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The Supreme Court has spoken: accrual of interest post-default is restricted

The Supreme Court of the Republic of Rwanda has recently handed down a historic and precedent-setting judgment on the accrual of interest after the loan is classified as non-performing and the lender terminates the loan agreement, particularly the application of the in duplum rule.

SIMACO Limited v I&M Bank Rwanda PLC (RS/INJUST/RCOM 00008/2021/SC)

The case arose from the loan agreement entered into between I&M Bank PLC (the lender) and SIMACO Ltd (the borrower) on 29 July 2014 under which the lender made available to the borrower three types of facilities including an overdraft facility of FRW200-million. The borrower fully repaid two facilities but defaulted on the overdraft facility which, in 2018, led the lender to terminate the loan agreement, with the outstanding loan amount of FRW248 384 992 becoming immediately repayable.

The borrower disagreed with the lender on how the loan amount outstanding as of the date of termination was calculated, and filed a claim before the court requesting the latter to quantify the loan amount that was outstanding on the date of termination of the loan agreement by the lender.

At all levels from the Commercial Court to the Court of Appeal, the borrower cited the regulation of the Central Bank on credit classification and provisioning, and submitted that interest should have ceased to accrue following the classification of the loan as non-performing and termination of the loan agreement by the lender. This argument was rejected by the three courts including the Court of Appeal which held that the loan amount payable by the borrower was FRW337 619 878. The borrower then referred the matter to the Supreme Court for review due to injustice.

Before the Supreme Court, two issues were considered. The first issue was more factual as it was related to the determination of the principal loan amount that was outstanding on the date of termination of the loan agreement. The second issue (which was more a question of law) was whether interest (both ordinary and default interest) could continue to accrue after the termination of the loan agreement by the lender. The Supreme Court first relied on the expert’s report and confirmed that the principal loan amount that was outstanding on the date of termination was FRW102 568 441.

On the issue of accrual of interest post-termination, the Supreme Court relied on scholarly legal writings and held that the accrual of interest cannot be affected by the termination of the loan agreement, and the parties are allowed to agree that in case of termination, interest shall continue to accrue. The Supreme Court then concluded that in loan agreements, interest (ordinary and default interest) continues to accrue on the principal loan amount outstanding at the time of termination until the date of full repayment of the loan.

The Supreme Court, however, further held that the accrual of interest after the loan has become non-performing and/or termination of the loan agreement is restricted by the provision of article 112 of the law nº 47/2017 of 23/9/2017 governing the organisation of banking, which provides that interest the lender can recover from the borrower following classification of the loan as non-performing cannot exceed the principal loan amount owed when the loan becomes non-performing (in duplum rule). It is on this basis that the Supreme Court reduced interest recoverable by the lender from the borrower to FRW102 568 441, which was the principal outstanding on the date of termination.

Relying on the judgment of the Supreme Court of Appeal of South Africa in Standard Bank of SA Ltd v Oneate Investment (Pty) Ltd, the Supreme Court emphasised the significance of in duplum rule where it held that this rule was included in legislation for public policy purposes to protect borrowers from continuing to be subjected to excessive interest even in case the lender decides not to recover for interest to continue to accrue, which would be a burden on the borrower and negatively affect the economy in general.

This Supreme Court decision is timely and commendable, and will likely be welcomed by the lenders regarding the implication of termination of the loan agreements on accrual of interest, and by borrowers regarding the application of the in duplum rule to protect them from exploitation by lenders.

It does however elicit a number of legal questions. By stating that the in duplum rule serves public policy or public interest, it is clear that the same rule can neither be waived by borrowers nor be altered by banking practice, but the question as to whether the rule would apply or not apply to foreign law governed loan agreements and/or credit facilities extended by foreign lenders remains unanswered.

Another issue is whether the in duplum rule is subject to exceptions or not. For instance, if, as advanced by the Supreme Court, the ratio legis of the in duplum rule is to protect borrowers from the exploitation of lenders who permit interest to accumulate, a view one concurs with, it may be well argued that the rule should not apply where the lender or the borrower timeously institutes legal proceedings, as in that case the lender cannot be said to be exploiting a borrower who with the assistance of delays inherent in legal proceedings, keeps the lender out of his money.

Related to this is also the issue as to whether the in duplum rule affects the accrual of interest on the judgment debt until the date of repayment thereof by the judgment debtor, and whether such interest would accrue on the whole amount of judgment debt or the principal loan amount outstanding.

Dieudonné Nzafashwanayo

ENSafrica Rwanda | Partner