Can Dutch banks sell and transfer your loan to any random third party including "loan-to-own" parties?
Published on 17th Apr 2020
Our insights on Duty of Care of Dutch Banks and our insight on supporting measures Dutch banks are taking may have given borrowers some comfort. But what if Dutch banks transfer their loans to non-Dutch banks like loan-to-own parties? Is this possible and are those parties bound by the same norms as Dutch banks?
In two court cases (dated 7 August 2019 and 4 September 2019) (the Van Lanschot Cases) the court of Amsterdam requested a preliminary ruling (Prejudiciële vragen) from the Dutch Supreme Court (Hoge Raad) on four questions. The questions are about the legal consequences of the "special" duty of care obligations that apply to Dutch banks. Is this special position of banks so special that it could prevent the transfer of loans from a bank to a non-bank? If not, does a non-bank become subject to these "special" obligations if it acquires such loans?
Banks transfer their loans to other parties for a variety of reasons, such as for purposes of syndication, covered bond programmes, securitisations and as a way to dispose of non-performing loans. This is essential for healthy financial markets. High levels of non-performing loans can weigh on the economic growth of countries as they reduce the banks’ profitability and their ability to lend (since banks need to keep more reserves for non-performing loans), particularly to small to medium-sized enterprises.
The EU is currently working on plans to reduce the non-performing loan ratios of banks. This has led to an EU-directive proposal to "provide banks with an efficient mechanism of out-of-court value recovery from secured loans and will encourage the development of secondary markets where banks can sell their non-performing loans to investors and make use of specialised credit servicers".
The impact of the answers by the Dutch Supreme Court to the four questions can be significant because it could restrict Dutch banks in transferring their (non-performing) loans. Which is, in part, the opposite to what the EU is trying to achieve. This decision could also become a precedent that could affect other types of legal relationships, for instance factoring.
In this article, we will discuss the first question from the Amsterdam Court to the Supreme Court: Does the nature of a banking relationship with a Dutch Bank prevent the transfer of the claim to a non-bank? (We will discuss the other three questions in our next article.)
What are the Van Lanschot Cases about?
In 2015, F. Van Lanschot Bankiers N.V. sold a package of non-performing loans that were under the management of their restructuring department (bijzonder beheer) to an entity of Promontoria, which is part of the international investment fund Ceberus. Promontoria is a fund that focusses on acquisitions of real estate and the purchase of mortgage-backed loan portfolios. This transaction consisted of a total loan portfolio of €400 million (nominal value) that was purchased by Promontoria for €260 million. A discount like this is applied because the loans are non-performing (that is, the borrower is in breach of its obligations under the loan agreements), hence there is a high risk that the new lender will not recover the nominal value and perhaps not even the discounted value.
After the deal Promontoria notified the relevant debtors (i) that Promontoria had become the owner of the loan and (ii) that going forward the debt would be managed by Capita Banking and Debt Solutions (Netherlands) B.V. (currently known as Link Asset Services B.V.). So the borrowers that had a credit relationship with a local Dutch bank were thereby confronted with two new parties: Link Asset Services B.V. as credit manager and Promontoria as owner of the loan.
The Van Lanschot-Promontoria deal has led to many court cases with borrowers under the various bilateral loans that were purchased in one package by Promontoria. But only a few of these cases relate to Van Lanschot. Some borrowers in the Van Lanschot Cases – in these they were commercial parties – also objected to the transfer of the loans. The reasons for their objections can be summarised as follows. The non-performance of the borrower under a loan agreement usually gives lenders a set of instruments, which range from margin increases (increasing interest), default interest (increasing interest) and accelerating the loan (by demanding immediate repayment) to requesting bankruptcy and enforcing their rights under the security documents (such as mortgages, pledges over shares, rights, etc.). If the conditions are met to use those instruments it becomes relevant who will be pushing the buttons and by what (ethical) norms the behaviour of that party is bound and what strategy it has.
A bank and a non-bank can have different strategies. Many banks operate on the basis of a long-term relationship with their clients and in getting a return on the loans they make (whether or not through securitisation). The non-bank category is quite broad, but for the sake of this article, we will focus on the typical loan-to-own parties (usually private equity or hedge funds). The strategy of these parties is to invest in distressed debt at a (high) discount with the intention to (i) recover more than they paid for or (ii) to use the security over the assets to acquire the company or the assets (e.g. the building). The focus is therefore more on mid- and short term.
In essence, however, the acquiring party will get the same rights (and obligations, depending on the legal form of the transfer) as the bank. In essence it will acquire a claim under the loan agreement secured with a security package. The acquiring party may however use its rights for a different purpose. Is that allowed? And what about the obligations? Does that party have the same obligations as the bank? Before we answer that, we will first explain what the obligations of Dutch bank are and why a Dutch bank would be different than any other contract party.
What is this duty of care?
Dutch banks are bound by a framework of duty of care obligations (zorgplicht). This framework consists of a mix of EU financial public law, private law (including terms and conditions set out by the Dutch Banking Association and by the bank itself) and case law. For more detail on those obligations, see this Insight.
Transfer of contract versus assignment
It is important to understand that under Dutch law there are two instruments (apart from (de)mergers) a lender can use to transfer loans.
- Transfer of contract – A transfer of contract (contractsoverneming) requires the consent from all parties to the contract and will transfer the total legal position under the contract, so rights and obligations, to another party.
- Assignment (cessie) – The transfer of a right does not require the consent of the counterparty, unless assignment has been prohibited by law or by contract. The obligations of the transferring party would remain at that party. Since the underlying agreements do not include any limitation for the bank to assign its rights, the only argument to contest the transfer of the right lies in a statutory exception that we will discuss below.
In both scenarios, the acquiring party will by operation of law get the benefit of the security (mortgage and deeds of pledge) as well.
The General Banking Conditions (algemene bankvoorwaarden) (GBC) include a specific provision that allows the transfer of contracts. The GBC states: "We can transfer (a part of) our business to another party. In that case, we can also transfer the legal relationship that we have with you under an agreement with you. Upon the GBC becoming applicable, you agree to cooperate in this matter in advance. The transfer of the agreement with you is also called a transfer of contract. Naturally, you will be informed of the transfer of contract." Due to the fact that this pre-approval is limited to a transfer of (part of) the business, this provision is not considered "unreasonably onerous" (onredelijk bewarend) in the sense of section 6:236 (e) of the Dutch Civil Code (DCC) and therefore remains enforceable against consumers (and for commercial party this section does not apply – so transfer is possible if the contract does not include any restrictions).
In the Van Lanschot transaction, the bank and Promontoria went for both options. Pursuant to the purchase agreement the loans were transferred using to a transfer of contract (this option was included in the applicable general terms of van Lanschot (not GBC)), but if that would not work, the purchase agreement included a Plan B: the rights of Van Lanschot would be assigned to Promontoria. As it turns out, the transfer of contract did not work since the court ruled that there was no transfer of the business, meaning that the exception did not apply and that consent was required from the borrower. Van Lanschot, without consent of the counterparty, would only be able transfer its rights under the loan by way of assignment to Promontoria.
Does the nature of a banking relationship with a Dutch Bank prevent the transfer of the claim to a non-bank?
In the Van Lanschot cases the borrowers argued that with regard to the assignability of the rights of the bank a Dutch law exception applies: If the nature of a right/claim precludes the transfer of such a right/claim it cannot be transferred (section 3:83(1) of the DCC). This is only the case if the right has a "personal character" (persoonlijk karakter). It is not easy to determine when this is the case. There are only few examples in Dutch case law where the Dutch court acknowledged the personal character of a right.
In the Van Lanschot Cases the court of Amsterdam found parallels with the Staat/Appels case (12 January 1990 / NJ 1990/766) in which the Dutch Supreme Court acknowledged that a credit granted by the Dutch state could not be transferred to a private party due to the nature of the legal relationship. In that case it was deemed relevant that:
- the state (not a private party) provided the credit (as such the relationship is governed by a different set of principles than the legal relationship between private parties);
- given the specific nature of the financing (to support businesses in harsh economic times during the late 1970s) the state had very specific and far-reaching (non-commercial) rights to interfere with and control the borrower; and
- from certain correspondence it appeared that a transfer would not be able to take place without involvement of the borrower.
Although the Staat/Appels case also related to a credit relationship, this is where the parallel stops in our view. As we will explain below, the crucial elements of the Staat/Appels case do not apply to the Van Lanschot Cases.
Banks are private – not public parties
Other than the Dutch state in Staat/Appels, Dutch banks are private parties and do not have "special" (non-commercial) rights that they can exercise against the borrower.
The FSA includes an exception for transfer of debt to non-licensed parties
The only public law angle in the Van Lanschot Cases is the fact that banks was subject to supervision in accordance with the Dutch Financial Supervision Act (FSA). In order to operate as a bank that issues consumer credit, a licence is required and a bank will become subject to supervision of the Dutch Authority Financial Markets and the Dutch Central Bank.
A non-bank that buys distressed debt is usually not equipped to deal with the ongoing day-to-day management of all loans included in the portfolio, nor do they have licences to deal with consumer credit. Under the FSA, an exception to that rule applies for non-banks if they outsource the management of the credit to a credit manager that does have the necessary licences. For that reason, Promontoria appointed Link Asset Services B.V.
This is an important difference between the Van Lanschot Cases and Staat/Appels. In the Van Lanschot Cases the protective public law framework is continued by the appointment of a credit manager in accordance with the FSA. In Staat/Appels the public law "angle" would have been discontinued because of the fact that the acquiring party was a private party that is not subject to the same rules and principles as the Dutch state.
The special duty of care obligations
Would the special duty of care obligations that apply to a bank alone be sufficient to give a credit relationship with a Dutch bank a "personal character"? We think the answer is no.
Part of the duty of care obligations only apply at the time of origination of the credit and are less relevant during and at the end of the credit relationship.
As explained above, if the exception under the FSA is used and the credit management is transferred to a credit manager in accordance with the FSA, that credit manager is under the same supervision as a Dutch bank.
The other duty of care obligations (such as the ones included in the general banking terms and conditions) can be fulfilled by any party. It does not require a specific "personal quality". A non-bank that would acquire loans from a bank could fulfil the same duty of care obligations if necessary. Non-transferability is also not the only way to safeguard the duty of care principles and it would also not be proportionate given the consequences that will have.
If the line of reasoning of the borrower in the Van Lanschot Cases is accepted, the practical consequences would be that Dutch banks could not transfer their loans (at least, not to non-banks), which would be a disaster for the Dutch financial market. It would also create a precedent that may open the door for "locking-up" other types of legal relationships from having any type of personal or special angle.
Given the potential consequences, the EU developments on non-performing loans and the seemingly narrow base for the statutory exception of non-transferability because of the nature of a relationship, in our view there is only a very remote chance that the Dutch Supreme Court would rule that this exception indeed applies.
We are of course excited to see how the questions of the Amsterdam court will be answered by the Dutch Supreme Court. Their decision is expected at the start of the second quarter of 2020.
We have now only answered the first question – whether the loan can be transferred. In our next Insight we will address the other three questions.
- Does the non-bank to whom the rights are transferred have a duty of care? If so, how does this duty of care relate to the rules of public law that apply to a Dutch bank and the duty of care that rests on a Dutch bank?
- For the answers to the previous questions, does it matter whether the Dutch bank has terminated the banking relationship?
- What rights can the client exercise vis-à-vis the transferring bank if the actions of the non-bank to whom rights are assigned deviate from what could be expected of a bank on the basis of the public law rules applicable to a bank and the duty of care imposed on a bank?