This Insight is a follow up on our Insight of April 2020 in which we discussed Dutch case law relating to the transfer of distressed debt by Dutch banks to non-banks. On 10 July 2020 the Dutch Supreme Court (Hoge Raad) (the "Supreme Court") provided the preliminary ruling that was requested by the Amsterdam courts.
Our previous Insight set out the background and discussed the first question posed in the cases. The court of Amsterdam had requested a preliminary ruling (prejudiciële vragen) from the Supreme Court on four questions regarding the transfer of bank loans from banks to non-banks:
- Does the nature of a banking relationship with a Dutch Bank prevent the transfer of the claim to a non-bank?
- 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?
We now discuss the answers to all four questions provided by the Supreme Court.
Nature of a banking relationship with a Dutch Bank
On this question, the Supreme Court was clear. Dutch law does not prohibit or limit the transfer of the rights under a loan agreement by a Dutch bank to a non-bank. The reasoning of the Supreme Court was that:
- the obligations of the borrower do not change (and as such the nature of the right does not limit the transfer);
- the rights of a Dutch bank are not so special that only a Dutch bank should be able to exercise these rights (opposed to the Staat/Appels case (12 January 1990 / NJ 1990/766) discussed in our Insight);
- the obligations of the acquiring non-bank will not be so different that only a Dutch bank would could be the counterparty; and
- the possibility that the acquiring party could use the acquired rights differently than a bank could, does not limit the transferability of those rights.
Duty of care
The Supreme Court ruled that the assignment of rights under an agreement does not change the duty of care obligations (this Insight includes a more detailed explanation on the duty of care of Dutch Banks).
However, when using assignment instead of a transfer of contract (contractsovername), not all aspects of the legal relationship between the bank and its client will transfer to the non-bank. In principle, only the rights specified in the assignment (usually the monetary claim) will transfer. The exception to that is that pursuant to articles 6:142 and 6:144 of the Dutch Civil Code, ancillary rights (nevenrechten) and obligations (relating to the creditorship) directly connected with the rights that are transferred, will transfer to the new creditor. Does this mean that some parts of the duty of care would be left behind?
In its decision the Supreme Court gives a set of coherent rules that, when applied, as combination or standalone, each result in the same outcome: the acquiring non-bank cannot ignore the duty of care.
The rules set out by the Supreme Court are:
- The original right (for instance the monetary claim) was created subject to the limitations of an applicable duty of care. This means that the right itself is subject to those limitations when transferred even if the Dutch bank does not explicitly transfer its duty of care obligations.
- Pursuant to article 6:145 of the Dutch Civil Code, following a transfer, the debtor has the same defences against the new creditor as it had against the original creditor. This means that as far as it would have any defences on the basis of the duty of care, it can also use these against the new creditor (the non-bank).
- After the assignment, the relationship between the bank and the non-bank are also determined by the principles of reasonableness and fairness (article 6:2 of the Dutch Civil Code). This means that the non-bank should take into account the interests of the debtor. Since it acquired the rights from a Dutch bank (bound by certain duty of care obligations) the acquiring non-bank should take these duty of care obligations into account as well.
Does it matter whether the Dutch bank has terminated the banking relationship?
The Supreme Court confirmed that it would not matter whether the credit relationship was terminated or not. It also ruled that it was not relevant whether the loans were consumer and/or commercial loans.
What rights can the client exercise?
The Supreme Court “parked” this question because the Dutch bank (Van Lanschot) was not a party in the relevant proceedings and questions relating to its position were not considered pertinent. We understand the Supreme Court took this position, but it is of course important to know the answer to this question. Potentially, it could mean that Dutch banks would, even after the transfer of their claims, still have some level of responsibility towards their former client. And responsibility is sometimes followed by liability.
We think that following a valid transfer of contract or a valid transfer of rights, the borrower can in principle only take action against its new contract party. Since we are of the view that duty of care obligations follow the contractual relationship, that new party is likely to be bound by the same set of rules. Under normal circumstances, we do not see any grounds for legal action by the borrower against the bank for any breaches of those obligations by the new contract party of the borrower. When transferring the credit relationship, we think it would be advisable for banks that transfer loans:
- to verify whether the acquiring party has the relevant licenses (if required); and
- to make sure that the acquiring party is aware of their duty (and to the extent possible in the transfer documentation request that such party commits to complying with these obligations).
Taking such prudent measures may prevent the transferring bank becoming liable towards its former client. If the former client later takes action against the bank, the bank may have the possibility to point to the acquiring party on the basis of the transfer documentation.
We think it will only be a matter of time before we will get an answer on this question.
What does this mean in practice?
This is best illustrated with an example, based on an example the Supreme Court provided in its judgment.
A bank and borrower entered into a loan agreement for the sum of €1m with an interest percentage of 6%. The bank assigns the claim of €1m to a non-bank. After the transfer, the non-bank raises the interest percentage to 9%. For this example, we assume that there are legal grounds to increase the interest and that the bank had not made use of this option (yet).
Can the borrower object to this on the basis of the duty of care? The Supreme Court provided three lines of reasoning:
- The general duty of care did not transfer to the non-bank since this was an assignment only. This follows the formal approach in the answer to the second question considered by the Supreme Court, however, the implications of this are limited when applying the rules the court also provided.
- If the bank and the borrower had agreed to (explicit, or implied through the concept of reasonableness and fairness (article 6:248 of the Dutch Civil Code)) a maximum increase of interest, this would have limited the claim (since it would have been a claim with an interest cap on it). In that case the non-bank cannot claim more than it acquired and cannot increase the interest rate.
- If there was a special duty of care that could limit the increase of the interest, this duty of care would limit the actual claim. Similar to option 2 above, the non-bank would be bound by this limitation. The difference with option 1 is that this is not a general duty of care, but a specific one that has a direct impact on the nature of the rights transferred. This leaves a debate as to whether a special duty of care should apply which would give any additional duty of requirements on top of a general duty of care based on the principles of reasonableness and fairness.
Limitation of rights
This means that limitations of rights, whether explicitly agreed, following from the principle of reasonableness and fairness applying to contracts (article 6:248 of the Dutch Civil Code) or from a special duty of care limit the right transferred. As such, the acquiring party will always be bound by such limitations even without a specific need of article 6:145 of the Dutch Civil Code.
If the transferred rights are not limited by any of the above, for instance if the bank voluntarily did not increase any interest, the general principles of reasonableness and fairness (article 6:2 of the Dutch Civil Code) could still mean that the non-bank cannot increase the interest rate. One example might be that an agreed default interest rate of 3% may be considered too high given market practice.
The borrower can still try to resist the increase of interest or other use of rights against it by using any of the defences it had against the bank (article 6:145 of the Dutch Civil Code). For instance, it could use a right of suspension of payments.
A borrower cannot prevent the assignment of claims against it by its bank to a non-bank. And although some of its defences remain intact, and some principles will still apply to the non-bank, the non-bank is allowed to exercise its rights (subject to certain limitations) as it seems fit and it can have a different view than the bank. So the position of the borrower will change because of the transfer and in many cases, probably not for the better.