Funding Loss and Early Repayment: A New Court of Cassation Judgment

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The indemnities claimed by credit institutions on the early termination of a pre-2014 investment credit and on early repayment still stir debate.

The borrowers’ strategy to avoid a large funding-loss indemnity

The main stake in litigation is, for borrowers, to persuade the court to recharacterise an investment-credit agreement as an interest-bearing loan. If they succeed, they may repay early despite the agreed term and, above all, benefit from the six-month cap on the indemnity under Article 1907bis of the Civil Code, applicable only to loans. The task remains difficult: absent a flagrant case where a loan was clumsily labelled a credit, or a court’s doctrinal position hostile to funding loss, the borrower must clear several hurdles and show that, despite the credit’s label (a consensual, unnamed contract for the holding of funds at the borrower’s disposal), the parties in fact concluded a loan (a real, named contract for the delivery of funds to the borrower).

Recharacterising an unnamed contract as a named one: the Cassation test (2009)

Under the Court of Cassation’s 2009 case law, recharacterisation is admitted only where there are elements radically incompatible with the characterisation chosen by the parties, and provided all the essential features of the named contract are met. The borrower must therefore, in two steps, show elements radically incompatible with the credit-facility figure and show that all the features of an interest-bearing loan are met.

The clauses commonly debated

Credit agreements contain many clauses whose classification is debated: a reservation commission; a drawdown period; an indemnity for non-use of the credit at the end of that period; the subjection of drawdowns to supporting documents such as works invoices; a ban on re-use; a ban on early repayment; a break indemnity (funding loss) on early repayment; fixed repayments per an amortisation schedule; an obligation to draw the credit in one go; and so on.

The Cassation decision: freedom to draw and clauses compatible with a credit

On 27 April 2020, the Court of Cassation rejected an appeal against a 2019 Dutch-speaking Brussels Court of Appeal judgment, which had confirmed that the credit could not be recharacterised as a loan, upholding the first-instance ruling. Early repayment was therefore subject to an indemnity compensating the bank’s real loss, calculated as funding loss.

The Court first recalled the difference between loan and credit. On the first ground (the appellate court’s assessment of the borrower’s freedom to draw), it declared the ground inadmissible, being a factual assessment. On the second ground (the confirmed characterisation), the Court upheld the appellate reasoning: neither the clause requiring an indemnity for non-drawdown, nor the clause subjecting each drawdown to the bank’s prior approval, excludes the credit characterisation. Nor does a fixed amortisation schedule from the first month, since where the borrower does not draw all the funds, a new schedule is drawn up in practice based on the amount actually drawn.

The Court has not ended all debate, but it indirectly confirms the legal differences and different economic realities of loans and credits. The freedom-to-draw criterion, often invoked by borrowers, is now more precise: a non-re-use indemnity, prior authorisation of drawdowns (so the bank can check the funds are put to lawful use or to the property over which it holds security), and fixed repayments after the drawdown period do not exclude the credit characterisation. In some cases, the hurdles to unilaterally terminating a fixed-term credit without fair compensation to the bank have just risen a little higher.

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