07 May On issuing loans, banks may not simply impose onerous terms on companies in trouble
Companies that are in financial trouble run the risk of being put under pressure by a bank when they receive emergency credit. Especially when a company is up to its neck in it and alternative financing is not possible. In such a case, the dependent position that a company is in with respect to the bank can mean that a company feels required to agree to the onerous terms that a bank attaches to the loan, simply because that company has no choice but to agree to the terms reluctantly.
But even if a company finds itself in such a dependent position, the bank must (from the perspective of the banking duty of care) recognise the importance of its customer’s interests. In the opinion of the Arnhem-Leeuwarden Court of Appeal, Rabobank failed to appreciate this when it imposed very onerous terms on issuing a loan to Midreth, a construction company that had found itself in trouble. Rabobank abused the grave financial situation, inter alia, by stipulating an exorbitantly high fee for issuing emergency credit. What is more, the director provided an enormous amount in security to the bank in his private capacity and the shareholder had to transfer a large portion of the shares in return for EUR 1. Midreth and the director did not have alternative financing options and therefore felt required to agree to the terms that Rabobank imposed.
The Court of Appeal found that the disproportionately large benefits that Rabobank had stipulated were in breach of its banking duty of care. In doing so, Rabobank had moreover acted unlawfully towards the director and the shareholder personally. In a judgment of 27 March 2018, Rabobank was therefore ordered to compensate the losses that the shareholder and the director had suffered as a result of this breach.
This judgment shows that the court is putting a stop to the unreasonable requirements that lenders impose, without looking at the company’s interest.
Therefore, when your company is in trouble, remember that you do not have to accept all the bank’s terms. And remember that it is possible that your company is entitled to compensation for the losses resulting from the onerous terms imposed by a bank on issuing emergency credit.