If you are unable to pay the sums due to a lender in accordance with the terms of a loan agreement, the outcome will largely depend on:
- the processes that your lender has in place to recover its loan;
- your past repayment history;
- your relationship with your lender; and
- acting and communicating swiftly, and accurately.
The loan agreement will set out what the lender’s rights are if there is a failure by the borrower to comply with the terms of a loan agreement that they have agreed with a borrower.
What action will the lender take?
Upon a failure to pay sums due under a loan agreement, the first step that is likely to be taken by a lender will typically be informal communication to determine why you have not made your payment on time.
At this stage, the lender may attempt to discuss agreeing with your alternative arrangements for the payment of the loan to ensure that they continue to receive their repayments in a way that you are able to sustain.
This will all be subject to getting internal approval by the lender and may require an amendment to the loan documentation or greater security to support the debt may be sought by the lender.
If alternative payment arrangements cannot be agreed and the liabilities under the loan remain due and payable, the lender can and is likely to serve a formal notice and demand repayment of the loan.
From the lender’s perspective, formal demand is usually served where there is a lack of communication and ongoing issues regarding non-payment of loans – so it’s best to remain in open and honest communication with your loan provider.
If repayment is not made within 24 hours of the receipt of demand, the lender can take action to secure repayment of the loan – although they are not legally required to wait for this length of time.
What happens once payment is demanded?
At this point, any assets that you have used to secure the loan are at risk, the lender or its insolvency practitioner (“IP”), if one is appointed, can take control of the assets.
If the assets include a business, the IP is likely to have the ability to run the business.
They will typically sell them in order to discharge the value of the sums due to the lender under the loan documentation.
If enforcement action takes place, any costs (including the costs and expenses of the IP or the receiver) associated with this will be added onto the loan and paid using the proceeds of the sale of assets.
If there are any surplus funds following the payment to the lender, these will be due and paid to the borrower – although there are rarely leftover funds from asset sales to hand over to a borrower.
Will I face other charges?
The costs and expenses of enforcement of any security granted to the lender to support the debt under the loan agreement will depend on the enforcement method, including whether receivers or administrators have had to be appointed.
However, they can run high – sometimes in excess of £50,000, plus VAT and disbursements.
Depending on the terms of the loan agreement, the lender may also be entitled to charge default interest if the borrowers fail to pay the loan.
In some circumstances the lender can even charge a management fee for its time associated with managing your account during the default period.
Avoiding loss of assets
“In my experience,” says Dashna, “communication is key to avoiding severe cost implications and the loss of assets.
“A good relationship between borrowers and lenders is built on a mutual understanding of each party’s perspective and expectations.
“Lenders know that there is always a chance borrowers will, for whatever reason, be unable to make a specific payment at a specific time.
“Equally, borrowers understand that lenders expect timely repayments – and that they are usually legally required to make them.
“In order to prevent lenders from enforcing loan security (i.e. seizing and selling charged assets), it is essential that borrowers plan ahead and attempt to make arrangements with their loan provider before it comes to enforcement.”
We can provide impartial, straightforward legal advice to anyone unable to repay an existing loan.
Contact Dashna Morarji-Sagoo by emailing DashnaMorarji-Sagoo@palmerslaw.co.uk or calling 01375 484443 or BJ Chong by emailing BJChong@palmerslaw.co.uk
The contents of this article are intended for informational and educational purposes only.