Credit cancellation (in corona time) part 1

As attorneys bankruptcy and finance and security law, as well as bankruptcy trustees, we currently see no or limited increase in bankruptcies.

The reasons include:

1. the dampening effect of government measures;
2. the commitment of Dutch banks to give MBK customers a six-month extension of their repayment and sometimes interest obligations;
3. That courts will treat bankruptcy petitions dealing with corona-related issues with restraint; and
4. That the processing of a bankruptcy petition by a creditor does not take place until about five/six weeks after the filing anyway.

However, appearances are deceptive. In fact, our expectation is that the number of bankruptcies will increase sharply starting this fall.

One of the reasons for this is that Dutch banks - as it looks now - will again claim payment of deferred liabilities from October 2020. Because the vast majority of the Dutch business owners is still financed by banks and because a significant portion will be unable or insufficiently able to repay as yet, this will undoubtedly lead to credit cancellations by banks.

In our experience, a loan cancellation-if replacement financing is not found in a timely manner-often leads to bankruptcy. Therefore, it is critical for business owners to know exactly when a bank may cancel financing and what you can best do (or not do) to reduce the chances of this happening.

In this first part of this diptych, we will outline the assessment framework, i.e., when may a bank cancel and under what conditions. Here we will also discuss the corona crisis.

In the second part, we provide some concrete tips for business owners to avoid termination or what to do if termination does occur. In short, the do's and don'ts for business owners.

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Authority to cancel credit

Whether the bank has authority to terminate depends on what is contained in a bank's contract and applicable general terms and conditions.

As a rule, general terms and conditions state that a current account credit may be claimed at any time, usually subject to a short notice period. For other forms of financing (such as money loan agreements), further grounds are often stipulated. These may include the cessation or transfer of the business or failure to fulfill any obligation towards the bank.

In practice, by far the most common reason for termination is that business owner is no longer meeting its payment obligations.

Because of the corona crisis, this situation will occur more often than before and the bank can in principle - by virtue of its contractual authority - cancel and demand the financing. However, there are limits to this.

Balance of interests

The Supreme Court ruled in 2014 that it may be unacceptable by standards of reasonableness and fairness for the bank to use its contractual termination power.

This is because the bank must also consider the interests of business owner (duty of care) when deciding whether or not to cancel.

This balancing of interests may involve the following circumstances:

1. The duration, extent, nature and course of the credit relationship;
2. the behavior and reliability of the business owner;
3. Whether and to what extent the business owner was culpably deficient;
4. a significant decline in creditworthiness and/or an increase in the bank's risk exposure;
5. the likelihood that the business owner will survive and the extent to which the business owner is in the process of reorganization;
6. the time period granted to business owner to obtain refinancing from another lender;
7. Whether the bank consulted with the business owner prior to termination and warned about termination;
8. Whether the bank created certain expectations, such as allowing the credit limit to be exceeded for a certain period of time;
9. other societal interests, such as continued employment.

Balancing the aforementioned circumstances, a court may find that a bank - despite its contractual power of termination - may not terminate.

Our assessment is that the corona crisis will certainly affect this balancing of interests.

It is quite conceivable, for example, that a bank may cancel less quickly if the inability to pay is caused by exceptional circumstances beyond the control of the business owner and there is a view, that in the short term the situation normalizes and sufficient income is enjoyed again to catch up the arrears.

It is also quite conceivable that the bank should allow a long(er) period for the business owner to restructure before giving notice.

It is also quite conceivable that once terminated, business owner will be given a longer period of time to find replacement funding.

These are just a few examples, but given the handles provided by Supreme Court case law, we certainly see (additional) opportunities for a business owner to resist (impending) termination of credit in this corona crisis.

Conclusion

Our expectation is that more bankruptcies will be declared this fall, in part because of credit cancellations by banks.

Whether a bank may terminate and under what conditions depends on what is stipulated in the general terms and conditions or agreement. If the bank has a contractual termination option, this does not automatically mean that it may use it. A weighing of interests will have to take place, whereby the bank must also observe a duty of care towards its client. We have mentioned some of the circumstances that are important in this regard in this article.

Our assessment is that the corona crisis is certainly affecting that balancing of interests. If, as business owner , you are faced with an (imminent) credit termination, we recommend that you call in a specialist (preferably at an early stage). This may enable you to avoid termination and bankruptcy.

Also read the sequel to this diptych. Here Reinier Pijls and Heleen Wessel-Krijger give some concrete tips for business owners to avoid termination or what to do if termination does occur. In short, the do's and don'ts for business owners.