The spectacular collapse of a regional bank has resulted in the Supreme Court having to decide whether a third bank's involvement in the granting of loans in breach of Banking Law provisions which impose limits on credits and investments should result in an annulment of the relevant transactions. The court eventually declared the loan transactions to be legally valid.
Due to lending limits under the Banking Law, the bank that ultimately collapsed found itself unable to provide any further loans to one of its clients (which was also financially unstable), although it wished to continue financing the client in order to enable the latter's survival and avoid the need for write-offs. Accordingly, the bank requested that other banks grant the loans and offered securities as collateral.
During the course of the bank's bankruptcy proceedings, the official receiver disputed the validity of the transactions, suggesting that they served the sole purpose of circumventing the limits of the Banking Law concerning credits and investments. If the transactions were found to be invalid, then the offering of securities as collateral was also without legal basis (in accordance with the so-called 'accessory principle') and the securities would have to be surrendered.
The Supreme Court ruled that the transactions were valid (OGH September 27 2001, 6 Ob 287/00z). The Banking Law expressly states that violations of the limits imposed on credits and investments are subject to sanctions under the law, but do not affect the legal validity of transactions conducted in breach of them.
The court opined that the provisions of the Banking Law are intended to safeguard the banking industry and not to provide the borrower (who, usually, is not in a position to check whether the regulations are being complied with) with the ready objection that a transaction is invalid.
Since the loan transactions would have been valid if made by the bankrupt bank, so were the transactions negotiated in collaboration with the third bank. Even if the third bank was fully aware of the breach of the regulations, this fact alone was insufficient to declare the transactions void. Only immoral behaviour on the part of the third bank could cause the credit agreement to be declared void. A straightforward violation of a legal prohibition (even if premeditated) does not of itself constitute an immoral act.
The third bank would have committed an immoral act if:
- its representatives had conspired deliberately with the entities of the bankrupt bank with the intention of damaging the latter;
- they had at least been aware that the representatives of the bankrupt bank were deliberately acting against the interests of their bank; or
- the violation should have been obvious to the third bank.
There was no evidence to suggest that any of these actions had occurred. The third bank was not required to surrender the securities and retained the proceeds with which it covered the loan.
For further information on this topic please contact Tibor Fabian at Binder Grösswang Rechtsanwälte by telephone (+43 1534 80) or by fax (+43 1534 808) or by email ([email protected]). The Binder Grösswang Rechtsanwälte website can be accessed at www.bgnet.at.