Loan Agreement Default Interest
The two usual justifications for a lender demanding a higher interest rate after a borrower default are both: the recent case of the AV Supreme Court of Argonaut Equity Partners Pty Ltd/Moran  WASC 24 offers borrowers and lenders a useful reminder of the importance of carefully developing interest clauses for delays. Borrowers: The definition of the borrower includes all group companies that require access to the loan, including revolving credits (flexible credits as opposed to a fixed amount repaid in increments) or the working capital component. This should also include all target companies acquired with the funds made available. Subsidiaries that need a provision may need to join the group of borrowers. If there is a reason why the affected companies cannot be parties to the agreement when they are executed – for example. B in the event of an acquisition by limited companies – prior approval from the bank would be required for them to be included in the agreement at a later date. If there are foreign companies in the group, it is worth asking whether they will have access to credit facilities or how. The facility agreement may also designate an individual borrower and allow that borrower to continue lending to other members of his or her group of companies. In ZCCM Investment Holdings plc/Konkola Copper Mines Plc7, a LIBOR default rate plus 10% for unpaid amounts under a transaction agreement was not considered a penalty.
The judge found that it was reasonable for ZCCM to charge higher interest rates in the event of a late payment, as a late borrower does not represent the same credit risk as a potential borrower. The judge also stated that he had seen no evidence that the agreed LIBOR plus 10% rate was “manifestly extravagant” and noted that the 5% rate proposed by Konkolas` lawyer was “below the current rate of judgment”. In addition, the judge was shown that rates of up to 14% had been paid for ZCCM`s shareholder loans. The vast majority of loan contracts will include a late interest provision with a contractual penalty against non-payment of a sum of money. However, caution should be exercised in choosing the default rate and how it becomes due, otherwise such a provision could be invalidated as a sanction. Recent case law has confirmed the new approach a court will apply to determine whether a particular provision can be considered a sanction (and therefore not applicable). Referring to the California Supreme Court precedent in Thompson v. Gorner (1894) 104 Cal. 168, which considered that a lender was entitled to calculate the higher interest rate based on the default agreed by the parties at the time the loan was granted, accepted the EWB`s position that a probable increase in the interest rate of a loan maturing in the event of a late payment would not be subject to an analysis of item 1671 (b). In addition, the Tribunal refused to consider the dir provision as a sanction and instead compared the provision to an additional contract or agreement for an alternative benefit (paying a higher interest rate in the event of a delay) if the initially expected benefit (repayment of the entire loan amount at maturity) did not occur.
In practical terms, the court stated that the bankruptcy court order may have initially felt like a blow to lenders across California, but thanks to the Court`s opinion on the appeal, those feelings were short-lived. However, before expiring to include the DIR rules in each loan, please note that (1) the IDD must be a “reasonable estimate” of potential damage to the lender caused by the default; and (2) Altadena appealed the decision to the 9th Court of Appeal.