The Supreme Court upholds the High Court ruling - but on changed grounds.
The case follows in the wake of the Capinordic bank case and the Eik Bank case. In these cases, the Supreme Court has been reluctant to establish liability in damages for corporate executives in case of losses on commitments in the period of the financial crisis.
The Business Judgment Rule
In the judgment, the Supreme Court referred to the legal doctrine known as the “Business Judgment Rule”, according to which courts must exercise caution when determining whether or not to hold corporate executives liable for their actions.
However, they should not exercise caution if it must be assumed that the actions are based on considerations for the business but also other third-party considerations.
The principle, which was established by the Supreme Court in the Capinordic Bank case (UfR 2019.1907 H) implies that the following four criteria must be included when assessing whether fault liability may be established in relation to an unsuccessful commitment:
- The purpose of the loan.
- The borrower’s financial status.
- The security provided.
- The customer’s ability to carry on its business in the light of the general economic cycle.
The case against the former CEO of ebh bank
Finansiel Stabilitet had raised an aggregate claim of approx. DKK 550 mill. against former members of the bank’s management. The case was heard by the High Court.
The High Court found in favour of ebh bank’s former CEO in two out of three claims. In one of the two counts where the court found in favour of the CEO, the court assessed that the CEO had acted in a manner giving rise to liability. As Finansiel Stabilitet could not prove to have suffered a loss, the High Court nevertheless found in favour of the CEO.
The case before the Supreme Court concerned only the three claims against the former executive where the total claim for damage was limited to DKK 100 mill.
The three commitments in dispute concerned the following:
- The issuing of mortgage guarantees totalling DKK 130 mill., which exceeded the CEO’s powers. The High Court found in favour of the CEO as a loss could not be established.
- A potential obligation for the bank to buy bank some shares and grant credit to the same group of investors. The High Court found in favour of the CEO.
- Buy-back of some mortgages according to which the bank suffered a loss of approx. DKK 2 mill. The High Court found that the CEO was liable in damages.
Issuing of mortgage guarantees
The Supreme Court found that the CEO had acted beyond his powers when issuing mortgage guarantees for DKK 130 mill. The executive board was only authorised to provide guarantees totalling DKK 15 million.
The guarantees were issued for mortgages which were sold by the fund that owned 45 % of ebh bank and the bank’s subsidiary.
On this basis, Finansiel Stabilitet argued that the issuing of the guarantees safeguarded interests that were irrelevant for the bank, and therefore the court should not show reluctance when assessing the business judgment.
The Supreme Court emphasised that the fund’s primary object was to provide support to and serve the interests of the bank. The other guarantees were issued for mortgages sold by the bank’s subsidiary. Therefore, the Supreme Court did not find that there was a basis for determining that third-party interests had been safeguarded. The commitment was therefore to be assessed according to the precautionary principle.
The Supreme Court found that the CEO’s breach of his powers could not in itself justify liability in damages.
The Supreme Court assessed that ebh bank had sufficient knowledge of the mortgages sold from the fund and the subsidiary. These did not appear distressed at that time. The mortgages were also assessed internally, including whether the mortgages were adequately covered by the value of the properties. Therefore, there was no basis for setting the CEO’s business judgment aside. As opposed to the High Court, the Supreme Court found that the CEO had therefore not acted in a manner giving rise to liability.
Pledge to buy back shares
Finansiel Stabilitet had also based a claim on the CEO allegedly having pledged to some investors to buy back shares in a property company. The same investors had been granted credits in ebh bank.
The Supreme Court found that it had not been proved that the CEO had pledged to buy the shares back.
According to Finansiel Stabilitet, the fund which owned 45 % of the bank had an interest in the shares being sold. The CEO had allegedly once again safeguarded third-party interests in relation to the fund by granting the credits. The Supreme Court referred to the previous assessment of the relationship between the fund and the bank. Therefore, there was no basis for setting the precautionary principle aside.
Based on a cautious assessment, the Supreme Court found that there was not a sufficient basis for establishing that the credits - which were granted before the financial crisis - were reckless. Therefore, the court also found in favour of the CEO in relation to this claim.
Buy-back of mortgages
Like the High Court, the Supreme Court found that the CEO was liable in damages for buying some mortgages back.
A buyer of two mortgages from the bank had indicated dissatisfaction with one of the mortgages. Thereafter, ebh bank bought the mortgage back. The same occurred with another customer.
Thereafter, ebh bank bought three additional mortgages back of its own motion. This occurred after the issuer of the mortgages had filed for suspension of payments. At the subsequent sale of the property which had been provided as security, the bank suffered a loss of approx. DKK 2 mill. on one of the mortgages which the bank had bought back of its own motion.
The Supreme Court found that ebh bank had not been obligated or had a commercial interest in buying the mortgages back. Consequently, the transaction has not appeared to be a safeguard of relevant considerations. In addition, the CEO had not presented the commitment to the board of directors as required under section 76 of the Financial Business Act then in force.
The Supreme Court’s judgment in the ebh bank case illustrates the tendency in case law of being reluctant to set corporate executives’ business judgment aside.