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

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.