This is the second instalment from a 4-part series focusing on the key notable issues from the enactment of the Borrowers and Lenders Act, 2020 (Act 1052) (the New BL Act) and the Rules for the Effective Implementation of the New BL Act issued by the Bank of Ghana on the back of the New BL Act (together with the New BL Act, the New BL Regime). In this edition, we will discuss the borrower protections introduced by the New BL Regime which did not exist under the repealed Borrowers and Lenders Act, 2008 (Act 773) (the Repealed BL Act) and the Registry Rules under the Repealed BL Act (together with the Repealed BL Act, the Repealed BL Regime).
The New BL Regime makes life relatively easier for borrowers by prohibiting certain credit practices which the Repealed BL Regime was silent on. For instance, the New BL Act provides that lenders can only impose interest rates which are calculated on an annual basis on borrowers. This appears to be a parliamentary recognition of one of the debilitative credit practices which persisted prior to the enactment of the New BL Act, involving the provision of credit to borrowers at monthly interest rates. The problem with this practice was that most borrowers lacked the financial savviness to recognise the effect of monthly interest rates on their loan repayment obligations over the long-term. For example, an interest rate of 5% per month could seem deceptively low until the annual interest rate of 60% per annum is computed. To prevent financial illiteracy from being used as a tool to enrich creditors at the expense of unsuspecting borrowers, the New BL Act now requires interest rates to be imposed on an annual basis only.
Secondly, the New BL Act prohibits Bank of Ghana regulated lenders from imposing any charges or fees on borrowers unless those charges and fees are disclosed to the borrower in a pre-agreement disclosure statement before the actual loan agreement is signed. A borrower who has paid any such undisclosed fees and/or charges may require the Bank of Ghana regulated lender to refund such charges and/or fees with interest at the prevailing rate. For failing to comply with this provision, a lender may be subject to an administrative penalty of GHS 18,000.
Thirdly, the New BL Act prescribes that where a loan agreement authorises a lender to apply a penal interest rate to any delayed payment of principal and/or interest on principal, the penal interest rate may only be applied on the delayed payment and not the total outstanding loan. It is typical for loan agreements to stipulate an interest rate to be applied to the principal amount advanced under the loan, and an additional interest rate, customarily referred to as a default interest rate, which is to apply if a default event (such as non-payment of any due amount or some other breach of the loan agreement) occurs. Under the Repealed BL Regime, it was not unusual for creditors to apply the default interest rate to the total outstanding loan, instead of only on the delayed payment. With the enactment of the New BL Act, such practices are expected to stop.
Default interest clauses are not without some controversy, and the enforcement of such clauses are subjected to judicial scrutiny to protect borrowers in common law jurisdictions such as ours through the common law ‘rule against penalties’. At common law, a clause is viewed as an unenforceable penalty if it provides that upon the breach of a primary obligation under a contract, a secondary obligation arises on the part of the defaulting party to pay a sum of money to the non-defaulting party which does not represent a genuine pre-estimate of any loss likely to be sustained by the non-defaulting party due to the breach of the primary obligation. Ghanaian courts have held that whether a contractual sum in a lending transaction is to be regarded as an unenforceable penalty is a question of construction to be decided from the contractual terms and inherent circumstances of the financing contract (judged as at the time of the contract was made and not at the time of the breach), and that a sum will be considered to be an unenforceable penalty if the stipulated amount is extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have resulted from the breach.
In England, the House of Lords has recently clarified that when the enforceability of a contractual provision is challenged as a penalty, the real question is whether the impugned provision is penal (and not whether it is a genuine pre-estimate of loss), and that the fact that the remedy proposed under a default clause is not a genuine pre-estimate of the loss to be caused by the relevant breach does not, without more, mean that the default clause is penal. To better guide English courts when deciding whether a default interest clause becomes unenforceable as a penalty, the House of Lords has mandated courts to determine whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.
Within the context of a loan agreement, the English courts recognise that the legitimate interests of lenders include sound commercial reasons which justify the imposition of default interest, such as the fact that the default interest imposed under a loan agreement may reflect the greater credit risk associated with a defaulting borrower. In Ghana, the above mentioned sound commercial reasons (such as the credit risk of non-defaulting and defaulting borrowers) may form part of the contractual terms and inherent circumstances of the financing contract (judged as at the time of the contract was made and not at the time of the breach) which Ghanaian courts are required to consider when determining whether the default interest applied under a particular lending transaction is an unenforceable penalty.
Accordingly, the rule against penalties enables courts to protect borrowers from unconscionable or extravagant default interest rates and is still being applied in English courts. However, the New BL Act, in its quest to protect borrowers by limiting the application of default interest rates to only delayed payments, seems to have cast a shadow over the applicability of the rule against penalties to loan agreements in Ghana going forward. This is because of the wording used in section 55(3) of the New BL Act, which uses the term ‘penal interest rate’ instead of default interest rate and states that penal interest rates are enforceable, subject to their limitation to the delayed principal and/or interest (instead of the total outstanding loan). The reference to penal interest rate begs the question of whether Ghanaian courts still have jurisdiction to strike down default interest rates for being unenforceable penalties. It is my view that this is simply a misnomer, and that by referring to penal interest rate, the lawmakers’ actually intended to refer to default interest rate and did not intend to oust the courts’ long held jurisdiction to protect borrowers by striking down penalty clauses. However, this may need to be clarified by the legislature or our courts.
Finally, a lender is required to discharge a security interest (or cause a registered security interest to be discharged) within 5 days after:
(a) the borrower performs its obligations under the credit agreement to which the registration relates (unless there is a commitment to make a future advance);
(b) the lender consents to release the whole or part of the security interest;
(c) the collateral has been realised in accordance with the New BL Act;
(d) the collateral has been retained as satisfaction for all or part of the relevant secured liabilities in accordance with the New BL Act; or
(e) the debt has been settled and the collateral has been redeemed in accordance with the New BL Act.
The lender is required to provide the borrower with proof of the discharge within the same timeline. The borrower may request the secured lender to discharge (or register the discharge of) its registered security interest where the secured lender fails to comply with its discharge obligations. In such cases, the secured lender is required to comply within 5 days of receipt of the written notice from the borrower. Where the secured lender fails to comply with its discharge obligations within the specified period after being notified by the borrower, the borrower may apply to court for an order compelling the secured lender to comply with its discharge obligations.
It is also the lender’s duty to give a copy of the memorandum of release of debt to the borrower within 5 days after the discharge of a registration.
A Bank of Ghana regulated lender that fails to discharge its collateral registration as stipulated above will be liable to an administrative penalty of GHS 18,000.
We have, through this edition, examined the key additional protections provided to borrowers under the New BL Act. In the third part of the series, we will examine the notable protections and benefits offered to creditors under the New BL Act.