THE IMPLICATION OF TERMINATION OF A LOAN CONTRACT BETWEEN THE DECEASED AND THE BANK
By Adedolapo Adeyosoye Esq
Abstract
Many people assume that debts vanish upon the death of the borrower. Under the Nigerian law, however, debts are tied to the deceased’s estate and must be settled before any inheritance is shared. The banker-customer relationship, being primarily that of a debtor-creditor, does not end with death when a loan is outstanding. This article examines the legal implications of a loan contract following the death of a bank customer and how the estates, administrators, and beneficiaries are affected.
Introduction
An estate refers to everything a person leaves behind after death, such as land, houses, money in the bank, shares, businesses, and even personal belongings of value. After the death of a person, their estate becomes the pool from which debts, funeral expenses, and other obligations are settled before any balance is distributed to beneficiaries. This means that banks or other creditors do not simply write off outstanding loans upon the borrower’s death. Instead, they recover such debts from the deceased’s estate.
Role of the Executor or Administrator of an Estate
Where a deceased person leaves a will, the named Executor assumes responsibility for managing the estate, including repayment of debts. In the absence of a will, the court appoints an Administrator, usually a close relative, to perform the same function.
Executors and Administrators of an estate have a strict duty to identify and settle the debts of the deceased before distributing the estate to beneficiaries. They cannot evade this duty by claiming ignorance of certain debts. Any such debts that come to light remain binding on the estate.
Scope of Powers of Administrators Under Letters of Administration
An administrator of an estate has a legal duty to first identify all debts owed by the deceased during their lifetime and ensure such debts are settled from the estate before any distribution to beneficiaries.[1] This includes outstanding loans and accruing interest, which the bank is contractually entitled to recover.
The powers conferred on an administrator by a letter of administration are wide. It includes the power to hold the real estate as a trustee and also to bear the liabilities of the estate. Although the properties to be administered are usually specified in the grant of letters of administration, this does not limit the administrator’s obligation to settle debts.
When an administrator distributes the estate without first settling outstanding debts, unpaid creditors are not left without remedy. A creditor may recover the debt from the distributed residue, and beneficiaries can be compelled to refund part or all of what they have received from the deceased’s estate to satisfy such claims. In effect, beneficiaries are liable to settle the deceased’s debts to the extent of the value of the assets they inherit.
The Banker-Customer Relationship in Loan Transactions
A banker-customer relationship is, fundamentally, contractual. Where a customer applies for and secures a loan, a distinct loan contract arises, independent of the general banker-customer relationship. The loan contract is evidenced by the loan application, the approval letter setting out terms and conditions, and the customer’s acceptance of the written terms and conditions for the grant of the loan.
The courts have consistently held that such contractual obligations do not terminate upon the death of the customer. In Daura v U.B.N. Plc (2024) 14 NWLR (Pt. 1957) 64 (SC), the Supreme Court held:
I think it is necessary to restate the nature of the legal relationship that arises between a bank and its customer, when the customer applies for a loan from the bank and agrees to repay same on written terms and conditions. In a situation such as this, the banker customer relationship is the primary contract that exists before the customer’s application for loan. This primary contract is the platform on which the customer was able to apply for and secure the loan. The loan contract is contained in the application for the loan, the letter granting the loan and stating the terms and conditions of the loan, his acknowledgment of receipt of the letter and cheque by which he withdrew the loan sum. The acceptance of the written terms and conditions for the grant of the loan brought into being a loan contract with a life of its own separate from the primary contract of banker customer. The death of the customer would not terminate the loan contract until the loan is fully repaid by his estate.
Implication of Termination of a Loan Contract Upon Death
The death of a bank customer does not extinguish outstanding loan obligations. Instead, such obligations transfer to the deceased’s estate.
- Secured loans (e.g., mortgages or car loans), which are tied to collateral, allow the bank to enforce against the collateral by sale or foreclosure to recover the loan.
- Unsecured loans (e.g., personal loans or credit card debt) are recovered from the estate if sufficient assets exist. Where the estate is insufficient, the bank absorbs the loss.
The bank must direct its claims to the estate through the executor or administrator and not harass the deceased’s family members. Just as a bank’s obligation to pay interest on funds in a deceased customer’s account survives the customer’s death, the obligation of the deceased to pay periodic interest on loans or overdrafts also survives and becomes a debt chargeable against the estate.
In practice, however, some banks pressure spouses or children into making payments, even though the proper remedy lies in civil proceedings against the estate. Furthermore, where an administrator distributes the residue of an estate without first settling outstanding debts, creditors may recover directly from that residue. Beneficiaries who have received distributions can be compelled to refund as much as is necessary to satisfy the creditor’s claim.
Thus, it is crucial to note that upon the death of a debtor, the debt automatically transfers to and remains enforceable against the estate and not against individual family members in their personal capacity.
Way Forward
Banks (creditors) must recognize that when a customer dies, repayment of outstanding loans depends entirely on the sufficiency of the estate. If the deceased leaves behind little or no assets, the bank may simply be unable to recover its money, and beneficiaries or relatives cannot be compelled to pay from their personal funds.
To better safeguard against this risk, banks should consider incorporating loan protection insurance into their agreements. Such insurance ensures that, in the event of the borrower’s death, the repayment obligation is covered, protecting both the bank’s financial interests and the deceased’s family from undue pressure.
Conclusion
The death of a bank customer ordinarily brings the banker-customer relationship to an end, but it does not extinguish financial obligations that arose during the customer’s lifetime. Just as a bank’s duty to pay interest on funds standing to the customer’s credit survives death and becomes part of the estate, so too does the customer’s obligation to repay loans or overdrafts with accrued interest. These obligations pass automatically to the estate and must be settled before any distribution to beneficiaries.
However, the family of the deceased is not personally liable for the debt. If the estate is sufficient, creditors are entitled to be paid in full. If it is not, they may only recover what is available. Creditors cannot compel children, spouses, or relatives to use their own personal funds to settle the deceased’s obligations.
It is recommended that banks and financial institutions should embrace practices that strike a fair balance between debt recovery and the protection of grieving families. Measures such as incorporating loan protection insurance, encouraging estate planning among borrowers, and adhering strictly to legal recovery channels would not only safeguard creditor interests but also foster trust and compassion in banking relationships.
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[1] Daura v. U.B.N. Plc (2024) 14 NWLR (Pt. 1957) 64