Banks often provide credit facilities in the form of current accounts.  Securing credit is no sinecure these days.  The bank’s cancellation of credit, on the other hand, seems dead simple. Take for example the general terms and conditions of a business credit from a (large) Dutch bank chosen at random: ‘Either the Borrower or [bank] may cancel the Credit in the form of a current account facility (…) at any time (…). In the event of cancellation, anything the Borrower owes on account of debit balances in current account is immediately due and payable without any demand or notice of default being required.’  In other words: the credit may be cancelled at any time and becomes immediately due and payable.[1] But things are never as bad as they seem.

Special duty of care
Because of its social function, a bank has a special duty of care towards its clients. As far as the cancellation of credit is concerned, this implies that this cancellation will at least have to satisfy the requirements of proportionality and subsidiarity.[2] In order to make this more concrete, a number of factors are listed below which are or can be important in assessing whether the cancellation of credit satisfies this.

The term, degree of exclusivity, size and degree of complexity and developments in the credit relationship;

  1. a substantial decrease in the borrower’s creditworthiness and/or substantial increase in the bank’s credit risk;
  2. the conduct and reliability of the borrower as well as the degree to which and timeliness with which the bank notifies/has notified the borrower of the cancellation and all other circumstances relevant for the credit relationship;
  3. whether and to what extent the borrower has failed culpably, for example by systematically exceeding the credit limit and/or doing so excessively;
  4. the likelihood that the borrower’s business will survive, whether or not after a reorganisation or restart, and the degree to which the borrower has started a reorganisation;
  5. what period of time the borrower has been given to find another bank and what serious financial problems will arise for the borrower if it cannot find financing elsewhere soon;
  6. the bank’s manner of decision-making prior to the cancellation and how consultation took place with the borrower and whether and to what extent the bank warned the borrower in advance;
  7. whether the bank’s own conduct created expectations on the borrower’s side, for instance by allowing the credit limit to be exceeded;
  8. other social interests, including the continuation of employment at the borrower.[3]

Some circumstances weigh more heavily than others, as is evidenced by the case law discussed below.

Case law

Cancellation by bank lawful
In the case that resulted in a decision from the District Court of Gelderland of 26 March 2014[4], the district court found that the bank had the right to cancel the credit relationship. The court considered in this case (among other things) that the borrower had taken on (major) financial obligations without the bank’s knowledge, the borrower was facing declining turnover, rising costs, serious liquidity problems, overdue payments, a negative operating result and drastically reduced shareholders’ equity. The Court of Amsterdam handed down a similar judgement on 2 April 2014[5], as did the Appeal Court of Leeuwarden of 31 January 2012[6]; in which the many unauthorised overexpenditures/payment arrears constituted grounds for the bank’s lawful cancellation of the credit.

In a recent judgment from the Appeal Court of ‘s-Hertogenbosch[7], the Appeal Court considered that the bank had serious enough grounds for cancelling the credit relationship. In summary, for more than six months the bank had given the borrower the chance to undo its mounting default and get its affairs in order. The Appeal Court also took into account here the fact that the bank had invited the borrower to enter consultation on the possibility of avoiding enforcement of the securities and that the borrower did not take up this opportunity.

Cancellation by bank unlawful
The bank does not always win. In the dispute that resulted in the decision from the Appeal Court of Amsterdam of 12 February 2013[8], the bank cancelled the credit facility because i) the withdrawals had been too high, ii) there had been no increase in the shareholders’ equity, even though the parties had agreed that this would take place, and iii) the quarterly figures were not supplied on time. The Appeal Court found, however, that the bank had not had the right to cancel; the Appeal Court considered in this respect (among other things) that the borrower had always paid its interest and repayment obligations on time, the securities furnished had a value well in excess of the credit and that the bank had not suffered any financial disadvantage as a result of the shortcomings it had asserted.

Cancellation on grounds of reputational damage
Another, less common ground for cancellation can be found in clause 2 of the General Banking Terms and Conditions. This clause stipulates (among other things) that the client cannot make use of the bank’s services in such a way that this causes reputational damage to the bank. The case law is not always unequivocal, however.

A bank that wants to terminate its relationship with a cannabis café owner because this relationship entails an ‘integrity risk’ could have better prospects at the District Court of Groningen than at the District Court of ‘s-Hertogenbosch.[9] After all, the latter awarded a cannabis café owner’s claim for continuation of a (credit) relationship, while the District Court of Groningen dismissed this claim in a similar case.

Converse: borrower cancels
The converse also occurs: the borrower cancels the credit facility. Even if the borrower cancels the credit, the bank still has a duty of care in the context of the cancellation. The case which resulted in a decision from the Appeal Court of ‘s-Hertogenbosch of 15 April 2014[10] focused on the costs associated with the cancellation. The borrower sued the bank for failing to adequately point out the costs entailed by this specific cancellation. And won: the Appeal Court found in the borrower’s favour.

Conclusion
The literature and case law both indicate that, in principle, a bank may cancel a credit relationship. Under certain circumstances, however, this cancellation may be in violation of the special duty of care that a bank has and/or the principles of reasonableness and fairness. In order to make sure that the cancellation is lawful, it is important for the bank to i) properly build its dossier, ii) warn the borrower on time, iii) stay in dialogue with the borrower and iv) give the borrower enough time to find financing elsewhere. It can also be relevant (v) whether the bank suffers any disadvantage as a result of continuing the credit relationship. This is not limited to financial disadvantage; reputational damage can also qualify as such.

By Floris Pels Rijcken

[1] The authority to cancel a relationship also arises from the General Banking Terms and Conditions, see clause 35

[2] See also: N.C. van Oostrom-Streep, ‘Carefree financing: on due care on the part of financiers in providing and calling in loans’ (Financieren zonder zorgen: over het zorgkader van financiers bij het verstrekken en opeisen van leningen), in Vastgoed Fiscaal & Civiel, 19-4

[3] See the Appeal Court of Arnhem, 18 February 2003, LJN: AF5233 and the District Court of Gelderland, 26 March 2014, NJF2014/218, legal ground 4.2

[4] See the District Court of Gelderland, 26 March 2014, NJF2014/218

[5] District Court of Amsterdam, 2 April 2014, RF 2014/60

[6] Appeal Court of Leeuwarden, 31 January 2012, LJN: BV2358

[7] Appeal Court of ’s-Hertogenbosch, 26 August 2014, ECLI:NL:GHSHE:2014:2977

[8] Appeal Court of Amsterdam, 12 February 2013, ECLI:NL:GHAMS:2013:BZ8567

[9] Interim relief judge of the District Court of Groningen, 18 November 2008, LJN: BG6475 and Interim relief judge in ’s-Hertogenbosch, 23 June 2008, LJN: BD5292Vzr, respectively. District Court of Den Bosch, 23 June 2008, LJN BD5292; Interim relief judge District Court of Groningen, 18 November 2008, LJN BG6475. Interim relief judge District Court of Den Bosch, 23 June 2008, LJN BD5292; Interim relief judge District Court of Groningen, 18 November 2008, LJN BG6475.

[10] Appeal Court of ‘s-Hertogenbosch, 15 April 2014, RF 2014/51