Funding Loss and Early Repayment: The Court of Cassation Continues

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A new funding-loss judgment from the Court of Cassation (Dutch-speaking division) of 18 June 2020. In an earlier article, we reported the Cassation judgment of 27 April on the features distinguishing interest-bearing loans from credit facilities, and the possible recharacterisation of a credit as a loan. In this new judgment, the Court ruled on an appeal against a Ghent Court of Appeal judgment of 14 January 2019. The case concerned a 15-year investment credit granted in 2008 to finance the purchase of industrial land and part of the construction of an industrial building.

The Dendermonde first-instance judgment: recharacterisation and a six-month cap

Drawdowns had to be made against supporting documents (invoices or evidence of works) over an 8-month drawdown period, at the end of which the credit had to be fully drawn. Monthly repayment began at the end of that period. A reservation commission of 1.2% per year was agreed on the undrawn amount, contractual interest being computed, logically for a credit, only on the amounts drawn. The business drew down seven times, four just after the drawdown period expired. After it was declared bankrupt, the bank claimed the outstanding balance and a funding-loss indemnity of about 20% of the balance, with default interest at 15.40% per year. The Dendermonde court sided with the trustee: recharacterising the investment credit as a loan, it reduced the reinvestment indemnity to six months’ interest and the rate to 12%.

The Ghent Court of Appeal: reversal and no recharacterisation

The Ghent Court of Appeal reversed, holding the trustee’s claim unfounded and the funding-loss indemnity to be included in the privileged liabilities of the bankruptcy. It stressed that, given the consensual nature of a credit facility, both bank and borrower set the terms and conditions of a facility, whereas a loan is a unilateral contract arising from the delivery (traditio) of the borrowed capital. It retained the following criteria against recharacterisation: the clear title of the instrument (investment credit); a reservation commission on undrawn amounts; a drawdown period and actual drawing after its expiry; interest computed only on amounts drawn from the drawdown date; and the non-simultaneity between delivery of funds and the existence of the contract. It concluded that the borrower did have a freedom to draw, the requirement to provide invoices not limiting that freedom. It also rejected the fashionable argument that the credit was really a disguised promise of loan, and recalled that funding loss cannot be interpreted as a penalty clause under Article 1231 of the Civil Code.

Confirmation by the Court of Cassation, 18 June 2020

The Court of Cassation recalled that a loan is a real contract formed by the delivery of a sum of money by the lender to the borrower, against the borrower’s obligation to repay the amount and interest; the funding-loss indemnity on the early repayment of a loan is capped at six months’ interest under Article 1907bis. A credit facility, by contrast, is a consensual, synallagmatic contract by which the bank makes funds available temporarily and up to a set amount; the borrower may draw in one or more drawdowns and is not obliged to draw, even in part. For the Court, a drawdown under a credit facility does not give rise to an interest-bearing loan within the meaning of Articles 1892 and 1905 of the Civil Code; a fortiori, Article 1907bis does not apply.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.