Debt financing has become a significant aspect of capital raising for businesses globally. In 2019, the Central Bank of Nigeria issued a directive that increased Loan-to-Deposit Ratio (LDR) to 65%, which means that Deposit Money Banks (DMBs) were obligated to give 65% of their deposits as loan. Due to this directive, many DMBs gave out more loans, but no one could have predicted a global pandemic that would force businesses to close down with grim prospects on ability of borrowers to fulfil their obligations under a loan contract.

The ravaging Coronavirus (Covid-19) pandemic and measures to flatten the curve have thrown individuals and corporate bodies with outstanding loan obligations into a frenzy on how to redeem commitments to banks and other financial institutions. This is even as most businesses have been forced to shut down operations in compliance with directives issued by government in the wake of the pandemic. This, certainly, will affect their turnover, profitability and liquidity. Whereas the cloud of uncertainty continues to thicken, the banks’ obligation to pay interest on deposits may be unaffected by the pandemic.

Many borrowers may be inclined to rely on the pandemic as force majeure or frustration to avoid or postpone liabilities under a loan contract. The lenders on the other hand may be disposed to interpret any default as such event that would entitle them to call in the facilities and make the principal sum and the accrued interest due and immediately payable. Would the doctrine of force majeure avail a borrower in the circumstance? Can the lender successfully invoke its powers under the facility on account that such failure constitutes event of default? Would the effect of the pandemic on businesses trigger provisions relating to material adverse change/material adverse effect? Can a borrower seek refuge in the pandemic to request for moratorium on repayment obligation?

In our maiden publication on the series, we carefully examined the implications of Covid-19 pandemic on contractual obligations generally; probable defences of force majeure and frustration; and the nuances of such defence where applicable. This article interrogates effects of Covid-19 containment measures on loan contracts, prospects of repayment challenge on account of impaired financial health and nature of accommodation to incentivise the borrower.

LOAN FACILITY AND REPAYMENT OBLIGATION
A facility has been defined as “formal financial assistance program offered by a lending institution to help a company that requires operating capital.” Also, Loan Facility has been described as “an arrangement where a person or organisation can borrow money up to a particular amount if and when they need it.” In this contractual arrangement, the lender advances certain amount of money to the borrower for a definite purpose and a determinable period, under certain terms and conditions. There are many types of facilities ranging from term loan, overdraft, deferred payment plan, line of credit, revolving credit, etc…