Concern credit: the importance of making proper arrangements regarding intercompany carry.

When there is a group of companies under central management, it is called a concern. The individual group companies may each be financed separately or they may collectively attract credit. In the latter case, one speaks of group financing.

Almost always, the lender can claim each group company separately for repayment of the entire loan. This so-called "joint and several liability" must then have been agreed upon.

The group company that is sued by the lender and must repay the credit can then seek recourse against the other group companies for that portion it paid in excess of its share of the debt. This is called recourse.

So how do you determine whether a company has paid more than the portion of the debt owed to it and whether and for what amount it is entitled to take recourse? In short, how exactly is this so-called mutual (or internal) duty to pay determined?

Two situations

Two situations must be distinguished when determining the mutual carrying obligation, namely whether or not there are agreements between the group companies regarding the mutual carrying obligation.

Situation 1: Agreements have been made regarding mutual carrying obligations

At the time of entering into - and, for that matter, also after the conclusion of the credit - agreements can be made between the group company about (the waiver of) recourse and the internal carrying obligation. These agreements are then leading.

For example, if three companies borrow €300,000.00 from a lender and agree among themselves that the mutual carrying obligation is equal, then the company that receives the loan from

€300,000.00 eventually repays the financier, require payment of €100,000.00 each from the other two companies.

Here it does not matter that the full credit of €300,000.00 may have been used in full by one of the three companies: what is decisive is, as stated above, the agreement made.

Situation 2: No agreements have been made regarding mutual carrying obligations

According to the Supreme Court (HR July 13, 2012, JOR 2012/306 Jansen q.q./JSV Beheer), if no agreements have been made regarding the internal carrying obligation of the group financing, the question of whether and to what extent the group debt affects a company must be determined on the basis of the profit principle.

This principle means, in short, that it must be ascertained who used the loan or credit or to whose disposal the loan or credit came.

That the determination of this is by no means simple is proven by a recent ruling of the District Court of The Hague.

Ruling Court of The Hague

In this case, an amount totaling €30,000.00 was lent by Rabobank to three companies. All companies were jointly and severally liable for repayment of the loan, and no agreements had been made regarding the mutual carrying obligation.

One of the companies goes bankrupt and the financier settles his outstanding claim with the credit balance on the bank account of this company in the amount of approximately € 28,000.00. In effect, therefore, the bankrupt company repays an amount of €28,000.00.

The trustee of the bankrupt company then sues one of the non-failed companies to pay €28,000.00 to him because he believes that the debt to Rabobank was not owed to the bankrupt company, but to the non-failed company.

He takes this view because although the amount of money - as agreed - was transferred by the financier to a bank account of the subsequently bankrupt company, it was then paid on to the non-failed company (and thus would have benefited that company).

The non-failed company disputes this, claiming that the amount was in turn passed on to the third group company, which then allegedly paid start-up costs to the non-failed company.

The court has not yet rendered a final judgment in this case. It is giving the parties the opportunity to further substantiate their contentions. However, the ruling illustrates how important it is to make clear agreements regarding the mutual support obligation.

Conclusion

When a group raises credit, it is important to make proper arrangements not only with the lender (such as with respect to repayment of the credit), but also between the group companies themselves (such as with respect to the mutual/internal carrying obligation).

Indeed, if proper agreements are not made among themselves - at the time the loan is obtained or during the term of the loan - this can have unpleasant and serious consequences, for example, in the event of bankruptcy of one of the group companies.

In an extreme case, it could even result in the bankruptcy of all group companies, whereas the very purpose of working with different companies was probably to minimize risks.

It is therefore important to be well advised when raising credit - as well as when restructuring.