Bank of Ireland had no valid basis for imposing an “unconscionable” €213,000 surcharge interest over a loan default by a Co Mayo farmer, the High Court has ruled.
In a judgment raising doubt about the bank’s ability to enforce surcharge interest clauses over loan defaults, Ms Justice Marguerite Bolger refused the bank an order requiring the estate of the since deceased James Boyle snr, a farmer from Drumkeen, Claremorris, to pay that sum over his default on a 2017 loan.
The bank had “no validated, empirical basis” for the “unconscionable and extravagant” surcharge interest rate of 9 per cent, she held.
While it was contractually entitled to charge surcharge interest, which is additional to regular interest, on the debt due, the rate charged was “not a genuine pre-estimate of its loss” as of the date of the 2017 loan agreement.
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The rate was also more than three times the original lending rate of 2.86 per cent, she noted.
Mr Boyle snr was offered the €1.2 million loan facility in 2017 to restructure existing borrowings by him and his wife, who predeceased him, to develop five houses on his lands.
The facility was to be repaid in full by May 2018 from the sale of property assets and was based on its standard terms and conditions for business customers, the bank said.
The bank was entitled, under a clause in the agreement, to apply “proportionate, reasonable and fair” surcharge interest of 0.75 per cent per month to any due amount not paid, the bank argued.
When the loan was not repaid, the bank in May 2022 obtained judgment against Mr Boyle snr of €1.15 million. The issue of liability for the surcharge interest of €213,671, charged between August 2018 and May 2020, was adjourned to a full hearing.
After the farmer’s death in 2023, the proceedings were against his estate, administered by his son Declan. The bank described the case as a lead case and agreed to pay the reasonable costs of the defendant in raising opposing arguments on the surcharge interest issue.
In her recently published judgment, Ms Justice Bolger noted Bank of Ireland’s surcharge interest rate of 9 per cent was struck in 2008 and was the subject of correspondence with the Central Bank of Ireland and the then Irish Financial Regulatory Authority.
The imposition of surcharge interest on a defaulting customer is a “penalty” as well as a means of costs recovery and the surcharge interest clause in the 2017 loan agreement “clearly offends against the rule against penalty clauses”, she held.
The surcharge interest was also “not a genuine pre-estimate” of the bank’s loss in the event of default, the judge found.
There was “no statistical or evidential basis” in 2017 on which the bank could estimate the costs it would sustain if he defaulted.
The surcharge sum equated to the costs of more than 4,000 bank staff hours when the management of this default “did not require that amount of work or anything close to it”.
Nor had the bank established any commercial justification for the surcharge interest charged, she held.
The bank stopped charging Mr Boyle snr surcharge interest in May 2020, having concluded it was unlikely he would repay any of his debt.
Due to uncertainty over the legal position of surcharge interest, it had in August 2021 suspended its practice of applying surcharge interest on all its loans in default.
A 2022 internal review found its costs of collecting surcharge interest were greater than the income derived from surcharge interest, she noted.
Its decision in 2008 to increase surcharge interest to the 9 per cent rate was not based on any identified data or empirical evidence at the time, she found. There was no attempt by it to secure any such data until its 2022 review.
The bank had a “low level of commitment” to recovery of surcharge interest from some customers, she noted.
