the bank has aroused expectations through its own behaviour (such as allowing the credit limit to be exceeded);
- other social considerations (including preserving jobs).”
In 2014, the Supreme Court changed the basic assumptions by ruling that the bank may always exercise its contractual termination right, unless this action is unacceptable according to the principles of reasonableness and fairness. Whether or not termination is unacceptable is still determined based on the bank’s special duty of care in respect of borrowers. This may seem like legal hair-splitting, however it is actually an important nuance as, prior to this date, the bank had to demonstrate, based on the criteria summarised above, that it had indeed acted reasonably in terminating the arrangement. Since 2014, the opposite applies: the entrepreneur must demonstrate that the bank has not acted reasonably in terminating the arrangement. Due to the complexity of procedural law and the law of evidence, this nuance can have a decisive effect on the outcome of a court case. These rules are still the basis for terminating credit arrangements at the present time.
In the light of the above rules, there is all the more justification for forming a detailed dossier, communicating effectively and drawing up a well-considered plan of action!
So much for the theory. What action can you take?
The first piece of advice is self-evident: comply with all your obligations in respect of the bank. This mainly involves providing information and paying interest and redemption instalments in a timely manner. If a situation arises in which you are no longer able to fulfil your obligations, you need to inform the bank at an early stage and keep the relationship amicable. For example, an inability to pay interest and redemption instalments, and also overrunning the credit limit.
If the bank does indeed decide to terminate the credit arrangement, the period of notice set by the bank is important. This is one of the factors which determine whether or not termination can be considered reasonable. Determining the notice period is not an exact science, meaning that good argumentation in this respect may achieve results. A generous notice period gives you the opportunity of finding a different source of finance and/or improving the financial situation of your business.
If you find the bank’s actions totally unacceptable, rather than trying to extend the notice period, you should demand reversal of the decision to terminate the credit arrangement. When doing so, you can make the bank aware of the damage you will suffer if your credit arrangement is reduced or terminated, or if an unused amount of credit is frozen. If you are unable to reach a solution, the matter must be decided in court. Summary proceedings should be started as terminating a credit arrangement generally means the end of a business. This is an emergency procedure in which the court is asked to issue an immediate ruling preventing the bank from terminating the credit arrangement or requiring the bank to make alterations. We continuously discuss with you the best course of action in the situation that has arisen.
Contact Special Assets Desk:
T. +31 (0) 88 141 08 16
T. +31 (0) 88 141 08 16
T. +31 (0) 88 141 08 16