New case law - loan granted shortly before bankruptcy was a pro forma loan
04 November 2015
A loan agreement entered into between a debtor and his friend and former business partner one week before the debtor's bankruptcy must be set aside as it was a pro forma loan. This is the conclusion reached by the Danish Eastern High Court in its judgment of 28 October 2015. The decision is a contribution to the case law on pro forma issues in bankruptcy proceedings. Plesner acted as the trustee and conducted the case both before the District Court and the High Court.
One week before his bankruptcy a personal debtor lent his friend and former business partner an amount that was only to be repaid after 15 years according to the loan agreement.
In 2012 the trustee issued a writ of summons against the former business partner and it was disclosed during the proceedings that the loan proceeds had been passed on to a company from which the debtor could freely withdraw funds for his private consumption. Attempts had been made to mask the payments to the company as consultant fees to the debtor and as profit from investments. However, this was not supported by the other production of evidence during the proceedings.
The Danish Eastern High Court upheld the District Court in Elsinore's reasoning, namely that the conclusion of the loan agreement had been pro forma and consequently expressed the parties' mutual understanding that the loan proceeds were to be withheld from the debtor's creditors during the bankruptcy. In other words, in reality the loan agreement was not to have the effect described in the agreement.
It means that two courts of two different instances agreed with the trustee's primary opinion on pro forma issues and ruled in favour of the estate in bankruptcy and found that the creditors are not to observe an agreement that demonstrably had another object than what was directly described in the agreement if the agreement will lead to the creditors suffering a loss.
There is no printed case law on pro forma issues and also for such reason the judgment is of interest.
Pernille Bigaard, Attorney-at-Law and Plesner Partner, was the trustee of the estate in bankruptcy.
In 2012 the trustee issued a writ of summons against the former business partner and it was disclosed during the proceedings that the loan proceeds had been passed on to a company from which the debtor could freely withdraw funds for his private consumption. Attempts had been made to mask the payments to the company as consultant fees to the debtor and as profit from investments. However, this was not supported by the other production of evidence during the proceedings.
The Danish Eastern High Court upheld the District Court in Elsinore's reasoning, namely that the conclusion of the loan agreement had been pro forma and consequently expressed the parties' mutual understanding that the loan proceeds were to be withheld from the debtor's creditors during the bankruptcy. In other words, in reality the loan agreement was not to have the effect described in the agreement.
It means that two courts of two different instances agreed with the trustee's primary opinion on pro forma issues and ruled in favour of the estate in bankruptcy and found that the creditors are not to observe an agreement that demonstrably had another object than what was directly described in the agreement if the agreement will lead to the creditors suffering a loss.
There is no printed case law on pro forma issues and also for such reason the judgment is of interest.
Pernille Bigaard, Attorney-at-Law and Plesner Partner, was the trustee of the estate in bankruptcy.
