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Bank acquitted of claim for avoidance in the amount of DKK 28.6 million

A case about the avoidance of a bank’s reduction of a business loan and an overdraft facility in the total amount of DKK 28.6 million was brought before the District Court of Lyngby and subsequently before the Eastern Division of the Danish High Court. The District Court in Lyngby ordered the bank to pay DKK 16.5 million, while the Eastern Division of the High Court acquitted the bank, which was represented by Holst, before both courts.

Legal action was brought against a bank by a bankruptcy estate after a property company, which was declared bankrupt on 5 January 2017.

It was a case of a claim for avoidance with an aggregate value of DKK 28.6 million, and the main issues of the case were:

  • whether repayment/reduction of an overdraft facility and a business loan, respectively, which the property company had taken out with the bank, could be avoided by the bankruptcy estate,
  • whether the owners and guarantors of the property company towards the bank had orchestrated the reduction and were therefore liable for damages,
  • whether the securities which the property company had provided towards the bank entailed that the repayments were non-voidable towards the bank.

The case was first brought before the District Court in Lyngby and subsequently before the Eastern Divi-sion of the High Court. Associate partner at Holst, Henrik Christian Strand, represented the bank before both courts.

Avoidance by the District Court in Lyngby

The bank was ordered by the District Court in Lyngby to pay DKK 16.5 million of the total amount of DKK 28.6 million, as the court found:

  • that the reduction of DKK 7.5 million of the overdraft facility during the period from 6 October until 30 December 2016 was voidable, since the property company at the time of reducing the amount was in such serious, financial difficulties that bankruptcy was the only opportunity. The court ascribed importance to the fact that the property company during the period did not pay property tax, VAT nor mortgage payments, and that there was substantial uncertainty about the terms for refinancing the mortgage loan in the company’s property.
  • that the reduction of the property company’s business loan in the bank of DKK 9 million, which had been made from 30 December 2015 until 30 June 2016, also was considered voidable. The court found that the bank must have been aware that the property company was insolvent in connection with an internal transfer made between two accounts on 9 May 2016. Although the payments made were assigned to the bank, the District Court in Lyngby declared these void as a similar new drawing right had been established for the property company simultaneously with making the payments.

The remaining amount claimed of DKK 12.1 million related to repayments of the business loan before 30 December 2015. This amount was not declared void as the court found that the property company was not insolvent at that time.

Acquittal: Funds were available for paying debts

The bank and the guarantors appealed against the judgment to the Eastern Division of the Danish High Court which acquitted both the bank and the guarantors.

Regarding the reduction in the amount of DKK 9 million of the business loan, the High Court concluded that the property company in May 2016 had funds available to pay any debts falling due in the nearest future.

In support of its decision, the High Court relied on:

  • information in the company’s 2015 annual report and auditor’s report
  • that there was a profit of about DKK 7.4 million in the ongoing operation
  • that part of the poor annual result was due to a downward regulation by DKK 115 million of the property company’s property value as at 31 December 2015.

The Eastern Division of the Danish High Court also based its decision on the fact:

  • that the property company during the autumn of 2016 negotiated with a creditor about a pur-chase-money mortgage of about DKK 31.2 million which fell due for payment on 31 December 2016; the negotiations were about the payment of an amount of DKK 1 million, and in December 2016 the parties agreed about an amount of DKK 2 million – which was also in the range esti-mated by the bank,
  • that from the summer of 2016, there had been negotiations between the property company and its mortgage credit institute about refinancing the mortgage loan,
  • that in the beginning of May 2016, it could not be regarded as unlikely that partially or wholly re-leasing could be made of an area, which a lessee pursuant to the lease agreement was to re-duce its lease with as at 1 January 2017.

Hence, the High Court was not satisfied that the property company on 9 May 2016 was insolvent, nor that the repayment of the business loan on that date had any coherence with the insolvency which 8 months later led to the bankruptcy of the company.

Furthermore, the High Court also found that because the property company did not pay VAT and taxes on 1 August nor on 1 September, the court could not decide otherwise, since the property company had funds available and could have paid if it had decided to do so.

Acquittal: The bank held a non-voidable security

Regarding the reduction of the overdraft facility from 6 October 2016 and through to 30 December 2016, the High Court concluded that the lessee’s rent payments on 7 and 10 October 2016 entailed that the related overdraft facility was reduced, thereby creating a positive balance of the overdraft facility on 10 October 2016. The balance remained positive through until the occurrence of the bankruptcy, where it amounted to about DKK 5.4 million.

It appeared from the case:

  • that as security for the bank facility with the property company, the bank had on 15 June 2007 obtained an irrevocable primary assignment in rental payments made any time under the three lease agreements with the lessee, and that the lessee had been notified of such assignment,
  • that the lease agreements regarding the same areas with effect from 1 January 2014 were com-bined in one lease agreement, simultaneously reducing the leased area as at 1 January 2017.

On the same day the latter agreement was signed, the lessee and the property company also signed a conditional substitution agreement from which it was set out:

  • that the new lease agreement should replace the original lease agreements,
  • that the expiry of such was conditional to the parties no later than on 1 March 2014 and with ef-fect from 1 January 2014 entered into a final, unconditional and binding lease agreement for the lease,
  • that the lessee’s obligations in the event of vacation was maximised at DKK 7.5 million.

On those grounds – and since no new terms were agreed when the new lease was entered into about rent payments which constituted the security, and since there were no justified doubts about the rent payments – the Eastern Division of the High Court found that the bank held a non-voidable security in the rent payments that were paid into the overdraft facility of the operating account on 7 and 10 October 2016, respectively.

Hence, there could be no avoidance of the reduction and the repayment of the overdraft facility in rela-tion to the bank, as the security in the rent payments had not been made later than 3 months before the reference date.

Practice areas applied