Coronavirus – Can my bank suspend or terminate my credit lines? What to do? (Altius)
Author: Banking & Finance team (Altius)
Publication date: 12/03/2020
Balancing between your bank taking purely business considerations or being reasonable. We advise being proactive and approaching your bank.
The Coronavirus is unfortunately a human tragedy that is affecting thousands of people on all continents. It has also a very serious impact on businesses worldwide and locally.
Your credit that finances your working capital, investments, projects, pays your employees, suppliers and many other stakeholders in your supply chain is essential for your business operations.
Your set of contracts with your bank will almost certainly include wording along the lines of “loss of trust”, “negative indicators”, “important reduction in activity”, which allow your bank to terminate and/or suspend your credit lines. These clauses will appear in credit facility agreements, credit letters, the bank’s general terms and conditions or any similar documentation governing your relationship with your bank.
In addition, credit lines or credit facilities will be secured by a variety of charges, such as: pledges on receivables and bank accounts, pledges of business assets, pledges on shares and mortgages on real (i.e. immovable) property. For Belgian companies that are part of a group, they often provide such security to secure financing operations of a parent company in another country or on another continent.
Despite these clauses, banks have an obligation of good faith, reasonableness and fairness. These concepts are comforting to read, but do they really protect you? Can you sue your bank if it suspends credit lines due to ratios being no longer met and business substantially falling due to the coronavirus? Banks are in most cases attentive to potential ‘bankers’ liability’ if their actions would result in very serious financial difficulties for a client and potentially a bankruptcy. However, companies invoking bankers’ liability have rarely been successful in the Belgian courts. First, if the terms of an agreement provide for the right to take certain actions, then the company has agreed to its bank having those rights. Second, no contractual party is obliged to continue trading (in whatever form) with another party knowing that it is quite unlikely that such other party will be able to (re)pay. Third, by continuing credit lines, third parties may be misled and consider that the affected company is in an acceptable financial health and so it can continue trading.
Our advice to companies in a financially stressful situation due to the coronavirus is to:
- create a core team that meets very regularly;
- carefully analyse the (potential) impact of the virus on the business;
- verify the supply chain and communicate with suppliers and customers;
- consider potential savings & alternative financing sources (e.g. the parent company); and,
- implement risk control and risk management measures.
The results will be very valuable to discuss with your bank and it will be appreciated. Doing so does not provide a guarantee that credit lines will remain, but at least you are in control of the information. If the situation is so bad that bankruptcy is lurking around the corner, consider temporary protection against your creditors.
ALTIUS – Banking & Finance team – ready to help
The above information is merely intended as comment on relevant issues of Belgian law and is not intended as legal advice. Before taking action or relying on the comments and the information given, please seek specific advice on the matters that are of concern to you.