LSP142: Loan Contracts

Good morning, Readers! This week’s article will be presented in a question-and-answer format focusing on loans.

• What’s a loan?
Loan signifies a sum of money lent to a borrower with interest. Olowu v Building Stock Ltd. (2018) 1 NWLR (Pt. 1601) 343. A loan contract is an agreement by which one party (“the lender”) agrees to pay money to another (“the borrower”), or to a third party at the borrower’s request, on terms that the borrower will repay the money together with any agreed interest. For the agreement to constitute a loan, the payment must be made with a view to giving the borrower financial accommodation. Blackburn Building Society v Cunliffe Brooks & Co. (1882) 22 Ch.D. 61

• When does it become a loan contract?
A loan is not an offer but an invitation to treat. As such, when someone asks a bank for a loan or an overdraft (borrowing more money than they have), the bank decides if they will offer it. If they agree, they lay out the terms and conditions clearly. If the person agrees to these terms and communicates that clearly back to the bank, a legal contract is formed, and the loan is valid. An unqualified acceptance of the offer duly communicated to the bank by the customer in respect of all the terms and conditions thereof, would result in a valid and binding legal contract between them on the loan facility. Omega Bank Nigeria PLC v O.B.C LTD. (2005) 8 NWLR (PT. 928) 547 AT 583 PARAS C-E

• Is demand necessary when a bank seeks to recover a loan?
The law is that demand is not necessary in law when a bank seeks to recover a loan unless there is an agreement to that effect. U.B.A. Ltd. v. C Michael O. Abimbola (1995) 9 NWLR (Pt. 419) P. 371.

• Whether a party who benefitted from a loan contract/facility can turn around to deny taking the loan because a condition wasn’t fulfilled?
It would be morally despicable for the Appellants after benefiting from the loan facilities granted by the Bank to turn around to deny taking the loan merely on the ground of non-proof of a condition precedent to drawing down the loan. The Appellant’s cannot, after admitting disbursement of the loan and utilizing the same contend that they did not access the facility because the documents necessary to perfect the loans were not executed. The law is clear on this. If a contract isn’t outright illegal, like in the case of Sodipo v Lemninkainen (1986) 1 NWLR (PT. 15) 220, a person who benefits from a contract can’t argue it’s void or illegal later on, especially when the other party has fulfilled their part of the deal. Doing so would be unfair and unjust. Hydro Hotoles Ltd & Anor v Amcon (2020) LPELR-50740(CA)

5. Is the lender required to give pre-action notice to a borrower before suing to recover a debt?
In Mabon Ltd & ors v Access Bank (2021) LPELR-53261(CA), the agreement between the lender and borrower includes a clause that requires the borrower to give a 90-day prior written notice to the lender before initiating any legal action against the lender. This clause does not require the lender to provide any pre-action notice to the borrower before suing to recover a debt. The Court of Appeal held that it would be unreasonable to require a lender to notify a borrower before suing to recover an unpaid debt. The lender has a legal right to take action to recover its money without providing such notice. The borrower’s obligation to provide notice is meant to prevent frivolous lawsuits against the lender that could delay the recovery process. As such, while borrowers may be required to notify lenders before suing, lenders are not similarly required to notify borrowers before taking legal action to recover debts. The ruling protects lenders’ rights to promptly recover owed funds without unnecessary delays caused by pre-action notices.

• What are the borrower’s Defenses in Loan Recovery Actions?
There are limited defenses a borrower can use in court when sued by a lender for debt recovery:
The borrower has fully repaid the loan and can provide proof of payment.
The borrower never took the loan or the documents related to the loan are forged. Okoli v Morecab Finance (Nig.) Ltd (2002) All FWLR (pt. 369) p. 1164 @ 1184

• Whether the failure of a finance company to comply with the Central Bank of Nigeria (CBN) Guidelines regarding the display and quoting of interest rates renders a loan contract illegal.

No. The court in ProsperFunds Ltd v. Ray-Sam Elite Security & Safety Ltd & Anor (2019) LPELR-50685(CA)  held that the failure to comply with the CBN Guidelines regarding the display and quoting of interest rates does not render the loan contract illegal. The guidelines are not primary legislation, and the proper consequence for non-compliance is the imposition of fines, not the nullification of the contract. The borrower, having benefited from the loan, cannot escape repayment by arguing that the contract is void due to non-compliance with these guidelines.

• Whether a bank has the right to recover a loan facility granted to a customer from any available funds belonging to such customer.
Yes, it does. The court upheld the bank’s right to recover the loan facility from the appellants’ available funds, specifically from their cash collateral. General Housing & Products Ltd v Access Bank (2022) LPELR-58897(CA)

•When will the relationship between a bank and the guarantor of a loan exist?
When the borrower defaults, the guarantor steps into the shoes of the creditor (the bank). This means that the guarantor takes on the rights and responsibilities of the bank concerning the loan. Upon stepping into the shoes of the creditor, the guarantor enjoys the same relationship with the bank as the original borrower. This relationship is defined under Section 251(1)(d) of the Constitution, which pertains to the jurisdiction of the Federal High Court over matters involving the operation of banking and other financial institutions. Royal Exchange Assurance (Nig.) Ltd. v. Aswani Textile Ltd. (1992) 3 NWLR (Pt. 227)  Eboni Finance & Securities Ltd v. Wole-Ojo Technical Services Ltd & 2 Ors (1996) 7 NWLR (Pt. 461) 464

•What’s the effect of write off in Loan?
The primary aim of writing off a debt is to provide investors and auditors with an accurate representation of the bank’s financial health. This accounting action reflects that the bank acknowledges the difficulty or near impossibility of recovering the debt. Despite the debt being written off in the bank’s books, the debtor’s obligation to repay the loan remains intact. Writing off a debt does not equate to forgiving or canceling the debt. Tade Abimbola Nig Ltd v FBN PLC. (2021) LPELR-55773(CA)

For example, suppose Kolagba Stairs Nig Ltd borrowed ₦500,000 from First Bank of Nigeria (FBN) PLC, and over time, it became clear to FBN that recovering this debt was extremely difficult. The bank decides to write off the debt to present a more accurate financial statement to investors and auditors. Despite this accounting decision, Kolagba Stairs Nig Ltd still owes ₦500,000 to FBN. The write-off does not cancel or forgive the debt. FBN retains the right to sell the debt to a collection agency or to file a lawsuit to recover the amount owed. The write-off does not eliminate these rights.


Thank you for reading. See you next week