Turmoil in the banking sector? The transferability of credit claims after the Promontoria case (2020)
In July 2020, the Supreme Court of the Netherlands answered in its so-called Promontoria case ruling four preliminary questions in the context of the transferability of credit claims from banks to non-banks. The financial sector was on edge, but could breathe a sigh of relief after the judgment.
Legal framework and practice
An important principle of the free-market economy is the free transferability of goods. In Dutch law, this principle is laid down in Article 3:83 Dutch Civil Code (DCC). According to Article 3:83(1) DCC, credit claims are transferable, unless this is opposed by their nature or the law. Banks continuously transfer credit claims to non-banks, inter alia through whole loan sales, securitisations and covered bonds. These concepts enable banks to (re-)finance their credit business. If banks are no longer able to transfer their credit claims, this will have serious consequences for the financial sector and the economy as a whole.
The Promontoria case (2020) challenged the existing financing practice of banks. In this case, Van Lanschot N.V. (bank) sold a portfolio of non-performing commercial real estate loans to Promontoria Holding 107 B.V. (non-bank). The transfer of the loan portfolio had to be effected by means of a contract takeover or by an assignment of the credit claims. Various borrowers protested against this sale. The preliminary questions submitted to the Dutch Supreme Court focused on the legal validity of the assignment of the credit claims only. Two of the four questions and their answers are important for legal evolution.
Transferability of credit claims
The first question concerned the question of whether the nature of a bank's credit claim against its customer (borrower), opposes the claim of the bank from being transferred to a non-bank. The answer is no. First, the content of a customer's performance remains the same after the credit claim has been transferred to a non-bank. The customer is obliged to pay the borrowed sum of money with interest, both before and after the transfer. Furthermore, the exercise of a bank’s rights and powers under a loan agreement is not limited to a creditor in the capacity of a bank. Non-banks are also able to exercise these rights. Finally, the fact that a bank is bound by various duties of care under both public and private law, does not necessarily mean that a bank's credit claim can by its very nature only accrue to that bank.
Considering the above, credit claims are in principle transferable, also to non-banks. For this purpose, it is irrelevant whether the borrower is a consumer or a business customer.
Duty of care
The second preliminary question raises the question of whether a non-bank has a duty of care similar to a bank when claims are transferred and, if so, how this relates to the duty of care of the bank. A bank does not only have various duties of care under private law, but it also has a special duty of care due to its pivotal role in society. The special duty of care of banks is linked to the capacity of the bank and its content is specified according to the circumstances of the case. This duty of care is linked to the legal relationship between the bank and the customer. In the case of contract takeovers, the entire legal relationship between the bank and its customer is transferred, whereas in the case of an assignment, the entire legal relationship is not transferred to the non-bank. The duties of care associated with this legal relationship, therefore, do not as such form part of the transferred credit claim. This is the reason why these duties of care do not lie within the responsibilities of the non-bank after transfer.
Nevertheless, the bank's duty of care can affect the rights and obligations of the non-bank in various ways, which are coherent and interchangeable. These routes are:
(1) The legal relationship between the borrower and the non-bank is determined by the content of the transferred claim. An agreement between a bank and a customer about a maximum permitted interest rate hike is an example of a restriction on the content of a claim. This limitation thus becomes part of the claim and is therefore also passed to the non-bank through transfer.
(2) Pursuant to Article 6:145 DCC, the borrower can also invoke the same defences against the non-bank that he would have against the bank. For example, the borrower could invoke the same right of suspension against the non-bank that the borrower could previously invoke against the bank.
(3) Finally, the legal relationship between the non-bank and the borrower is governed by the principle of reasonableness and fairness (Article 6:2 DCC). When implementing this standard into the legal relationship between the non-bank and the borrower, it is important, inter alia, that the transferred claim originates from a bank that has a certain (special) duty of care.
Financial sector reassured. What’s next?
It follows from the Promontoria case that, under Dutch law, the nature of credit claims does not oppose the transfer of these claims from banks to non-banks. Although non-banks may have their own duty of care after the transfer of claims, the question remains whether borrowers are actually ‘protected’ by implementing that duty of care. After all, they still can be confronted with non-banks, which are known as ‘vulture funds’ and ‘loan sharks’, who may only seek to enforce collateral from money loans. The financial sector was saved from drastic consequences. The banking industry seemed to be in temporary turmoil, but after the Promontoria case, banks can breathe a sigh of relief and can continue doing what they used to do: transferring credit claims to non-banks.
The judgment of the Supreme Court of the Netherlands of 10 July 2020 (in Dutch) can be found here.