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When a business sets out to repay an investment credit early, the bank generally claims, for credits concluded before December 2013, an indemnity called variously a break indemnity, a reinvestment indemnity or funding loss. The question is topical both because of the large amount this indemnity may represent for the borrower in a low-rate environment, and because, despite abundant scholarship and case law, the outcome of litigation remains hard to predict with certainty.
The borrower’s challenge is often to persuade the court to recharacterise the credit agreement as a loan, thereby benefiting from the cap on the indemnity at six months’ interest under Article 1907bis of the Civil Code.
Recharacterisation according to the Court of Cassation
Such recharacterisation is far from straightforward. In a 2011 judgment, the Court of Cassation held that where the evidence does not allow the characterisation chosen by the parties to be excluded, the trial court may not substitute a different one, nor look to extrinsic circumstances to justify it. It is also regrettable that decisions recharacterising a credit as a loan omit the underlying economic question and the loss suffered by the bank absent a compensatory indemnity.
The principle confirmed in the courts
A recent first-instance decision is notable: the court held that the existence of an indemnity for total or partial non-drawdown means the essential feature of a loan, the delivery of the funds, is absent. The credit agreement could not have been concluded on the same terms if the reinvestment indemnity had been capped at six months’ interest. By seeking to strip the agreement of a clause it had accepted and which is now unfavourable to it, the borrower breaks the contractual balance and causes certain loss to the bank, which amounts to conduct lacking good faith. The court declined to take part in dismantling a lawfully formed agreement.
Recently, four days apart, the Dutch-speaking and French-speaking divisions of the Brussels Court of Appeal handed down two entirely contradictory decisions on very similar cases: one recharacterised a credit as a loan, even where drawn in several tranches, since the borrower lacked the effective freedom to draw only part of it; the other refused recharacterisation of a credit drawable in several tranches over five months for a property purchase and works, non-drawdown likewise being penalised by an indemnity. A plenary-chamber Cassation judgment would be welcome and might settle the question, perhaps definitively.
This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.
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