Recent case law from the Nigerian Court of Appeal demonstrates that, under certain circumstances, borrowers can hold lenders liable under a margin loan facility. In particular, a lender may be held liable where it has significant influence over the facility’s management. The note below discusses the Court of Appeal’s decision in Access Bank v. Menakaya. It shows that a lender’s total disregard for market conditions can have severe consequences.
The bank offered the respondent a margin loan facility described as a “Term Loan”. The facility, which had the following material terms, allowed the respondent to invest in blue-chip stocks in the secondary market.
The bank’s subsidiary, a securities company, purchased shares under the facility. The securities subsidiary could only acquire shares that the bank approved. Following the acquisition, the bank was responsible for managing shares purchased under the facility.
The bank reserved the right to sell the shares if its reading of the market suggested that it was prudent to do so. Additionally, the respondent authorised the bank to sell the shares if their value fell below 130% of the facility amount.
The bank secured the facility with the respondent’s 40% contribution thereto and with the shares purchased under the facility.
Market conditions deteriorated under the 2008 financial crisis in Nigeria. Consequently, the respondent’s portfolio value fell significantly below the facility amount. The bank disposed of the shares and demanded the respondent’s full payment of the facility’s remainder. The respondent sued the bank, arguing that it negligently managed the facility. The respondent argued that the bank had significant control over the facility and was responsible for the subsequent losses. The bank denied that it owed the respondent a duty of care. It maintained that the respondent accepted the transaction risk was liable to repay the loan.
The trial court weighed the respondent’s repayment obligation against the bank’s management undertakings under the facility. It found that the bank had placed itself in and could not renege from the position of a professional investment adviser. Consequently, the trial court held:
“There is no evidence placed before the court by the defendants that they or the 1st defendant took care to sell the shares and remitted the money to the plaintiff when the value fell below 130% of the facility amount. Likewise, there is no evidence placed before the court to show the 1st defendant at anytime read the capital market and found it imprudent to sell the shares; hence it failed to dispose of the shares when it was necessary to forestall a loss of value. What is rather deducible to the court is that the defendants were contented with holding back the shares till the value crashed. It was thereafter that they sold the shares and considered it proper to send Exhibit D to the plaintiff demanding of it to settle an outstanding indebtedness of N715,389,610.35 […] I do hold that by the foregoing acts of omission, the defendants were negligent in the management of the said plaintiff’s shares.”
The trial court ordered the bank to compensate the respondent for its negligent management of the facility. Dissatisfied with the trial court’s decision, the bank appealed to the Court of Appeal. Among other things, it argued that the evidence before the trial court did not support a conclusion that the bank owed the respondent a duty of care. It invited the appellate court to find that the respondent was obliged to settle his outstanding indebtedness to the bank.
The Court of Appeal disagreed with the bank’s position. According to the court:
“The appellant has put itself in a position of an investment adviser or a professional manager of shares. The mere fact that Exhibits B and C were tagged ‘Term Loan’ simplicta does not remove the transaction from the precincts of a Share Purchase Facility, having regard to the contents of the agreements themselves. I agree entirely with the submission of the respondent’s counsel that the appellant owed the respondent a duty of care to properly manage the shares bought with the facility. The appellant had an obligation to monitor the market price value by virtue of the agreement in Exhibit C since the appellant was to manage all the shares bought by the facility, and to sell the shares if the value of the shares fell below 130%.”
The court found that banks undertake several highly professional services on their customers’ behalf. These services may sometimes extend beyond the confines of traditional banking into those where the bank undertakes to transact on its customer’s behalf. According to the court, the law sets and expects a minimum standard of care and skill where the bank renders investment advice to its customer. If a shortfall of standard occurs in discharging the services, the tort of negligence engages, and the bank would have breached its duty of care.
Given the circumstances of the case, the Court of Appeal found that the bank acted negligently by failing to sell the shares in deteriorating market conditions. It, therefore, affirmed the trial court’s decision.
The Court of Appeal’s decision develops the doctrine of lender liability under Nigerian law. The court emphasised the critical condition of the lender’s control over the management of the debtor’s facility. As such, the court will only find a lender liable in a narrow category of cases.
Although the court inferred a duty of care in the parties’ relationship, the case’s outcome is likely to be an exceptional ruling. The court’s decision turned on the bank’s control over the facility’s management and its undertaking to monitor market conditions. However, the case serves as a reminder that a lender’s risk of liability is more than an abstract possibility. Therefore, lenders should be aware of their liability risk whenever they exercise influence over a borrower’s facility.