Credit cancellation by Rabobank of OAD financing permissible

Last week, after years of proceedings, the Central Netherlands District Court ruled that Rabobank could terminate its credit agreement with travel company OAD. The trustees of the OAD companies declared bankrupt in 2013 had initiated proceedings against Rabobank. They felt that Rabobank should not have been allowed to terminate the credit agreement. That termination of credit led to the OAD companies' own filing for bankruptcy a few weeks later. Rabobank was held liable for damages resulting from that termination of credit. That damage of €76 million would consist of the destruction of OAD's value. The court did not go along with this.

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What was going on?

In the period before 2011, OAD's results were disappointing, while internet travel sales were becoming increasingly important. In 2012, a change in strategy was initiated and a reorganization of OAD began. In 2013, OAD was transferred from the commercial department within Rabobank to the Special Management Department (FR&R) and came under increased scrutiny from the bank. At the same time, Rabobank required OAD to strengthen its capital. In addition to a current account credit of €20 million, the credit agreement included a guarantee facility for the benefit of third parties such as the SGR (Stichting Garantiefonds Reisgelden) of €12.5 million. Another factor was that OAD also sold TUI trips to its customers. OAD received the travel sums from the travelers and had to pay them on to TUI. TUI therefore had continuous receivables from OAD.

On September 6, 2013, Rabobank terminated the credit with three months' notice. Afterwards, OAD continued to seek capital in the hope that the termination would be reversed. A group of Twente investors presented themselves who were willing to help with the capital enhancement demanded by Rabobank by looking at buying OAD's bus business. Rabobank agreed to negotiate, but the problems with TUI and SGR also had to be resolved. Moreover, the transaction had to be completed by September 27, 2013. Rabobank was not willing to extend that deadline. When OAD realized it would not meet the deadline, it filed for its own bankruptcy on Sept. 24, 2013.

Review framework

Pursuant to the credit agreement and the general terms and conditions applicable to it, Rabobank was authorized to terminate it. I previously wrote about the conditions under which a bank may terminate the credit with a law firm colleague in this article. In it, we discussed that the Supreme Court ruled in 2014 [1] that it may be unacceptable by the standards of reasonableness and fairness for the bank to use this contractual termination power. In this case, the court put the credit termination along the same bar.

The special feature of a banking relationship is the bank's duty of care. This requires the bank to take the interests of its clients into account to the best of its ability. [ 2] Because of this contractual duty of care, the exercise of the bank's power of termination may be unacceptable more quickly than in other long-term contracts. But courts should be cautious in testing that unacceptability.

Decision

In an interlocutory ruling in 2019, the court ruled that OAD had to prove that during the crucial week of negotiations with the Twente investors, in late September 2013, Rabobank had given OAD more time to complete the acquisition. According to OAD, this had been promised in a telephone conversation between the then commissioner of the Queen, Ank Bijleveld, and Rabobank's top management. Rabobank disputed this. OAD failed to provide this evidence despite hearing a number of witnesses, the court said.

From January 2013, Rabobank gave OAD time to avoid termination of the credit agreement. Rabobank left no doubt that if OAD did not strengthen its capital by August 31, 2013 (and later September 15, 2013), it would not allow OAD to take it on credit during the winter period, which would begin in September/October 2013. According to the court, Rabobank was entitled to stick to the September 27, 2013 deadline under the facts and circumstances.

For the sake of completeness, the court indicated that even if Rabobank should not have stuck to the deadline, Rabobank is not liable for the damages OAD says it suffered. Even if Rabobank had agreed to the extension, bankruptcy would not have been averted. A liquidity forecast, of which Rabobank was unaware, showed that even a transaction with the Twente investors could not clear the liquidity shortfall between €2.8 million and €3.9 million. The problem with TUI was also unresolved, which would greatly increase the liquidity deficit. Finally, SGR was going to demand a bank guarantee of € 20 - € 30 million and this problem was not solved either. In the court's view, bankruptcy would have followed regardless.

Conclusion

Under the circumstances, Rabobank was entitled to terminate the credit agreement with OAD and is not liable for OAD's bankruptcy. With this ruling, not everything has been said. OAD is appealing because it believes the court misinterpreted the figures and ignored Rabobank's breach of its duty of care. In a termination of credit, the court will weigh whether the termination is acceptable according to the standards of reasonableness and fairness based on all relevant facts and circumstances of the case.

Following this article, do you have questions about the bank's duty of care or a credit termination?Please feel free to contact Heleen (h.wessel-krijger@pvdb.nl) or complete the question form below.

[1] HR October 10, 2014, ECLI:NL:HR:2014:2929.

[2] art. 2 of the General Banking Conditions.