Common banking and finance matters involve restructuring & recovery, suspension or termination of credit or termination of the bank-client relationship. In such cases, the customer may rely on the duties of care imposed on the bank by law, contract and jurisprudence. Small and medium sized companies may also invoke the Code of Conduct for Small Business Financing of the Dutch Banking Association (NVB).
Intensive Care Department
A bank can transfer a client to its Intensive Care Department if he is no longer able to comply with the terms of the credit arrangement or the bank fears that this situation may arise in the near future. In such case, the bank is obligated to inform the client about this transfer in writing and explain the reasons for this. The bank will also have to provide adequate information about the purther process and the name and contact information of his new contact person. The main goal of the Intensive Care Department is to reduce credit risks for the bank. For this purpose, it is first checked whether the financial situation of the client can be improved, if necessary through a debt restructuring and/or business reorganisation. The client himself also has an interest in improving his financial situation and restoring profitability. The bank often asks for a recovery plan that includes financial forecasts. In addition, the bank may wish to acquire more information and reduce credit risk by requiring (i) a re-valuation of collatoral (ii) more frequent financial reporting, (iii) additional collateral for the credit, (iv) an increase of equity capital or (v) repaymet of (part of) the outstanding debt through a new financier and/or a sale of assets. In addition, the bank may raise interest rates because of the (alleged) higher credit risk, charge a special management fee and pass on the costs of external advisers. Sometimes the bank even asks for the appointment of an interim manager and more influence over the clients strategic business decisions. It is clear that such measures must always be reasonable and proportionate in relation to the (alleged) credit risk the bank faces. The bank will also have to properly consult the client about such measures in advance, be adequately accessible and confirm agreements made in writing. Compliance by the bank with such duty of care requirements can be enforced in court.
Suspension or termination of credit arrangement
When the bank considers the credit risk to be too great, it may suspend or terminate the existing credit arrangement. After termination the bank will focus on recovering as much money as possible. It is clear that suspension or termination of credit can cause acute financial problems for a client. Through summary proceedings client can try to enforce the execution of drawing requests and/or the continuation of the credit. The bank’s general conditions usually make it possible to suspend or terminate a credit in the interim. However, the bank must act diligently in this respect. Also, the bank’s interest in suspension or termination must be in reasonably proportionate to the interest of the client to continue the credit. The bank’s duty of care brings about that the bank must explain the reasons for the suspension or termination, base its decision on adequate information and consult and warn the client in advance in a proper and timely manner. Of course, the bank must also meet earlier commitments to wait for the outcome of pending negociations on re-financing or a business sale. The client may be disproportionately affected if the suspension or termination threatens to bankrupt his business, while on the other hand the bank has sufficient collateral and no significant increase in credit risk is expected. In such cases, the bank may be required to continue the credit for at least a reasonable period of time so that the client has sufficient opportunity to find new financing elsewhere. On the other hand, the court will often allow a termination of the credit if the client himself seriously falls short of his obligations, for example by withholding the bank important information or unlawfully withdrawing funds or assets. In event of a large or rapidly increasing credit risk the court will often find a termination at short notice acceptable. E.g. in case of a sharp decrease in the value of collatoral or rapidly increasing financial losses of the client’s business. When the bank terminates the credit, it will often seek additional compensation from the client for loss of interest income due to early repayment. Couts will sometimes consider this additional compensation too harmful for client and consider the termination unlawful on that groud. In such case, the bank may be wise to skip the compensaion or lower it.
Termination of the banking relationship
Increasingly banks are termination their relationship with customers on the ground of reputation risk. Sometimes the bank is even required by law to do so. The general banking conditions of Dutch banks state a general power of termination of the bank. At the time of cancellation, the bank must comply with the duty of care and the applicable agreed (or otherwise a reasonable) notice period. A termination with immediate effect will only be permitted in exceptional circumstances, for example when it is clear that the customer is abusing his bank account or other banking services to commit criminal offences such as fraud. An immediate termination must therefore be based on concrete facts that can be attributed to the client at hand. The mere fact that a client is active in an industry or sector that may be more sensitive to criminal offences is not sufficient for a termination. Banks are also increasingly moving to terminate the relationship because the customer does not (fully) comply with information requests from the bank on the basis of anti-money laundering regulations such as the Dutch Law on the Prevention of Money Laundering and Terrorist Financing (Wwft). As banks can face hefty fines in case of non-compliance, they have tightened their internal oversight of customers. Sometimes banks go too far in this and end the relationship even without sufficient concrete indications of the client being involved in criminal offences and the customer responds to the information requests of the bank properly. The client can then try in court to force the bank to continue the relationship through summary proceedings. It may then also be important to undo any registration of the client in the so-called internal or external referral register. Inclusion in such a register may hamper the client in finding banking services with other banks. The court sets even higher standards for a terminination of a checking (payment) account since it is vital to have such account to make and receive payments. Information requests from the bank to the client must have a sufficient basis in contract or law, be reasonable and proportionate and give the customer a reasonable time to respond. Dutch courts have determined that an information request may only relate to the client himself or, if it is a legal entity, its representatives and its ultimate beneficial owner(s). The bank may therefore in principle not ask for information about the clients further business relations. If the bank deems the information provided by the client not adequate or sufficent, it must inform the client about this and grant him an grace period to complete the information and/or provide a further explaination. Finally, the bank must first clearly notify the client before terminating the relationship due to non-compliance with an information request. A termination which does not comply wiht these due diligence requirements may be challanged in court.