COVID-19 and Loan Agreements In Nigeria: The Effects and Way Forward

Introduction

Nigeria, like most parts of the world, is beset with the worst social and economic crisis imaginable, resulting in decline in revenues, fall in price of commodities, disrupted supply chains and rising debt obligations. The world is enmeshed in the severe, devasating impacts of the novel Corona virus, and Nigeria is not spared. Lockdowns imposed by the Federal and State Government resulted into restrictions of personal and vehicular movements in Nigeria which,  in turn, led to a great reduction of economic and social activities. Disruption in contractual agreements therefore, was inevitable.

According to Kristalina Georgieva, the Managing Director and chairperson of International Monetary Fund (IMF), ‘the world is faced with the worst economic fallout since the Great Depression of the 1930s’. It is not strange then to expect that creditors be faced with instances of default in credit or loan agreement post-COVID-19.  As it stands,  a lot of companies and businesses are currently faced with reduction or even a halt in flow of revenues which put a clog in the wheel of their ability to from fulfill their contractual obligations in credit or loan agreements.

Jadesola Esan, Esq., Associate at HARLEM Solicitors

Drawing upon the foregoing, it is expected that the defaulting party should seek out ways to absolve himself from the breach of his contractual obligations. Force Majeure and the Doctrine of Frustration are the defences available to persons in breach of contract to mitigate or escape liability to pay damages for such breach.  Generally, a loan agreement does not contain the force majeure clause and it might be difficult for a defaulting debtor to wield the defence of the doctrine of frustration. It was held by the Supreme Court in the case of Lewis v. UBA[1] that “mere hardship, inconvenience or other unexpected turn of events which have created difficulties though not contemplated, cannot constitute frustration to release the appellant from his payment obligation”[2]. In the light of this Supreme Court judgement, the mere fact that COVID-19 has given rise to a hard and challenging economic situation would not avail a defaulting debtor. Thus, it goes to no issue.

This article seeks to highlight instances that trigger event of defaults, rights accruing to the creditor/lender upon an event of default, meaning of Material Adverse Change, meaning of Market Disruption Clause and options available to a debtor/lender who is or is likely to be unable to pay back his loan/debt.

Event of default

One of the important terms contained in a loan agreement is the event of default clause. An Event of Default is a predefined event or circumstance that allows a party to a loan agreement to declare a breach of the agreement and exercise rights contained in the agreement. These rights include:

1. Refusal to make any further advances.
2. Demand of immediate repayment of the loan.

• Commencement of insolvency procedures against the debtor/borrower, or

1. Enforcement of the security of the loan.

The Central Bank of Nigeria in a circular issued on the 26^th of August, 2019 and titled ‘New Offer Letter Clause for Credit Facilities,’ introduced a new right that can be exercised by a creditor bank upon event of default by a debtor. The first benefit offered by the circular allows a bank loan to be repaid with funds of the creditor in any bank account of the debtor. The bank can only exercise this right by reporting the defaulting loan and customer to the Central Bank of Nigeria who will then direct the bank that has the customer’s funds in his custody to pay and offset the outstanding indebtedness with deposits and asset in the name of the defaulting customer. A template for the clause as contained in the circular is as follows:

By signing this offer letter/loan agreement and by drawing on the loan, I covenant to repay the loan as and when due. In the event that I fail to repay the loan as agreed and the loan becomes delinquent, the bank shall have the right to report the delinquent loan to the CBN through the Credit Risk Management System (CRMS) or by any other means and request the CBN exercise its regulatory power to direct all banks and other financial institutions under its regulatory purview to set-off my indebtedness from any money standing to my credit in any bank account and from any other financial assets they may be holding for my benefit.

I covenant and warrant that the bank shall have power to set off my indebtedness under this loan agreement from all such monies and funds standing to my credit/benefit in any and all such accounts or from any other financial assets belonging to me and in the custody of any such bank.

I hereby waive any right of confidentiality whether arising under common law or statue or in any other manner whatsoever and irrevocably agree that I shall not argue to the contrary before any court of law, tribunal, administrative authority or any other body acting in any judicial or quasi-judicial capacity.

It is important to note, however, that not all events of default will lead to the termination of the loan agreement. Some defaults may lead to suspension of payment until such default is cleared. Events that are likely to trigger events of default include are non-payment, cross-default, misrepresentation, insolvency, material adverse change, etc.

The big question now is whether COVID-19 can trigger an event of default.

Even though a pandemic is not recognized as an event that can trigger an event of default, nonetheless, regulations and restrictions put in place as a result of the pandemic especially the lockdown and interstate travel ban may give rise to an event of default. For instance, cessation of business is one of the factors that may trigger an event of default and many businesses especially hotels, restaurants and other hospitality businesses in Nigeria had to shut down as a result of the Federal and State Government directives following COVID-19.

Material Adverse Change

Material Adverse Change is an event or condition which can adversely affect the borrower’s ability  to fulfill his obligation as contained in the loan agreement.[3] Any event which adversely affects the business of the lender or affects the value of the loan collateral may also be regarded as an event of material adverse change. This provision allows the creditor to declare an event of default when the debtor finds himself in a situation in which he is unable to pay the loan.

A critical question at this time is, ‘can COVID-19 constitute Material Adverse Change?’ The reality of the present situation is that COVID-19 has created a situation which has adversely affected many businesses and has affected the prices of goods and services. The ripple effect of COVID-19 has created a circumstance which may trigger Material Adverse Change.

It is noteworthy that even when the Material Adverse Effect clause is not couched to include the right to terminate; it creates an opening for a renegotiation of the terms of the loan agreement. The clause, however, does not include events that ordinarily fall under force majeure.

Market Disruption Clause

The Market Disruption Clause is usually found in loan agreements. It allows for an imposition of a substituted rate on the borrower. It requires the borrower to compensate the lender for costs of funds in the event of market disruption. The creditor can, however, not invoke market disruption if it is not included in the loan agreement. A borrower can also ensure while examining the terms of the loan agreement and before signing same that the Market Disruption Clause can only be invoked by the creditor where the creditor is unable to fund the loan.[4]

Options available to a debtor/borrower

Below are certain steps debtors/borrowers can take to avoid a situation where creditors/lenders can exercise the rights accruing to them under the events of default Clause should they default in the repayment of their loans. It is important that debtors/borrowers closely review their loan agreement and begin to take steps to renegotiate a mutually beneficial remedy to any of the events contained in the events of default that may affect them.

1. Restructuring of the loan agreement- Before the creditor company invokes the rights available to him under events of default, the debtor/borrower may approach the creditor company for a renegotiation/restructuring of the terms of the loan agreement.
2. Deferral/ payment of interest in installment- This is best applicable in the instance of a loan agreement involving a large sum of money and/or instances of long tenure loans. The creditor and the debtor may reach an agreement allowing the debtor to pay the interest accrued at an agreed later date or to pay in instalments.
3. Refinancing- A debtor/ borrower may also consider the option of refinancing. A borrower refinances a loan by taking on another loan from a different creditor to satisfy an existing loan.
4. Legislations- The Central Bank of Nigeria in its circular titled REGULATORY FORBEARANCE FOR THE RESTRUCTURING OF CREDIT FACILITIES OF OTHER FINANCIAL INSTITUTIONS IMPACTED BY COVID-19 issued through its Financial Policy and Regulation Department, provides that banks consider temporary and time-limited restructuring of the tenor and loan terms of households and businesses affected by COVID-19, subject to the recently issued guidelines for restructuring affected credit facilities in the OFI sub-sector.

Conclusion

Ultimately, the creditors can only be sympathetic, it does not change the fact that they are unwilling to let go of the amount loaned to a debtor/borrower. Debtors/borrowers on the other hand can also not wait to discharge themselves of the burden imposed on them by a loan agreement.  It is in the interest of both parties to negotiate  and meet at a middle ground with the ultimate goal of the repayment of the loan.

Creditors/lenders and debtors/borrowers need to go back to review the loan agreement and figure out how to reach a common ground benefitting both parties. In the same vein, the Central Bank of Nigeria and other government agencies are not resting on their oars in creating means of mitigating the effect of COVID-19 on loan facilities. Hence, it is important that Creditors/lenders and debtors/borrowers stay informed in the event that a regulation, circular or any other such document is issued to change the status quo.

FOOTNOTES:

[1] (2016) LPELR-40661(SC)

[2] https://legal.businessday.ng/2020/05/07/covid-19-pandemic-implications-for-loan-agreements-in-nigeria/  accessed 15/06/2020 at 10:38 am

[3] Grupo Hotelero Uvarsco SA v Carrey Added Value SL (2013) EWHC 1039 (Comm.).

[4] Ose .A. Binitie ‘Syndicated Lending in Nigeria: Questions and Answers’, October, 2019.