What is the in duplum rule?

The in duplum rule is a common law principle which provides that, when a borrower is in default, the amount of interest that can accrue on the outstanding debt is capped at the amount of the unpaid capital. In other words, once the unpaid interest equals the outstanding principal, no further interest may accrue while the default continues.

How does the rule apply?

• The rule only applies when the borrower is in default of payment obligations.
• It limits only the interest that accrues during the period of default (often referred to as “arrear interest”).
• Once the borrower remedies the default (for example, by making a payment), interest may begin to accrue again, but always subject to the cap.

Distressed debt and the in duplum rule

In practice, distressed debtors may seek to restructure or amend loan agreements, for example, by changing repayment dates or interest payment schedules. Such amendments can have unintended consequences for the application of the in duplum rule:

• If a loan is restructured so that repayments are relaxed and moved to future dates, especially when the borrower is already not meeting its scheduled instalments, there may be a question as to whether previously accrued interest remains “arrear interest” or becomes simply “unpaid accrued interest”.
• The in duplum rule, strictly speaking, only applies to arrear interest. If interest loses its character as “arrear”, the cap may no longer apply. For example, in the case of a lender and borrower extending the tenor of a loan, with a waiver of prior breaches or defaults, and other forbearance measures, this may have the effect of removing the cap on interest under the in duplum
• To address this debtor side risk, parties sometimes include specific clauses in amended agreements to clarify or preserve the effect of the in duplum rule, or even to extend its protection beyond what the common law requires.

Drafting considerations

When amending loan agreements, it is important to:

• Clearly define when repayments and interest payments are due.
• Specify how accrued but unpaid interest is to be treated, especially if the repayment schedule is being extended.
• Consider whether to include a contractual cap on interest, and if so, whether it should apply only to arrear interest or to all accrued interest.

Conclusion

The in duplum rule remains a vital protection for borrowers and a key consideration for lenders. In the context of loan restructurings and tenor extensions, careful attention must be paid to how interest is calculated and capped. Obtain advice on the drafting and amendment of loan agreements to ensure compliance with the in duplum rule and to protect your interests.