Loan Default

Demanding the Loan

The loan agreement will determine how and when the lender can demand repayment. A traditional term loan provides for an advance of monies and repayment over time in accordance with an agreed schedule of repayments.  A term loan is committed in that it may not be demanded unless there has been an event of default.

In recent years, many loan facilities have been rolled over for successive short periods of a year or less. In these cases, the loans will fall due on the specified repayment date. In practice, there has been forbearance on a wide scale, and lenders have used the expiry of a facility to renegotiate a further roll over, perhaps with varied terms and enhanced security.

Overdraft facilities are generally repayable on demand, although the bank will not generally “call” the loan and “pull the plug” without good reason.  In the current financial crisis, many facilities have continued on an on-demand basis for prolonged periods. Many facilities, which were originally advanced on a committed basis, have continued for many years beyond their expiry / repayment date, on the basis of interest only or otherwise.

When the loan monies are repayable “on demand”, then no more notice need be given than the time it would take, logistically, to make funds payment (assuming the money was available).  Usually, a day or so will suffice. Where the financial payments are in default, where the repayment date has passed or where there has been another event of default, the lender may demand a committed loan. It effectively becomes an on-demand loan.

An “on demand” loan or another loan which has become repayable on demand, has a very different character from both the lender and borrower’s perspective, to one which requires payment over a term or by a set repayment date. From the borrower’s perspective, a demand may push the borrower into insolvency at very short notice.


Time Limits for Legal Action

A personal claim on a debt must be taken to court within six years of the date on which it fell due or the right to sue will be lost. The time runs from the date on which the right to receive the money arises. There are certain important exceptions to this rule.

The period in which to take court action generally starts on the date monies fall due. This may be the date of default or may be the date of demand after a default. This depends on the wording of the loan agreement.

An acknowledgment of liability by the borrower usually starts the period running again. The acknowledgment must be in writing and signed by the borrower. A part payment also starts the period again.A right to take action to enforce the mortgage or bring a claim for possession must be taken within 12 years after the entitlement first arose. After that time period, legal action cannot be taken.


Statute of Limitations I

On the issue of a demand, all loan monies become immediately payable. Generally, the loan agreement provides that the loan is payable “on demand”. In this case, the Statute of Limitations should begin to run on demand. If on the true construction of the loan agreement / mortgage, the monies become due on default, then the Statute of Limitations may commence on the date of the first technical default. In some cases,

When a demand is made, all undrawn facilities are usually cancelled. The lender’s remedies under the security documents generally become immediately exercisable. The demand may be followed, within days or less by security enforcement, typically the appointment of a receiver, publication of appointment and the loss of control or closure of the business.

S. 11 (5) of the Statute of Limitation provides

The following actions shall not be brought after the expiration of twelve years from the date on which the cause of action accrued: a) an action upon an instrument under seal…..


Statute of Limitations II

Apart from this provision, a six-year time limit applies to an action on a simple contract debt. Part payment and acknowledgement in writing re-commences the statute.

In Irish Bank Resolution Corporation -v- Hayes [2014] IEHC  70 Kearns P, found that

under the terms of the mortgage in question, the principal monies were deemed to become due as soon as there has been a default in making one periodic payment and without the requirement for or necessity of any demand upon the borrowers. The immediate issue concerned entitlement to seek an order for possession under the provision of s.62(7) of the Registration of Title Act.

Many mortgages contain provisions that the loan monies fall due on execution for the purpose (only) of the Conveyancing Act powers (of sale and to appoint receiver). The wording seeks to make the remedies available without demand while avoiding the possibility that the loan agreement debt and the debt obligation in the mortgage deed, commence immediately or on default.


Events of Default

Under general law, parties are free to designate which clauses are so fundamental that their breach entitles the other party to terminate its commitment and recover compensation or return of monies. In the context of a loan agreement, an event of default will be the designated circumstances of fundamental breach. Certain events of default may provide for a grace period, in which the borrower can remedy the default.

In many cases of default, the lender may not wish to enforce its security. As under contract law generally, the “innocent” party has the option to terminate the contract or waive rights granted by the breach. Generally, a lender will wish to reserve its rights to enforce, even where it does not enforce. The appropriate course may be to negotiate with the borrower to remediate the position. The renegotiation may involve increased margin, tighter covenants, reduced loan to value, more security etc.

A lender can be legally liable to a borrower if it demands repayment or enforces security, where it is not entitled to do so. It is desirable to consider the loan agreement’s terms. The events of default should be clearly defined so that no question may arise of the lender wrongly calling a default.  If a lender wrongly calls an event of default, then it may be liable for breach of contract to the borrower.


Financial Default

Nonpayment of interest or capital will invariably be an event of default.  Default interest will also arise. Within limits, this will not constitute a penalty. The Consumer Credit Act may also apply to limit default interest.

Late payment will constitute a default. There may be provisions for a grace period to cover an inadvertent failure to pay on time.  This may cover some unexpected failure in the payment system.  A grace period is less likely in respect of non-payment of principal.

Non-payment is the most fundamental event of default. The other events play a supporting role in that they try to protect against prospective non-payment by allowing for pre-emptive action.  Even if a grace period is allowed for payment of interest, default interest will normally apply from the due date and the lender will require to be indemnified against losses sustained or incurred as a result of the late payment. General principles of contract law relating to penalties apply to default interest.  Provided the payment is a reasonable pre-estimate of likely loss it will be valid.


Breach of Warranties and Covenants

The breach of a warranty, representation or covenant will usually be an event of default.  The breach may occur at a point when the warranties and representations are deemed to be repeated.  If a breach can be remedied, the lender will generally allow a period of grace.  A grace period may be allowed although this is best provided for in the covenant or repeated representation itself rather than in the event of default clause.

A borrower may seek to limit by negotiation, breaches of representations, warranties and covenants which constitute events of default to material breaches.   He may argue that the lender should not be entitled to terminate its commitment and demand repayment for a relatively trivial breach.

If materiality is agreed as a limiting factor, there should be a threshold. For example, a breach may continue for a number of days at which point the breach is deemed material. It is preferable for the lender that materiality should be determined by the lender’s opinion. In the absence of an objective touchstone, the lender risk being liable for significant liability if it wrongfully calls an event of default.


Cross Default

A cross-default clause deems an event of default to have occurred where the borrower defaults on other (usually any other) lending.  The cross-default will generally be limited to loans or equivalent indebtedness.  In the absence of such a clause, a lender may be powerless in a situation where another lender has called a default and has required extra security, thereby eroding the position of the first lender. This enables the lender to protect its position by accelerating or threatening to accelerate the loan.

A cross-default clause may have a domino effect and lead to multiple defaults and ultimately insolvency. A borrower may, therefore, seek to restrict a cross-default clause.  He might argue that it should be limited to a cross-default having an effect on its business.  He might argue that it should not apply on the basis of breach of another loan agreement unless that other loan agreement has actually been demanded.  This is a cross acceleration clause. This is less favourable to the lender.

The borrower may wish to provide an exception (carve out) for defaults in respect of debts which are being disputed in good faith.  The lender may not wish to concede a subjective basis for contesting the debt of this nature.

If the borrower is part of a group, the lender may require that the cross-default clauses apply to all companies in the group.  The borrower will usually seek to limit this cross default to the material or principal subsidiaries.


Material Changes

A change in the nature of the business, without the lender’s consent, may be an event of default.  The lender may have lent on the basis of a particular assessment of the ability to repay the lending.  The cessation of a material part of a business or the disposal of business assets may be detrimental and accordingly be deemed an event of default.

A change in the corporate control of the borrower may constitute an event of default.  The relationship between parent and subsidiary may be a part of the original credit assessment.  Supervening illegality and loss of business licences will frequently constitute events of default.

An event of default caused by “material adverse change” is a sweep up provision.  The clause may be controversial.  The borrower may seek to exclude it arguing that it is entirely subjective. The lender will wish to phrase it in subjective terms.  The borrower will wish to limit it to an objective basis.

In practice, it may be used to stop the obligation to make future loans rather than used as a basis for demanding repayment of all funds. The lender should need to be sure of its grounds to rely on the clause as the consequences of wrongly calling the clause may be severe.


Solvency

The borrower’s insolvency or events which commence insolvency processes will invariably be events of default. The lender will wish to take action at the first sign of insolvency. It will want the option to optimise its position in relation to other creditors and preserve the borrower’s assets, by enforcement or otherwise.

The inability to pay debts as they fall due, cessation or threatening to cease business, enforcement of other security and steps taken by way of winding up or receivership will commonly constitute events of default.

There may be a “carve out” for a bona fide dispute with a creditor to prevent the risk of a creditor issuing a tactical “Section 214” notice. There may be a limit on the level of debt which may trigger the default.


Fair Procedures on Enforcement I

In Ryan -v- Danske Bank A/S t/a Danske Bank [2014] IEHC 236, Baker J, wrote

In summary, the Bank and the plaintiff entered into formal security documentation which entitled the Bank as a matter of contract to appoint a receiver on the happening of certain expressly identified events. Certain restrictions will be implied as a matter of common law in the exercise by the Bank of this right, but these are no more than the obligation on the part of the Bank to act fairly and honestly. The Bank was entitled to appoint a receiver following the making of demand, and it has not been asserted that proper demand was not made. I reject the assertion that there can be imported into the contractual relationship between the parties an obligation on the part of the Bank to act reasonably, to consult, or still less to fully consult, with the customer, or to act in the interest of the borrower. A duty of care may well arise should the receiver, or the Bank sell either or both of the secured properties, but such a duty has not arisen in these circumstances to date. What the plaintiff asserts is that he had a right to be heard, that the offer made by him to discharge the arrears ought to have been positively considered by the Bank, that the Bank failed to afford him natural justice in its process. These are rights and obligations which I cannot accept …”


Fair Procedures on Enforcement II

The National Asset Management Agency and (National Asset Loan Management Limited its lender entity) is obliged to apply fair procedures. This proposition was deduced by the Courts from its statutory / public law basis. In National Asset Loan Management Ltd -v- McMahon & others; National Asset Loan Management Ltd -v- Downes : [2014] IEHC 71 Charleton J. wrote

In relation to both sections put under scrutiny for possible constitutional infringement, the Court is guided by the decision of the Supreme Court in Dellway Investments Limited v. NAMA [2011] 4 I.R. 1. There Finnegan J. at pp. 360-377 made it clear that the special treatment of mortgagees and the commercial consequences of the transfer of a mortgage to the agency gave rise to a right to be heard on the part of the borrower..”

“The Court is not prepared to conclude, further, that rights are protected only by notice. Nor is the Court driven to decide that a right to fair procedures applies to every instance where the agency is proposing to exercise its powers. Prudence is also a constitutionally mandated principle. While, as in the Dellway case at p. 332, Fennelly J. penetratingly analysed the acquisition decision by the agency as one which made a substantial change in the way in which debtors are in a position to exercise their property rights, and that this involved a reduction in their ability to manage their properties independently, it must surely only be to those aspects of the powers mandated in the legislation which have that effect that require the application of fair procedures. There can be circumstances where appointing a receiver without notice is unfair to the property rights of a person whose debts and charged properties are being managed by the agency, but may also be circumstances where the agency is entitled to take swift action following a fair assessment of a business plan, or where the request for submissions about where the borrower proposes to go from here, is ignored or is treated deceitfully, and where it may be said that a proper balance in the rights of the borrower and the rights of the State, as the manager of distressed assets, is achieved by immediate action without notice.”


Fair Procedures on Enforcement III

In contrast, a borrower from an ordinary bank does not have a right to fair procedures. Charleton J. continued

 In a private context, a borrower does not have the entitlement to challenge a bank where the borrower’s loan is transferred from one bank to another or to a firm of factors, or even where a sympathetic bank manager retires to be replaced by a worrier who can make no decisions. Nor, in the sphere of ordinary borrowing, has a borrower much chance to challenge a bank outside the area of contract where a decision is made by the bank to appoint a receiver or otherwise to enforce a charge. This is so even though the decision is apparently unfair and the circumstances of the exercise of the power, while consistent with the contractual obligations settled by negotiation and carefully set out in a written document, may be so patently unreasonable as to fly in the face of fundamental reason and common sense. Perhaps it might be argued that no business contract contemplates an unreasonable end? But such an argument would not be easy to bring home.


Action for Debt

A judgment/court order declaring liability for money owed allows a lender to enforce directly against all of the borrower’s assets. A “judgment” and “court order” has the same meaning in this context. A judgment does not imply that there has been any formal adjudication by a judge. It refers to a court order which allows enforcement through a number of private and State-assisted means. An Irish Court judgment can be enforced throughout the European Union through a relatively straightforward procedure.

A judgment/court order for an undisputed fixed money sum in Ireland can usually be obtained through the court offices, without a court hearing. A court hearing is only likely if the liability is disputed for some legally valid reason. Generally, monies due under of a loan agreement will be for a fixed or ascertainable sum and can be recovered through so-called summary debt collection proceedings.

There are three levels of Courts in Ireland with powers to issue judgments for money due. The procedures for obtaining money judgments are broadly similar in each court.

The District Court has jurisdiction over claims on debts up to €15,000, the Circuit Court has jurisdiction over claims on debt up to €75,000 and the High Court unlimited jurisdiction in claims on debts. Where a debt is below the jurisdiction levels, it is desirable to proceed in the lower court as to avoid being penalised for costs for unnecessarily proceeding in the higher court.


Debt Collection Procedures

Before issuing proceedings, the debtor must first be warned and given an opportunity to pay. Failure to do so will prevent a claim for costs incurred. In each court, the legal claim is commenced by the claimant creditor’s (the plaintiff’s) solicitor preparing a court document; a civil summons in the District Court, a civil bill in the Circuit Court or a Summary Summons in the High Court setting out details of the plaintiff and defendant (debtor) and setting out details of the basis of the legal liability for the debt and the amount claimed.

The summons is then formally stamped and issued by the court offices. The claim document must then be served on the debtor by being sent or given to him in a prescribed manner. In all cases, where the debtor is represented by a solicitor, service on the solicitor is sufficient.


District and Circuit Courts

In the District and Circuit Court, service is usually by prepaid registered post to the debtor’s last known address. Registered post must be accepted or it will be returned. In the High Court claim, service is generally by personal service (i.e. the plaintiff’s representative personally delivers the summons) if this is reasonably practicable. If this is not possible, it may be permitted to leave the summons, with a person over 16 years of age at the defendant’s address. If difficulty is encountered, it is possible to apply to the court to allow valid service by some other some practical alternative means.

There are procedures in each court for obtaining a judgment in an undefended money claim. Where no response has been given by the defendant in the format prescribed or no defence is entered in response to the Civil Bill, the Plaintiff can file papers in the Circuit Court office to obtain a judgment. This is only permitted if the defendant was served within Ireland. The documents include proof of service, copies of warning letters, an affidavit proving the debt and certain other documentation. The sworn affidavit must set out the debt including particulars of interest.


High Court

There are broadly similar procedures in High Court cases. If no response and defence is given within a fixed time of the summary summons being served, it is possible to obtain judgment for the debt through the Court offices. The summons, proof of service, an affidavit proving the debt and certain other documents are filed with the court offices.  The affidavit must be sworn by an accounts manager or some person with knowledge of the debt. Details of the loan interest and other sums due must be set out and proved in the sworn affidavit.

If a response is entered by the defendant, he will need to notify the plaintiff and court office. The defendant must both respond and file a written defence setting out the basis on which he claims the part or the whole sum as claimed is not legally due. This must be a valid legal basis for non-liability. Inability to pay is not a valid basis. There will generally be limited grounds for a full valid defence in the case of debts and loans. There may be grounds for disputing the calculation of the debt.

If the defendant responds but does not file a defence, it is necessary to issue a notice of a motion (a short hearing) before the Master of the High Court seeking judgment (a court order confirming liability). The Master then decides whether to award a summary judgment or to allow the case go to a full hearing.  The application before the Master is based on written affidavits. A judgment will usually be issued if there is no legally valid defence. The Master gives an order to enter judgment. It is then necessary to file papers with the court offices to obtain a judgment.


References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015