When the bank calls in a loan – what should you do?

What does this mean in practice?

A credit facility being terminated typically means that the bank demands immediate repayment or freezes access to the credit line, for example by suspending the use of an overdraft facility. The background to this is often that the company no longer meets the terms of its financing agreements, that its financial performance has deteriorated, or that the bank is reassessing its risk appetite for other reasons. For the company, this effectively means that a key source of funding disappears overnight. Liquidity is immediately affected and the scope for managing day-to-day costs rapidly diminishes. The situation can also have knock-on effects – suppliers become more restrictive, other lenders take action, and uncertainty within the organisation increases.

Immediate consequences and priorities

In the initial stage, it is essential to establish a clear picture of the situation. Cash flow needs to be analysed in the short term, and priorities must be set regarding which payments are business-critical. At the same time, the company needs to quickly assess possible courses of action. If, at this stage, there is reason to believe that the company's equity falls below half of the registered share capital, the specific provisions of the Companies Act come into play. The board of directors must then, without delay, draw up a balance sheet for the purpose of assessing whether there is a capital shortfall. If this is the case, the board must convene a special general meeting as soon as possible. If the capital is not restored within eight months of the first special general meeting, a compulsory liquidation order will come into effect. Failure to act in accordance with these rules may lead to personal liability for payment. Another important issue that needs to be assessed on an ongoing basis is whether the company is insolvent.

Assessing insolvency and why it is crucial

If the company is insolvent, the circumstances change fundamentally. This affects not only the available courses of action, but also the measures that are appropriate to take. A key consequence is that the board's duty of loyalty is, in practice, shifted from the shareholders to the body of creditors, which entails a duty to act to avoid harm to the creditors. Transactions which, at the time of their execution, appear to be commercially justified may, if carried out whilst the company is insolvent, subsequently be scrutinised from a creditors' perspective in bankruptcy proceedings. For example, payments to certain creditors, the provision of security or transfers of assets may be challenged under the clawback rules or deemed to be unauthorised transfers of value. In such situations, not only may the recipient be liable to repay the funds, but board members who were involved in the decision also risk personal liability, for example in the form of liability for shortfall coverage.

Dialogue with the bank – often the first step

In many cases, continuing dialogue with the bank is the first practical step. Even though the credit facility has been terminated, there is often a shared interest in avoiding a rapid and value-destroying liquidation. Possible measures may include, for example, requesting temporary exemptions from certain conditions, renegotiating loan terms or agreeing on a shorter transition period to allow for other solutions. The terms of the dialogue are greatly influenced by the company's supporting documentation and credibility. A well-thought-out and realistic plan, even if it is preliminary, typically improves the prospects considerably.

Alternative measures

In parallel with discussions with the bank, the company needs to consider other alternatives. These may include raising capital from shareholders, seeking external financing or selling assets to strengthen liquidity. At the same time, immediate measures are often required to gain control over cash flow in the short term. This may, for example, involve introducing centralised payment control, whereby payments are only made following specific approval, and ensuring that salaries, taxes and duties are prioritised. A review of subscriptions and other ongoing contracts may also be warranted to identify potential cost reductions. In addition to these operational measures, more structural initiatives may be considered, such as sale-and-leaseback transactions, whereby assets are sold to free up capital whilst continuing to be utilised in the business. In certain situations, more drastic measures may also need to be considered, such as corporate reorganisation or, as a last resort, bankruptcy. The choice of measure depends to a large extent on the company's circumstances, debt situation and future prospects. There is rarely a standard solution, but often several conceivable courses of action.

Time is the decisive factor

A terminated credit facility often marks a clear shift in the company's situation, but rarely constitutes the first indication of underlying problems. In many cases, the negative trend has been ongoing for some time. It is therefore crucial to take responsibility for this trend at an early stage. The scope for action can change rapidly, and options that are available one week may no longer be available the next. The sooner the situation is addressed, the greater the chances of influencing the outcome. When the financial situation deteriorates, the threshold of insolvency may be crossed without this being apparent at any single point in time. As liquidity deteriorates, the board's actions also come under increased scrutiny, not least with regard to how swiftly it acted, what considerations were made and how decisions were documented.

What does this mean for you?

The termination of a credit facility is a critical event, but it does not necessarily mean that all options for action have been exhausted. For companies, owners and the board, it is essential to quickly gain an overview of the situation, identify possible ways forward and act with both speed and deliberation. In many cases, taking the right steps at an early stage can be crucial to preserving value and avoiding more drastic measures later on.

Do you have any questions about how to proceed when your financing arrangements change, or do you need advice in a financially challenging situation? Please contact one of our experts in insolvency law and financial restructuring.

The authors

Magnus Löfving is one of the law firm's ten insolvency practitioners and corporate reorganisation specialists, with extensive experience of restructuring issues and advising in situations close to insolvency.

Disa Johnsson is an associate with expertise in insolvency law and is a member of Lindahl's insolvency and reorganisation practice group.