Termination of bank financing and enforcement of bond

On April 1, 2020, the North Holland District Court ruled that ABN AMRO was allowed to terminate the financing with a group of companies and to call both guarantors to account for their bail. Why was the bank allowed to sue the guarantors on their bail?

The facts in brief

After two group companies were declared bankrupt, ABN terminated its financing with the group with immediate effect. Six days later, three other group companies were declared bankrupt. Thereupon, ABN requested both guarantors to fulfill their guarantor obligations. The guarantors refused. They believed that the termination of the financing violated reasonableness and fairness. This would mean that the guarantees could not be invoked.

Is termination of financing possible under the agreement?

The parties' agreements, more specifically ABN's general terms and conditions, provide that a loan may be terminated by the bank at any time. A loan may be terminated, among other things, if i) the obligations to the bank are not met or threaten to be met, if ii) the bankruptcy of a group company is declared or if iii) there is a circumstance that could adversely affect the punctual fulfillment of the obligations to the bank.

ABN terminated the financing as a result of the declaration of bankruptcy of two companies. Furthermore, after discussions with the trustee, ABN understood that the outstanding credit could not be paid in full. ABN was authorized by the agreement to terminate in this situation.

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Is the termination permissible by standards of reasonableness and fairness?

Even if termination of financing is possible under the agreement between the parties, it may be the case that termination in a specific case is unacceptable by the standards of reasonableness and fairness.

This is not the case here, according to the court. This is mainly because there had been a lack of liquidity for an extended period and there was no real prospect of proper fulfillment of the obligations.

Is there a private or business bail bond?

A private surety is entitled to better protection than a corporate surety. Therefore, it is always important to ascertain which surety is involved.

In this case, the two sureties were indirect directors and shareholders of the companies belonging to the group at the time the surety agreements were concluded. At both the shareholder and management levels, they had joint control. Based on established case law, the person who exercises control through a holding company and who holds the shares through an intermediary company is equated with the (in rem) guarantor-director. Accordingly, both guarantors provided a corporate surety bond.

Did ABN breach its duty of care to the guarantor?

Even when appealing to a corporate surety, this may be in violation of the bank's duty of care. This is despite the fact that a bank's duty of care is less in the case of a corporate surety than in the case of a private surety. After all, the corporate guarantor has an (in)direct interest in the bank financing the company in which the guarantor is involved. This does not apply to the private guarantor: they usually do not act as guarantor for business reasons, but for private considerations.

In an arm's length bail bond, the bank may, in principle, assume that the guarantor understands that by providing the bond, he is assuming the risk that he will have to pay the bail amount at some point. In this case, the bail amount was even negotiated and the sureties acknowledged at the hearing that they knew what the bail was.

The court in this case therefore ruled that the bank was entitled to sue the guarantors for their bail. However, this is not always the case. It is therefore important to always check whether a bank is justified in claiming its bail.