Loan agreement disputes: suspension of lending and demands for repayment

1. Checking what the suspension of lending or the demand for repayment involves

Checking the content of the notice and the deadline for responding

When a notice is received, we extract the borrowing concerned, the amount, the scheduled drawdown date or repayment date, and the deadline for replying. A refusal to make a new loan, a suspension of the use of a credit facility and a demand for repayment in full of an existing borrowing are separated out, and any reply to a proposal to vary the terms is set out as well.

This separation is necessary because what is in issue differs in each case. Where a drawdown is refused, the issue is whether an obligation to advance the loan had already arisen. Where the use of a credit facility is stopped, the issue is the conditions for using the facility and the judgment that they are met. Where repayment in full is demanded, the issue is whether an event causing the loss of the benefit of time has occurred and whether the procedure required for that has been followed. If these are all treated together as "the bank has cut off our funding", neither the material for a response nor the documents that need to be secured come into view.

The notice does not always arrive in writing. Where something is communicated at a meeting or by telephone, a record is made of when it was said, by whom and what was said. In the discussions that follow, that record becomes the material showing how the explanations developed.

The point of contact within the company is also settled at an early stage. Communications bearing on cash flow reach the accounting, sales and management functions separately. If it has not been settled who speaks to the financial institution and who keeps the records, each function gives its own account, and the discrepancies between them become an issue in the discussions that follow.

Cross-checking the loan agreement, the banking transaction agreement and any variations

This page takes business lending by financial institutions as the typical case, and cross-checks the identity of the lender, the loan agreement, the banking transaction agreement and any variation agreements. Receivables purchase transactions such as factoring are outside the scope of this page; a separate page deals with disputes from the position of the purchasing company.

What has to be collected is not only the individual loan agreements. The banking transaction agreement, the agreements on overdraft facilities or credit lines, the guarantee agreements, the agreements creating security, any variations of these, the documents submitted when the terms were varied, and the business plans and trial balance sheets that were provided are all relevant. Where the contract documents have been redrawn at several points in time, we check which agreement is currently in force.

Where a delay in repayment or a breach of a financial covenant is alleged, we check the reference date and the materials used for the calculation and the contractual conditions on notice and on remedying the breach. Where the lender's explanation has changed, we also check when that happened and who gave it, together with the record of the materials submitted and the answers given. On that basis we consider the contractual basis set out in the notice and the matters that the company is able to explain or remedy.

Understanding the effect on cash flow and on other borrowings

In parallel, scheduled payments such as wages and payments to suppliers are set out against the funds in hand, and the matters to be discussed before the reply, the additional materials needed and the effect on other borrowings are checked.

As to the order of work, the first step is to identify the point up to which payments can continue to be made. Where that point falls before the deadline for replying, the way the discussions themselves are approached has to change. The next step is to check, against the terms of each contract, whether this notice has consequences for other borrowings. There are cases in which the loss of the benefit of time on one borrowing is itself an event causing the loss of the benefit of time on others. In such a case, a single notice affects the relationship with several financial institutions at the same time.

Security and guarantees are checked in the same way. We set out whether the secured property also secures other borrowings, whether a member of management has given a personal guarantee, and on what conditions performance of the guarantee may be demanded. The release of a personal guarantee given by management in connection with a business succession or an M&A transaction, and rights of recourse and indemnification after a guarantee has been performed, are dealt with on the page on the release of personal guarantees given by management in M&A and business succession, and on disputes arising from them.

2. Considering the basis for a suspension of lending or a refusal to advance

Checking whether a contract was formed and what was promised about advancing the loan

Where the company is told that a loan will not be advanced, the first thing to check is whether an obligation to advance the loan had already arisen.

The Civil Code provides that a loan for consumption takes effect where one party receives money or other property from the other party, having promised to return property of the same type, quality and quantity. For a loan for consumption made in writing, it is separately provided that the contract takes effect where one party promises to deliver money or other property and the other party promises to return property of the same type, quality and quantity as the property received. In other words, where there is a written agreement, a contract can be formed even before the money is actually received. Where the agreement is made by electromagnetic record, it is deemed to have been made in writing.

What needs to be checked, therefore, is how far documents had been exchanged with the financial institution. The communication that internal approval had been obtained, the document setting out the terms, the signing of the contract and the specification of the drawdown date are set out in order, with their dates. Internal explanations and oral indications are kept separate from written agreements. That said, an oral explanation is also material showing how the negotiations went and what was said, so any records that exist are secured as well.

The borrower under a loan for consumption made in writing may terminate the contract until the money or other property is received from the lender. If, however, the lender suffers loss through that termination, damages may be sought, so the position is checked together with the terms of the contract. It is also provided that the contract loses its effect where either party becomes subject to an order for the commencement of bankruptcy proceedings before the borrower receives the money or other property. These provisions concern the borrower as well, and are checked where the formation of the contract is asserted.

Cross-checking the conditions for drawdown and for the use of a credit facility

Even where a contract has been formed, the drawdown may be subject to conditions: completion of the registration of security, signature by a guarantor, completion of funding from another bank, maintenance of specified financial figures, or submission of the most recent trial balance sheet. Where the reason the financial institution gives for refusing to advance the loan is that such conditions have not been met, the main points to check are whether the condition was set out in the contract as a condition for drawdown and whether it has in fact not been met. The interpretation of the condition, and any agreement varying or waiving it, are also checked.

The position is the same for credit facilities and overdraft arrangements. Even where an arrangement such as a committed line or a maximum facility amount is in place, under which borrowing may be made repeatedly within a given limit, the loan agreement in many cases provides that the bank may, at its discretion, reduce the facility or suspend its use. Where cash flow is planned on the basis alone that the facility remains available, the options are limited once notice of a suspension arrives.

Where whether a condition is met is in issue, the materials the company can produce are organized at an early stage. If the condition said not to be met is one that can be satisfied by submitting further materials or by taking steps over a short period, satisfying it may be quicker than contesting the point.

Distinguishing an expectation of renewal or refinancing from a contractual right

The fact that a facility has been renewed every year, or that refinancing has been agreed each time a repayment date has come around, does not as a matter of law assure the same treatment next time. Whether a fresh agreement is needed for renewal or refinancing depends on the terms of the existing contract. We check any automatic renewal clause, the deadline for giving notice of refusal to renew, and any renewal or refinancing already agreed. The fact that the relationship has continued as before does not by itself give rise to an obligation on the financial institution to agree to a renewal or a refinancing.

That said, the course of dealing is not without significance. Circumstances such as the financial institution having given explanations premised on renewal, having asked for a funding plan premised on renewal, or having agreed that advance notice would be given if the facility were not to be renewed, may carry weight both in the discussions and, if a dispute later arises, as part of the company's case. What needs to be checked is not whether there was an expectation, but what specific exchanges that expectation rests on.

Renewal and refinancing of a loan are approached on this page contract by contract; the points on notice and discussion that are common to the ending of any continuing business relationship are covered on the page on ending a business relationship and refusing to renew a contract.

Considering the stated reasons and the course of dealing

We distinguish between reasons given by the financial institution that have a contractual basis and reasons that amount to an explanation of policy or of a credit judgment. Explanations such as "business conditions are difficult" or "this is head office's decision" are not necessarily contractual grounds for suspension in themselves. Where, on the other hand, there is a specific ground behind such an explanation, such as a breach of a financial covenant or a failure to meet a reporting obligation, that is the substantive basis.

Where the discussions continue without the reasons being clear, a different reason is sometimes given later. Whether to ask for the reasons in writing is a judgment that also takes into account the effect on the business relationship, but a record is kept internally, at the least, of the reasons given and when they were given.

3. Considering loss of the benefit of time and demands for repayment in full

Checking alleged breaches of financial covenants and reporting obligations

Where repayment in full is demanded, the basis given is in most cases a contractual event causing the loss of the benefit of time. Events such as delay in repayment, loss of the benefit of time on another obligation, breach of a financial covenant, failure to meet a reporting obligation, and a material change in financial condition are typically set out in the contract.

The first step is to check with figures and documents whether the event alleged has in fact occurred. For financial covenants, the contract specifies which indicator for which accounting period is to be assessed and by which method of calculation. Whether the figures are consolidated or non-consolidated, the date to which they relate, and whether the contract provides for particular items to be excluded can change the conclusion. Where the financial institution's calculation and the company's own calculation differ, we identify the reason.

Reporting obligations likewise have the documents to be submitted, the deadline for submission and the recipient specified in the contract. Circumstances such as the document having been submitted but with no record of receipt, the document having been sent to the wrong recipient, or the deadline having passed but the document having since been submitted, have a bearing on the discussions that follow.

Checking the conditions for loss of the benefit of time and the notice or demand required

On the benefit of time, both the statutory provisions and the terms of the contract are checked.

The Civil Code provides that the benefit of time is presumed to have been fixed for the benefit of the obligor, and that the benefit of time may be waived but that this may not harm the interests of the other party. It also sets out cases in which the obligor may not assert the benefit of time: where the obligor becomes subject to an order for the commencement of bankruptcy proceedings; where the obligor destroys, damages or diminishes the security; and where the obligor fails to provide security in a case where it is under an obligation to do so.

In practice, however, a loan agreement will usually set out contractual events causing the loss of the benefit of time in detail, in addition to these. Such provisions take one of two forms: those under which the benefit of time is lost automatically on the occurrence of a specified event, and those under which it is lost upon demand by the financial institution. Which form applies determines whether a notice or a demand is required and from what point default interest runs.

What is checked, therefore, is, first, which of the two forms the event said to apply falls into; second, whether the procedure that form requires (notice, demand, or the allowance of a period in which to remedy the breach) has been followed; and third, what can be argued where it has not.

Considering remedying the breach and the effect on other contracts, security and guarantees

Even where a breach is made out, we consider whether it can be dealt with by remedying it. Where the contract provides for a period in which to remedy a breach, we check what has to be done within that period in order to satisfy the requirement. Even where there is no such provision, an offer to remedy the breach, and carrying it out, can be practical material in the discussions.

At the same time, we check the consequences for other contracts. As noted above, there are cases in which the loss of the benefit of time on one borrowing is an event causing the loss of the benefit of time on others. There are also cases in which the conditions for enforcing security or for demanding performance of a guarantee are linked to the loss of the benefit of time. Even where discussions are being taken forward with one financial institution, what would happen in relation to the others needs to be kept in view.

Default interest is also checked. On agreed damages for non-performance of an obligation under a loan for consumption of money, the Interest Rate Restriction Act provides that where the ratio of the agreed amount of damages to the principal exceeds a specified rate, the excess is void, and that a penalty is deemed to be agreed damages. Separate special rules apply to loans for consumption of money made in the course of business. When the basis on which the amount demanded has been calculated is checked, this point is checked with it.

4. Varying the terms and taking the discussions with the financial institution forward

Identifying the terms to be varied and the cash-flow evidence behind them

Where a variation of the terms is proposed, what is sought is identified specifically. Is it a deferral of principal repayments, a reduction in the amount repaid, an extension of the term, a change to the interest rate, or an easing of terms in exchange for additional security or an additional guarantee? Which of these is sought determines the materials that need to be produced.

In every case, what supports the request is the cash-flow outlook. We set out the monthly schedule of receipts and payments, the timing of large receipts, seasonal variation, the breakdown of fixed costs, the expenditure that can be reduced and the expenditure that cannot be stopped. What matters here is to state the assumptions on which the outlook rests. Figures whose assumptions are not stated cannot be tested in the discussions, and as a result carry little weight.

The company should also be able to explain what the period of relief sought is for. Where six months' relief is sought, it should be able to show what will change during those six months — a recovery in orders, equipment coming into operation, a sale of assets, or funding obtained elsewhere. Where the company cannot explain any prospect of the situation improving through the passage of the period itself, the relief is taken as putting the problem off. Conversely, where it can show what will change and when, the length of the relief sought has something to rest on.

Where some payments have already been stopped, or are likely to have to be stopped, the contractual reporting obligations and deadlines are checked, and how that fact is to be explained is considered. If it comes to light later, it affects the credibility of everything explained until then.

Considering proposals on deferral of repayment, interest rates and additional security

The terms proposed by a financial institution may include an extension of the term in exchange for a reduction in the amount repaid, an increase in the interest rate, the provision of additional security or an additional guarantee, restrictions on the use of funds or on dividends, and more frequent reporting. For each of these, we check what is settled and what remains open if it is accepted.

In particular, even where a variation involving additional security or an additional guarantee improves cash flow, we check its effect on other funding options and on the options for business restructuring. Where the asset to be given as security is one that the business needs in order to continue operating, and where the scope of a guarantee would extend beyond the existing guarantees, that effect is checked before the terms are accepted.

Keeping the materials and explanations given to several financial institutions consistent

Where the company borrows from several financial institutions, we check that the materials and explanations given to each are consistent. If the figures in the cash-flow projection or the business plan differ from bank to bank, that fact in itself affects the company's credibility. Continuing to repay some financial institutions on more favorable terms than others may also be raised as an issue in the discussions with the others.

The order in which each financial institution is told what, and when, is decided in advance. Where the collection of the company's own receivables, as the source of funds for repayment, is also an issue, the position of the creditor is covered on the page on what to do when a customer does not pay (unpaid receivables and late payment).

Checking the variation agreement and its effect on existing rights

Where a variation of the terms is agreed, the content of the agreement is checked. What has to be checked is not only the varied terms themselves. Are the existing events causing the loss of the benefit of time treated as resolved, or do they remain reserved? How is default interest that has already accrued to be dealt with? Is there any change to the security or the guarantees? Is there any provision on the relationship with the other borrowings? An agreement that does not deal with these expressly invites disagreement over its interpretation later.

We also check whether it could be argued that the variation agreement itself amounts to a "material change in financial condition" or similar event under another contract. The fact that a variation has been agreed with one financial institution may work against the company in its relationship with another.

There are also matters to check after the agreement has been made. Where the reporting obligations under the varied terms are more onerous, and a breach of reporting obligations is specified as an event causing the loss of the benefit of time, a failure to meet the varied obligations may become a new such event. If the company takes the view that the variation agreement has solved the problem and lets its management of these matters slacken, it will find itself repeating the same discussions before long. The terms agreed need to be set at a level the company can actually meet.

5. Considering what to do where the discussions do not reach agreement

Organizing the basis and the evidence for a claim for performance or for damages

Where the discussions do not reach agreement, we consider whether a legal claim is possible. A claim seeking the advance of the loan requires the formation of the contract and the satisfaction of the conditions for drawdown to be shown. Where damages are under consideration, the first step is to identify which breach of obligation or which conduct the claim is based on. For delay in performing the obligation to hand over the loan money, we check the special rules on monetary obligations together with the terms of the contract. Damages under those special rules do not require proof of the loss actually suffered. Claims based on a breach of a duty to explain, on tort or on similar grounds are considered separately, as to both their requirements and the scope of damages.

In practice, the difficult part is proving the loss. What is to be asserted as the loss caused by the failure to advance the loan, and what materials will show the amount, are considered at an early stage. The costs of obtaining alternative funding, penalties incurred through late payment and the profit on lost business are possible items, but we check not only the evidence for the amount but also whether the item is recoverable on the basis relied on.

Checking the conditions for using financial ADR, civil conciliation, litigation and other procedures

The procedures available for resolving a dispute include, besides direct discussions with the financial institution, dispute resolution procedures in the financial sector, civil conciliation, litigation and arbitration.

On dispute resolution procedures in the financial sector, the Banking Act provides that a bank must take the measure of concluding a basic contract for the implementation of dispute resolution procedures with a designated dispute resolution organization for banking services where such an organization exists, and, where none exists, must take complaint processing measures and dispute resolution measures. It also provides that, where the bank has taken the measure of concluding such a basic contract, it must make public the trade name or the name of the designated dispute resolution organization concerned.

The range of matters that dispute resolution procedures in the financial sector can cover differs according to the type of financial institution and the nature of the dispute. At the Mediation Committee of the Japanese Bankers Association, for example, cases in which an application for a loan or for a variation of terms has been declined following the institution's assessment are among those for which the dispute resolution procedure is not carried out. For disputes over a breach of contractual obligations or over the explanations given, whether the matter falls within the intake of consultations and complaints is checked separately from whether it falls within the scope of mediation.

Dispute resolution procedures in the financial sector and civil conciliation are procedures aimed mainly at a resolution by agreement between the parties. Civil conciliation is a Japanese court procedure in which a conciliation committee assists the parties in reaching a settlement. Dispute resolution procedures in the financial sector also include a mechanism under which a bank is asked to accept a special conciliation proposal, subject to the exceptions provided by law. Litigation, and arbitration based on a valid arbitration agreement, by contrast, seek a determination of the rights and obligations under the contract and related matters. No procedure, simply by being used, secures the variation of terms that the borrower seeks. Where one is to be used, the purpose and the extent of the resolution expected are set out in advance.

The requirements for making an application, the range of disputes covered, the costs and the time each procedure takes differ between organizations and procedures. The current rules are checked at the point when use of a procedure is being considered.

Considering whether provisional remedies are needed

Whether a provisional remedy is needed depends on what is in dispute. Where a claim for damages is in prospect and there are concerns about the other party's financial standing, a provisional attachment would be the step to consider, but where the other party is a financial institution the circumstances in which a need on grounds of financial standing is recognized are limited.

The Civil Provisional Remedies Act provides that an order for provisional attachment may be issued, in respect of a claim for the payment of money, where it would otherwise become impossible to enforce the claim or where enforcement would face significant difficulty. An application for a provisional remedy requires a showing both of the right to be preserved and of the need for the remedy, and security is usually required.

What arises more often in practice is how to respond to the enforcement of security or to a set-off against deposits. For these, the contractual requirements and procedure and the time at which enforcement is expected are checked, and the options for responding are then considered.

Considering the limits of repayment discussions and whether the company's debts as a whole need restructuring

Where a variation of terms with a single financial institution will not keep the company's cash flow going, the focus moves from the individual discussions to the restructuring of the company's debts as a whole. At that stage, payments to suppliers, employees' wages, whether taxes and social insurance contributions are in arrears, and the position of any unencumbered assets shape the options.

The dividing line is whether there is a prospect of the debts being restructured while the business continues to operate. Where there is such a prospect and where there is not, both what is explained to the financial institutions and the materials to be prepared differ. What steps are available also depends on the stage at which advice is sought and from whom. Where funds are already close to running out, the procedures that can be chosen are limited.

For that reason, what is to be done if the discussions do not reach agreement is considered at the same time as the discussions on varying the terms are begun.

How we assist

Organizing the contracts, the notice and the record of the discussions with the financial institution

We cross-check the loan agreement, the banking transaction agreement, any variations and the security and guarantee agreements, and set out the basis given in the notice alongside the matters the company is able to explain or remedy. Where there are several borrowings, we check how far the consequences extend.

Assisting with the reply to the financial institution and with discussions on varying the terms

We assist, from a practical standpoint, with drafting the written reply, with how the cash-flow projection and the business plan are presented, and with the consistency of the explanations given to several financial institutions. We also review the content of a variation agreement and its effect on existing rights.

Assisting with the choice of dispute procedure and with steps towards continuing the business

We consider the choice of procedure where the discussions do not reach agreement, the organization of the evidence, and whether a provisional remedy is needed. Where the company's debts as a whole need restructuring, we also consider the timing and the method.

Key legislation and official sources

English translations of legislation are provided for reference. The Japanese texts are authoritative.

Where it appears	Legislation	Source type
Formation of a loan for consumption; loan for consumption made in writing; electromagnetic records	Civil Code（民法）	Japanese legislation
Termination by the borrower before receipt; loss of effect on commencement of bankruptcy proceedings	Civil Code（民法）	Japanese legislation
Presumption as to the benefit of time, waiver, and cases where the benefit of time cannot be asserted	Civil Code（民法）	Japanese legislation
Restriction on agreed damages for non-performance under a loan for consumption of money; penalties	Interest Rate Restriction Act（利息制限法）	Japanese legislation
Special rules on damages for non-performance of monetary obligations	Civil Code（民法）	Japanese legislation
Measures for complaint processing and dispute resolution; publication of the designated dispute resolution organization	Banking Act（銀行法）	Japanese legislation
Dispute resolution procedures in the financial sector; scope of the Mediation Committee	Operational Rules regarding Complaint Processing Procedures and Dispute Resolution Procedures（全国銀行協会の業務規程）	Official guidance
Civil conciliation	Civil Conciliation Act（民事調停法）	Japanese legislation
Arbitration based on an arbitration agreement	Arbitration Act（仲裁法）	Japanese legislation
Requirements for an order for provisional attachment; showing the right to be preserved and the need for the remedy; security	Civil Provisional Remedies Act（民事保全法）	Japanese legislation

Legal information reviewed: 2026-09-18

Frequently asked questions

Contact

Making an inquiry

Please tell us the outline of the situation, any notice you have received and its date, and any deadline you are working to.

Contact Form

Related Services

Related Crisis Management Topics

Financial services: overview

Individual guides, according to the situation, on lending and the raising of funds, investment agreements, raising funds against receivables, the regulation of financial services, and dealing with the authorities.

Investor demands under investment agreements

Disputes over an investment agreement after investment has been taken in: objections to a further funding round, contractual demands for the purchase of shares, the difference between the position of the company and that of the founder, and responding in negotiations, arbitration and litigation.

Banking and finance (practice areas)

Our work in this area covers lending and the raising of funds, investment agreements and shareholders agreements, responding to financial regulation, project finance, and legal work relating to securities and financial instruments.

This article is provided for general informational purposes only and does not constitute legal advice on any specific matter. Please consult us regarding your specific situation. The content is based on the laws and regulations in effect as of the date of the last update.