Sunday, May 31,
2020 / 07:00 AM / by Debtors Africa/ Header Image
Place For Arbitration, Resolutions Or Debt Management / Court
urge you to designate some of the courts for AMCON cases. We urge you to assist
in granting accelerated hearing for AMCON cases."
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
this order, banks are mandated to henceforth prevent all further withdrawals of
funds and other debit transactions from the defendants' accounts domiciled with
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
The Background-Main Facts
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.
facility was meant for work over and drilling campaign at the Ukpokiti field
(OML 108) operated by Shebah E&P.
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.
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.
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.
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).
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.
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.
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.
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.
to the Syndication agreement by the AFREXIM consortium, it was believed that
Polaris Bank unilaterally transferred its share of the judgement facility to
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.
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
- 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
- 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
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.
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:
i. Give 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.
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
1. AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018
2. Bank NPLs (DR 1) - The Case for a New Industry Approach
3. Bank NPLs (2) - The Banking Industry and Its NPL Position
4. Bank NPLs (3) - The State of NPLs
5. Debtors Africa Launches Searchable Digital Database of Recalcitrant and Delinquent Debtors
6. Bank NPLs (4) - A Short History of Recovery Efforts - A Time Series Analysis
7. Bank NPLs (5) - How Banks Fared In 2018; Holding Up Against IFRS9 Tropical Winds
8. Bank NPLs (6) - Technical Analysis on Banks' NPLs - Gross Earnings
9. Debtors Africa: AMCON; Chike-Obi's Alternative View
10. Bank NPLs (7) - Technical Analysis on Banks' NPLs - Profitability
11. Bank NPLs (8) - Technical Analysis on Banks' NPLs - NPL Ratio
12. Bank NPLs (9) - Technical Analysis on Banks' NPLs - Liquidity Ratio
13. Bank NPLs (10) - Technical Analysis on Banks' NPLs - Leverage Ratio
14. Bank NPLs (11) - Technical Analysis on Banks' NPLs - LDR
15. Bank NPLs (12) - Impact of NPLs on Income Trends
16. Bank NPLs (13) - Impact on Growth of the Credit Market
17. Bank NPLs (14) - Regulatory Guidance, Conduct and Enablers