Bank NPLs (14) - Regulatory Guidance, Conduct and Enablers

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Friday, May 29, 2020 / 06:30 AM / by Debtors Africa/ Header Image Credit:   EcoGraphics


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Statutory and Judicial Position on Debt Recovery and Collection in Nigeria 

Very recently, the Central Bank of Nigeria (CBN) fined 12 major banks to a collective tune of N499.1billion for breaching CBN's policy on Loan Deposit Ratio (LDR) which the apex bank had fixed as a minimum of 60%.  While this fine is huge, the attitude of the banking sector towards lending is not far removed from the attitude of debtors towards repayment. It is the norm that banks will have to chase down debtors in order to recover loans given to them which sometimes have to be written off as bad debts. The Asset Management Company of Nigeria alone has about 3000 debt recovery cases in court accounting for over 5 trillion Naira debt.

 

The Legal Framework for Recovery 

The Nigerian legal system has quite a number of laws that govern the facilitation and recovery of credits. These include the Moneylenders Laws of various states, Stamp Duties Act, Companies And Allied Matters Act, Federal High Court Act, Bankruptcy Act, Statutes of Limitation and very recently, the Secured Transactions In Moveable Assets Act and the Credit Reporting Act both of 2017.  

 

The remedy for debt recovery is largely available under the common law obligation of the debtor to seek out his creditor to repay the loan. There is an implied obligation in contract that the borrower will repay the loan obtained from the lender, which implied obligation becomes strengthened when incorporated as an express term in the contract between parties. There are legislations primarily on insolvency, bankruptcy and receivership under the Companies and Allied Matters Act, which may be regarded as providing some legal framework of debt recovery. We also have the Bankruptcy and Insolvency Act 2016, and the Rules of Procedure set out in the Bankruptcy Rules Cap B2, LFN 2004. The rules are supplemented by the Federal High Court Rules with some modifications in conformity with the provisions of the Bankruptcy Act.  The AMCON Act is also relevant to debt recovery, however, it is not of general application but specific to recovery of debt in relation to eligible assets of delinquent debt bought over by AMCON. A combined application of these laws may be deemed a sufficient legal framework.

 

Some of the considerations that will guide the legal remedies available to a creditor are whether the debtor is an individual or corporate debtor, the nature of the security involved and the terms of the contract between the parties.

 

Recovery of Unsecured Credit

Generally speaking, all debt recovery begins with a demand for the repayment of the credit. It is trite law that there can be no action for recovery of credit in the absence of a demand. The case of UBN v OKI [1999] 8 NWLR (PT 614) is emphatic on this. The demand must be one that is unequivocal with a stated date as a deadline for payment. The law is that where the demand is left open ended without a deadline, it will amount to no demand.

 

It is not until after the debtor has failed to pay up upon the expiry of the demand notice that a creditor can proceed to enforce the recovery options open to him. 

 

A secured creditor can proceed against the security, and an unsecured creditor may proceed against the debtor. A secured creditor is one for who an interest or right  in a property is created to serve as a satisfaction upon default of payment by the debtor. An unsecured creditor is the one who has no security i.e no interest or right created for him to fall back on where the debtor defaults.

 

The very first consideration for a debtor trying to recover credit is the mode of recovery contained in the contract. Where however the contract is silent on the mode of recovery, one of the remedies open to an unsecured creditor is the commencement of an action in court against the debtor for the repayment of the credit amount. This is the usual remedy for unsecured credits. An action is brought under the undefended list or summary judgment process at a court with competent jurisdiction for claims that are non-contentious. Contentious amounts however will require a writ of summons. When judgment is entered in favour of the Creditor, a number of options are open to him in order to enforce the Court judgment. The Sheriffs and civil processes act provide for various processes of enforcing a judgment debt. relying on the Act, he can commence garnishee proceedings which is an order that monies belonging to the debtor held by a 3rd party be paid to the creditor.  in the case of Azubuike Vs Diamond Bank Plc (2014) 3 NWLR (pt. 1393) 116 at 127 paragraphs C - E the court held that:

 

"The attachment of debts by Garnishee proceedings is one of the ways a judgment creditor can execute his judgment and it is provided by section 83 - 92 of the sheriffs and civil procedures act. It enables a judgment creditor to attach an amount of money in hands of any other person who is indebted to the judgment debtor this third party is the Garnishee and an order nisi is made initially by the Court to attach the moneys in the hands of the Garnishee. Subsequently, the Garnishee will be ordered to appear and show cause why he should not pay the debt he owes to the judgment debtor or so much thereof to the judgment creditor, to satisfy the judgment sum and costs."

 

Also, a creditor (judgment creditor) who is successful in court against a debtor (Judgment debtor) can also levy execution against the assets of the debtor. This is done through what is called a writ of fiery facias (fi fa), This enables the court sheriffs to seize the movable goods of the judgment debtor and attach them, where the movable assets of the judgment debtor are not enough to satisfy the judgment debt, then the immovable assets of the judgment debtor will be attached. the purpose of attaching the goods of the judgment debtor is to the end that they may be sold off and the proceeds used to satisfy the debt owed by the judgment debtor to the creditor. 

 

Where a judgment debtor has repeatedly failed to pay the judgment debt and there are no properties of his to be attached, a judgment creditor can have a judgment summons brought against the judgment debtor.  A judgment summons is an order to show cause why a person in contempt of court should not be committed into prison custody. The judgment debtor will be examined as to his means and where it is considered that he has means but just willfully refuses to pay, he may be committed into custody.

 

What happens then when the debtor does not have enough monies or assets to satisfy the judgment debt? 

 

At this point the only option left to a judgment creditor is to bring about bankruptcy proceedings against the judgment debtor (Section 32 of the Bankruptcy Act). This will result in the appointment of trustees to manage whatever assets or income become due to the judgment debtor. Also, after a successful bankruptcy proceeding against a judgment debtor, the judgment debtor will be precluded him from holding certain elective and other public offices or from practicing any regulated profession (except as an employee).

 

However, the reality is that we hardly see any successful high-profile bankruptcy case mostly because those who borrow huge sums hide behind the cloak of incorporation to borrow monies for which they are the principal beneficiaries. This makes it increasingly difficult to recover the huge sums of monies that have put a dent in the Nigerian Economy and that form a huge chunk of the debts that have been acquired by the Assets Management Company of Nigeria (AMCON). This is rooted in the fact that companies have a separate legal personality from their shareholders and directors, and where the company is limited by shares, the liabilities of the shareholders are limited to the amount subscribed to by them which are most times already paid up.

 

While a creditor has more options in recovering debts against a corporate debtor, the end point is still the same. By the provisions of Section 408 of the Companies and Allied Matters Act, a creditor can commence winding up proceedings against a company that fails to pay his debts, under Section 412 of CAMA creditors can bring an order of stay on all other suits in other courts pending the outcome of the winding up proceedings. An action can also be commenced directly against directors of the company where the loan amount was misappropriated and the directors are culpable under Section 290 of CAMA. 


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Recovery of Secured Credit

In Nigeria, a credit facility can be secured either by a moveable or an immovable asset. Securities over immovable assets include mortgages and charges. 

 

Charges

A charge is an interest granted to a creditor over an asset. It is a right given to a creditor to discharge an interest in the charged asset for the satisfaction of the debt. 

 

Mortgages

A mortgage on the other hand is the transfer of interest in an asset to the creditor (mortgagee) as security for credit with a condition that the interest will be re-conveyed to the Debtor (Mortgagor) upon the satisfaction of the debt. A creditor is at liberty to proceed against the security asset in order to recover the credit amount.

 

Where the security is over movable assets, the security can take the form of liens, pledges, mortgages and charges. By the provisions of the Secured Transactions in Moveable Assets Act, where a security over movable assets is registered under the Act, what is required where the debtor defaults is that a notice of default and intention to repossess be given to the debtor and the grantor. Where after 10 days of the notice, the debtor still fails to fulfill his obligation, the creditor can take possession of the security by bringing judicial proceedings against the debtor except the right to judicial proceedings has been waived in the security instrument.

 

Limitations and Clogs to Recovery

By virtue of the limitation laws in Nigeria, the right to recover credit elapses after 6 years of either the date when the right of recovery arose or the last date the debt was acknowledged (where it is acknowledged within 6 years of the right of recovery). Furthermore, the Moneylenders Law of the various states require that registered moneylenders have all loan agreements formally documented in writing. Any agreement not put in writing cannot be enforced. Where the creditor charges an interest, there is an assumption that the creditor is a money lender.  The Stamp duties act also requires that all security instruments be duly registered and stamped. Where it is not stamped, the instrument cannot be tendered in evidence of the transaction in court. Also, for foreign companies who advance loans in foreign currency to Nigerian borrowers, a certificate of capital importation has to be acquired from a Nigerian bank to facilitate easy repatriation of the facility in foreign currency upon repayment.

 

It is interesting to note that under Nigerian legal jurisprudence non-payment of debt is not a criminal offence but purely a civil matter. To this end, the Police, EFCC and ICPC cannot be used to recover debts. The nature of debts is seen as a contract between persons under Nigerian law which lies within the purview of the civil jurisdiction of the courts. The only time law enforcement can get involved in debt recovery is when it has a colouration of fraud, theft or conversion and even then, the law enforcement agents can only be involved to the extent that the criminal aspect of the transaction extends.


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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



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