Bank NPLs (16) - The Place of Arbitration, Resolution or Debt Management


Sunday, May 31, 2020 /  07:00 AM / by Debtors Africa/ Header Image Credit:   EcoGraphics

Proshare Nigeria Pvt. Ltd.

The Place For Arbitration, Resolutions Or Debt Management / Court

"We urge you to designate some of the courts for AMCON cases. We urge you to assist in granting accelerated hearing for AMCON cases."


This was a statement by the Managing Director/Chief Executive Officer of AMCON, Mr. Ahmed Kuru, at the 2019 annual seminar for Justices of the Court of Appeal


The statement by the AMCON Boss underscores the need to have a specialised group of judges handling debt recovery matters. The question whether the judges should operate in a special court or should remain in a specialised division of the existing courts is still open to debate considering the modalities involved in either of those options.


Although the judiciary has tried to prioritize AMCON matters, court sittings are still affected by events such as court vacations, judges' conferences, availability of judges and long adjournments due to congested court dockets.


 There exist very strong advantages or arguments for special courts - which include the view that special and focused courts would have subject matter experts as judges, which would lead to sounder judgments. Another argument is that a new court would have less backlog of cases and would somehow translate to cases being resolved faster. Additionally, it is important to note that the need to have specialized judges that are familiar with the intricacies of commercial transactions led to the creation of the specialized division of the courts in Lagos State like the Commercial Division. Ultimately, the position is that a focused judiciary will deliver the best form of justice for the sector.


As an example of the application of this position, it is easy to appreciate that labour-related disputes are better resolved under the new arrangement of the National Industrial Court than what was obtainable before its establishment. Debt and debt recovery are fast becoming the bane of the financial sector of the economy and unless addressed, the economy may not experience much growth beyond the level of liquidity that is available to grow businesses. In conclusion, even if specialised courts for debt recovery are not created, matters related thereto should be handled by judges with specialised skills set in the subject matter.


Furthermore, litigation for the most part thrives on the ventilation of the rights of the parties. What is eventually produced at the end of litigation is the declaration of right in favour of one party and against the other. It turns out a "win-and-lose" situation. Alternative Dispute Resolution on the other hand de-emphasizes the ventilation of right and focuses on "interest" (nay commercial interests), which often turns out a "win-win" situation for the Parties. Due to the short timeframe it takes to resolve disputes via ADR, the time value of money makes ADR more advantageous to debt recovery than going the full hog of litigation with all its appellate trappings. Occasionally the ADR approach has yielded faster results where the debtor has shown a willingness to discharge their debts in a bid to protect their assets, preserve business relationships and avoid the publicity of litigation. Litigation is the last resort and for some debtors the threat of pending litigation and the risk of asset forfeiture is all the motivation they need to come to the negotiating table and agree on a way to discharge the debt that is fair to both parties.


The experience so far is that ADR may be a very cost-effective mechanism in debt recovery cases particularly when the debt is undisputed, and the parties understand commercial expediency and demonstrate their commitment and good faith towards the process.

Tricky Loans and Pivoting Laws

Banks get tied into difficult loan situations for a variety of reasons ranging from the complexity of the transaction, the competence of the loan officer, the underlying soundness of the activity to which the loan was to be used and the nature of the legal framework within which the loan facility was granted. A brief legal case study underlines the point.


Proshare Nigeria in 2019 reported the legal challenges between the Asset Management Company of Nigeria (AMCON) and Messrs. Shebah Exploration & Production Company herein Dr ABC Orjiako served as guarantor of a commercial loan in good faith as a director of the Oil & Gas Company. The issue, at the time, was fairly muddy in the local media but a review of the critical matters surrounding the loan provided significant learning moments for the banking sector.


The Suit

This is a case resulting from an application by Mojisola Owoseni of Lexavier Partners, legal practitioners, legal counsel to AMCON in suit number FHC/ABJ/CS/945/19 against ABC Orjiako, Shebah Exploration & Production Company Limited, with RC No 499348, and Allenne Limited.

In the application, AMCON asked the court to grant Francis Chuka, a Senior Advocate of Nigeria, right to exercise its function as Receiver/Manager of Dr. Orjiako's assets in Nigeria and abroad, including Shebah Exploration & Production Company Limited.


Mr. Chuka was appointed by AMCON as Receiver/Manager on July 30, 2019, with the mandate to "take possession of and preserve all its assets and undertakings" by Dr. Orjiako.


The assets and undertakings included his personal properties at Nos. 10C and 25A Lugard Avenue, Ikoyi, Lagos; an oil vessel, MT Trinity Spirit, used as a floating, Production, Storage, and Offloading (FPSO) facility in Ukpokiti Oil Field belonging to Shebah Exploration & Production Company Limited.



The Parties


Parties to the suit were the following:


1.     Asset Management Company of Nigeria and,


2.     Shebah Exploration & Production (E&P) Company Limited.


3.    Dr A.B.C Orjiakor



Recent Judgment


The Federal High Court holden at the FCT Abuja granted the Asset Management Corporation of Nigeria's (AMCON's) application to take over the assets of Dr. A.B.C. Orjiako. The order was given by Honourable Justice Taiwo O. Taiwo and issued on August 15, 2019.


By this order, banks are mandated to henceforth prevent all further withdrawals of funds and other debit transactions from the defendants' accounts domiciled with the banks.


They were also expected to furnish the Receiver/Manager within seven (7) days from the date of the notice with comprehensive statements in respect of each accounts while the order was expected to be binding and enforceable against the banks.



The Background-Main Facts


In 2012 Shebah E and P obtained a $150million loan facility from a consortium of banks (AFREXIM/Diamond- now Access/Skye- now Polaris) led by AFREXIM.

The loan facility was meant for work over and drilling campaign at the Ukpokiti field (OML 108) operated by Shebah E&P.


In the offshore Niger Delta, Shebah drilled a successful horizontal well, the first of its kind and tested 4000 barrels per day of oil and condensate production but encountered large gas reserves. 


Then, the company decided to find a solution to the huge Associated gas based on professional oil field best practices before continuation of the oil/ condensate production. Shebah required more funds to commercialise the gas to avoid excessive flaring while producing the discovered oil. Then, AFREXIM led consortium of lenders, could not provide further facilities to Shebah to conclude the operations. In 2014, Shebah approached Zenith Bank, which appraised the situation and provided a $200million loan facility fully approved by its board to rescue the situation. 


Zenith proposed to pay the consortium of banks $50million to reduce their collective exposure, enhance the facility to $300million, provide Shebah with additional funds to monetize the gas and produce the discovered oil. 


The enhanced facility would have had Zenith join and lead the syndicate with $200million, while the consortium of existing lenders would have reduced their exposure and stay at $100million (about $33million each).


In line with Shebah's need, Zenith was noted to have further requested a moratorium period of 9 months to conclude the projects and extend the facility tenure to 5 years.


This was meant to spread the cash flow and enable easy repayment of the enhanced facility. Unexpectedly, the AFREXIM consortium rejected the $50million offered by Zenith Bank on the grounds that Zenith should not lead the syndicate and they were not willing to extend the tenure of the facility which was remaining about two and half years as at the time of Zenith's offer.


The AFREXIM consortium allegedly rejected all the efforts being made by Shebah and proceeded to file an action to call the facility in 2014 (just two years after final draw down). The call of facility ahead of the maturity triggered the default on the loan. On February 19, 2016, Mr. Justice Phillips of the London High Court delivered a judgement in favour of the AFREXIM consortium for the repayment of the $150million loan facility. 


The judgement creditors then registered the judgement in Federal High Court in Lagos and applied for enforcement of the judgement. The defendants (Shebah Exploration & Production and ABC Orjiako) immediately opposed the registration and the enforcement of the judgement based on their convictions on rule of law and on the fact that they would like to negotiate an out of court settlement and pay back the loan under a restructured arrangement. This case was still live before an Honourable Justice of the Federal High Court in Lagos. The next hearing date was in October, 2019.


Contrary to the Syndication agreement by the AFREXIM consortium, it was believed that Polaris Bank unilaterally transferred its share of the judgement facility to AMCON.


Notwithstanding the unilateral action by Polaris Bank, some legal analysts have argued that AMCON should have joined the existing court case in the Federal High Court in Lagos, but instead it initiated a fresh action in the Federal High Court  Abuja, not minding that the same case  had  already received a ruling in London and was subject to a contested enforcement proceedings in the Federal High Court Lagos.


It is by the fresh case that AMCON was alleged to have obtained the Ex-Parte order which was reported by various media platforms.


 Post-Court Judgment Actions

Since the Judgment, the AMCON/Shebah case has become a major story, and remains one with delicate contours as it passes through local court processes.


Lessons on Developments

A few learning moments from the episode shows that:

  • Banks need to adopt flexible perspectives to the lending process and loan workouts. Considering the willingness of Dr. Orjiako to repay the loan as a guarantor, a line of mediation that allows for non-litigious channels could have been seen as preferable. This is an important point in the process of debt delinquency and recovery especially when it has to do with a consortium of financial institutions.
  • AMCON has done a decent job in the area of debt recovery, but in this instance, legal analysts argue that it may have shown more restraint in the case by pushing for mediated settlement, considering the action of the parties involved to find a lasting solution to the lingering issue.
  • Dr Orjiako had, from available information at the time, shown willingness to repay about $68m of the debt outstanding from personal resources but this should have been a proactive step that would have reduced the incidence of the bank and AMCON seeking to institute legal action against him and his investments in the first place.

The reports of AMCON's alleged move to impound the personal assets of Orjiako and Shebah was believed likely to harm efforts at resolving the debt quickly and to the satisfaction of all parties. The action showed a detour from the government's policy of encouraging direct domestic investment in the real sector and creating a less adversarial relationship between regulators and cooperative commercial debtors.

The AMCON/Shebah case opens up the consideration of other regulatory and legal matters as it affects bank loans.

AMCON - Provisions & Approach

The AMCON Act 2010 and its provisions have been discussed earlier, but of major importance to the financial system is the debt agencies approach to debt resolution and loan wind down. In the last nine years AMCON has seen debt resolution as a web of unresolvable loan assets covered by the weight of tax payers money. Resolving several debt issues in court has been a herculean task for the body despite the engagement of generally competent legal minds. The problems are two pronged:

1.      The original credit granted by the banks from which AMCON acquired the loan asset were defective in many ways concerning documentation, credit evaluation (through very weak credit appraisal memoranda (CAMs)), willful professional negligence (such as 'shorting' or delaying the sale of a borrowers collateral until the value of the pledged assets is lower than the loan amount) and spurious financial charges. The large numbers of cases that fall within these categories make AMCON's likelihood of winding down the public burden of carrying the assets very unlikely.

2.     AMCON bought loans from a number of banks at values far higher than the true value of the underlying facility in default. The fact that the assets were overpriced at the beginning suggests that AMCON had acquired assets of dubious recoverability. The overstated value of loan assets explains why nine years into its operations the agency still has debt assets of over N5trn on its books.


Considering the problems of AMCONs approach to debt recovery and the predominantly bureaucratic rather than pragmatic perspective to debt recovery, a new approach may be required to handle AMCON's bad assets, especially since the underlying redeemer of the loans is the tax-paying Nigerian public. AMCON has a sunset clause in its Act that rounds up the activities of the agency in 2020, this means that a successor institution or the CBN will need to carry the burden of recovery of outstanding assets on AMCON's books after 2020. Evidently the CBN has neither the inclination nor capacity to recover commercial debts as its structure is not designed for such operations. What appears obvious is that a new debt recovery approach needs adoption. Nigeria's version of the "good bank-bad bank" model that has worked in the United States of America and in some parts of Latin America has proved unworkable in its current format in Nigeria. The way forward may be to do the following:

  • Rethink the AMCON approach and "rebundle" the debt into a longer-tenored instrument to be paid from proceeds of loan recoveries and future taxes. The new sovereign instrument would write down the value of the debt outstanding and writes off parts of the debt against accumulations to the excess crude account (ECA) above a certain benchmark. 
  • The problem with the issuance of a sovereign instrument to pay off the debt of large domestic borrowers is that it leads to a problem of adverse selection where people with bad conduct are rewarded for their actions by tax payers having to pay for their character failings. But the converse side of the argument is that if funds were not used to bailout banks it could have resulted in a systemic financial meltdown that would equally have adversely affected tax payers.  To combat the problem of moral hazard, the debtor recovery architecture could be arranged such that as the fiscal system pays down existing debt, the debt recovery cases should be allowed to continue in court, and were convictions are secured, the defendant/s should be sent to jail in addition to having their assets seized and sold as part of the recovery process. Debt so recovered would be paid to the ECA.
  • The debt recovery process should be less a matter for guided public institutional oversight as it should be one of incentive-based private sector-led diligent prosecution. The debt recovery process should provide competent debt recovery agents a steeper reward for success and a more aggressive mandate for loan asset recovery.



 Proshare Nigeria Pvt. Ltd.

CBN Approach

The Central Bank of Nigeria in April 2015 issued a statement to the effect that in order to ensure that the industry NPL ratio does not exceed the prudential limit of 5%, and to improve the credit culture in the banking industry, banks and discount houses are directed to observe prudent credit underwriting and monitoring standards.


It further stated that banks and discount houses are required with effect from May 1st 2015 to: 


iGive the delinquent debtors three months of grace to turn their accounts from non-performing to performing status.

ii. Publish the list of delinquent debtors that remain non-performing in at least three national daily newspapers quarterly (The delinquent debtors are those whose accounts have been classified lost and include the persons, entities, directors, subsidiaries and other related parties). The list must be sent to the CBN as soon as the publication is made.


Banks and Discount houses are also to note that delinquent debtors in the category described above will be blacklisted by the CBN and are therefore:


i.  Banned from participating in the Nigerian foreign exchange market.

ii. Banned from participating in the Nigeria Government securities market.


The above was the beginning of a new era of non-fiscal policies aimed at curbing the trend of non-performing loans in the banking system.


Prior to this time, the Central Bank had partnered with the NDIC to setup the Asset Management Company of Nigeria (AMCON) in 2010. It gave a sovereign trust guarantee to back up the eligible bank assets purchased by the Asset Management Company of Nigeria. The banking system regulator helped to fund the purchase of 95% of the non-performing loans within the banking system. At the same time, the CBN released new prudential guidelines for deposit money banks (DMBs). This contained specific provisions as to regulation of credit and credit facilities by deposit-taking banks. The CBN stated in the document circulated to banks and signed by the Director of Banking Supervision, Samuel Oni, that the guidelines became necessary to correct the extremely fragile financial system that was tipped into crisis by the global financial meltdown, which manifested in macro-economic instability, major failures in corporate governance, lack of investor and consumer sophistication, inadequate disclosure and transparency, uneven supervision and enforcement and critical gaps in prudential guidelines.

In the new risk management framework, the CBN directed banks to prepare comprehensive credit policy manuals duly approved by their Board of Directors, and that the credit manuals should, among other things, cover loan administration, disbursement and appropriate monitoring mechanism and should be reviewed every three years. The new guideline stipulated that the tenure of external auditors in a given bank shall be for a maximum period of 10 years from date of appointment after which the audit firm shall not be reappointed in the bank until after a period of another 10 years.

The total outstanding exposure by a bank to any single person or a group of related borrowers is fixed at a maximum of 20% of the bank's shareholders' fund unimpaired by losses while aggregate large exposures in any bank should not exceed eight times the Shareholders' fund unimpaired by losses. "The top 50 exposures should not be more than 50% of the total loan portfolio and must be in at least 10 different sectors or industries. All banks must ensure that they have policies in place to address portfolio concentration and the policies must be strictly adhered to," the guideline stated.

The guideline further stipulated that the "Specialised loans" exposure of a bank shall not exceed 20 per cent of total loan portfolio net of provision of the bank - including off balance sheet engagement, adding that any excess over 20% prescribed limit without the CBN approval shall be subject to full provision and should be part of general provisions on a quarterly basis. The CBN also put a limit on exposures to directors and significant shareholders, stating that a director or a significant shareholder should not borrow more than 1% of a bank's share capital except with the prior approval of the CBN. It also said that the maximum credit to all insiders should not exceed 10% of share capital.


There was also a requirement that directed that all banks must obtain credit reports from at least two credit bureaus before granting any facility to their customers just as all banks should provide evidence that a search has been conducted on the borrower in the CBN's Credit Risk Management System (CRMS) database. Addressing margin lending, the guidelines stipulated that all banks involved in margin lending shall comply with the guidelines issued by the CBN and the Securities and Exchange Commission (SEC) on Margin Lending for banks, brokerage firms, asset managers and other financial institutions.


Unfortunately, CBN guidelines have not been able to tame the tendency of banks to find creative ways around the rules and so, insiders tend to benefit from bank loans to an extent significantly higher than what appears in their reports. AMCON Asset Management Partners (AMPs) have complained that privileged Nigerians, particularly politicians have been the most visible culprits in bad loan situations and they have used their privileged contacts to avoid punishment for bad conduct with respect to bank loans. In addition, bank directors have also shown a weakness to disrespect CBN rules concerning insider borrowing. Nigerians that have borrowed billions from the banks have in the process gained access to the financial arsenal needed to avoid repayment and jail time. 

Proshare Nigeria Pvt. Ltd.

Related Reports (PDF)

1.      Download the Full PDF Report - Debtors Africa, May 13, 2020

2.     Executive Summary PDF - Proshare, May 14, 2020

3.     AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018

Proshare Nigeria Pvt. Ltd.

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