Recovery of Debt in Nigeria: What Legal Considerations Should be Kept in Mind?

 

Debt recovery has become commonplace in both social and business contexts. Whether due to an unpaid loan, a breached obligation to pay for services or goods, or failure to deliver on a contract, anyone – regardless of social or economic standing – can become a debtor. Debt can refer to a principal sum, interest or installment [or both principal sum and interest].

When a debt is owed, the creditor’s next thought is often how to recover it. However, the process can be complex and involve various legal steps that must comply with Nigeria’s laws and regulations. These include the Companies and Allied Matters Act, 2020, the Banks and Other Financial Institutions Act, the Sheriff and Civil Process Act, and the High Court Civil Procedure Rules of the various states and of the Federal Capital Territory.

Debt Recovery Considerations

To recover a debt in Nigeria, several legal considerations must be kept in mind to ensure compliance and increase the chances of timely recovery. A hand-full of these considerations are discussed:

         1.    A Specific Sum

It is clear that in a debt recovery situation, the money to be recovered must be ascertainable, fixed, or known. Therefore, for a sum of money to be considered a ‘debt,’ it must be a specific, calculated amount. Any vague or imprecise sum cannot be recovered as a debt.¹

          2.    Document(s) Showing Indebtedness

It is not sufficient for a creditor to claim that a debtor owes them a specific sum of money without supporting documents to confirm the debt’s existence. The document, whether an agreement or letters, must clearly state the relationship, circumstances, and specific sum owed, and be confirmed by the debtor. Without proper documentation, it becomes a case of the creditor’s word against the debtor’s, making it more challenging to recover the debt when the debtor denies it.¹ This emphasises the importance of having written contracts in all money-related transactions. 

          3.    Default Date

Determining whether a debt is due and whether the obligation to repay has elapsed is a critical step in the debt recovery process. There can be no debt recovery without a default date. This is essential not only in relation to the original contractual agreement that established the obligation and due date but also because subsequent agreements between the debtor and creditor may extend the due date further.²

          4.    Waiver

It is critical to ensure that the creditor has not waived their right to the debt in any agreement or document that defines their relationship with the debtor. If the creditor has waived this right, they would no longer be entitled to demand repayment of the debt or be entitled to the sum owed.

          5.    Right to Privacy

In an attempt to recover a debt, the creditor must respect and uphold the debtor’s right to privacy, which means not disclosing the debt to third parties without the debtor’s consent. There are limitations on how to enforce a debt and publicising it to third parties is an unlawful way that has been frowned upon by consumer and data protection laws such as the Nigerian Constitution, the Federal Competition and Consumer Protection Act, 2019, Nigerian Data Protection Regulation, 2019, as well as the Nigerian courts. Such actions fundamentally breach the debtor’s right to privacy by way of “social-shaming,” defamation³, or criminal imputation without a court verdict. It must be noted that this can work against any chances of recovering the debt owed as the debtor will have ample causes of action to institute legal suits against the creditor – with a high probability of success.

          6.    Written Demand

The creditor must make a written demand for payment, specifying the amount owed, the due date of payment, the final date by which payment must be made, the payment method, and the credit details for payment. It is our opinion that the demand must not of necessity include a notice of legal action if the debt is not paid by the specified deadline Often, demand letters require that debts be paid in full and not in installments. It must be stated here that a formal written demand is a prerequisite for initiating legal action in court, if necessary.⁴

          7.    Dispute Resolution Clause

While the creditor may be eager to recover the money owed, the creditor may want to turn his mind to the dispute resolution clause in the agreement [where one exists] that governs his relationship with the creditor. For instance, where the dispute resolution clause provides for negotiation, mediation, conciliation [collectively known as ADR – alternative dispute resolution], and/or arbitration [in any order] to be used to resolve disputes, it would be inappropriate to rush to court to recover the debt without first exhausting these options satisfactorily.

          8.    Time Limitation

If the dispute resolution clause is silent on ADR or has no dispute resolution clause or the dispute resolution clause refers to litigation, the creditor may resort to court to recover the debt. The success of such legal action depends on many factors, including the presence or absence of the considerations mentioned above. Another important factor is whether the creditor is within the time limit to institute the action. This is because in the Limitation of Action Laws of the various states, an action for debt recovery cannot be instituted in court for a specific time, usually 5 years and upwards, from the time the creditor made the formal demand for the debt to be paid. ⁵ The implication of this is that any action to recover debt brought after the 5 years from the date of the formal demand [as is the case in Rivers State and Cross River State] is invalid and non-existent.⁶ The action can survive, nevertheless, if within, during or after the limitation period, the debtor has expressly admitted, re-admitted or acknowledged the entire debt or part of the debt.⁷ This admittance may be done in writing or by paying part of the debt owed.

          9.    Debt Recovery Action in Court

Debt recovery actions can be pursued at the Magistrate Court, State High Court, or Federal High Court, depending on the amount owed and the preference of the creditor.

In cases where the debt owed is not more than N5,000,000 [Five Million Naira], debt recovery action can be instituted at the Small Claims Court, which is a part of the Magistrate Court. This court provides an avenue for speedy adjudication of business claims, with judgments delivered within 60 days from the commencement of the suit.⁸ Small claims actions are relatively easy to pursue, and debtors can represent themselves adequately. Several states, including Lagos and Rivers, have established Small Claims Courts that cater to such matters.

When the debt recovery action is instituted at a State High Court, it is usually commenced under the “summary judgment” procedure. In some states, such as Lagos, this term describes all situations where the defendant has no defense to the claim brought against them. In other jurisdictions, such as Rivers and Cross River, an action for debt recovery is appropriately commenced using the “undefended list” procedure.⁹

The undefended list procedure is a form of summary judgment used to recover ascertained sums where the creditor believes that the debtor has no defense to the claim. The procedure for beginning an action under the undefended list is embodied in Order 13, Rule 8 of the Rivers State High Court [Civil Procedure] Rules, 2023, and Order 10, Rule 8 of the Cross River State High Court [Civil Procedure] Rules, 2008. This procedure is expeditiously dispensed with, particularly when the court is convinced that the debtor has no defense to the suit. However, actions brought under the undefended list procedure should not seek general or exemplary damages against the debtor since they are unascertainable, and such demands are likely to be refused.¹⁰

         10.  Appointment of Administrator or Petition for Winding Up

If a debtor is a company, a creditor may choose to appoint an Administrator to manage the debtor’s assets for the purpose of repaying the debt.¹¹ Alternatively, the creditor may petition the Federal High Court to wind up the company¹² and appoint receivers/managers and liquidators to oversee the winding-up process.¹³ It is important to note that this option is only available to the creditor if the debt owed is over N200,000 [Two Hundred Thousand Naira], and the debtor is unable to pay after demand is mad.¹¹ The winding-up process is often lengthy and involves the satisfaction of the debtor’s debt in order of priority.

It is essential to note that winding up brings an end to a company, and therefore, petitioning for winding up should be the last resort for the creditor. 

Conclusion

The inability or refusal of a debtor to pay their debts is a civil matter and not a criminal offense. Law enforcement agencies like the Police, Economic and Financial Crime Commission [EFCC], and the Department of State Services [DSS] should not be used to threaten debtors as they are not instruments of debt recovery. Engaging these agencies can have dire consequences, as courts have found such actions to be grossly inappropriate. Therefore, creditors should keep this in mind when seeking to recover debts from debtors.

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END NOTES:

       1.     NIPOST v. Insight Engineering Company Limited (2006) 8 NWLR (pt. 9830), p. 345

       2.     Hung v. E.C. Invest. Co. Nig. Ltd (2016) LPELR-42125 (CA)

       3.     Zenith Plastic Industries Ltd v. Samotech Limited (2007) 16 NWLR (Pt. 1060) CA 315

       4.     Coscharis Beverages Limited v. ITF & Anor (2021) LPELR-56849(CA), Hung v. E.C. Investment Company. Nigeria Limited (2016) LPELR-42125 (CA)

       5.     Mercantile Bank of Nigeria PLC v. Feteco Nigeria Ltd (1998) 3 NWLR (PT.540) 143

       6.     Sections 16 and 22(1) of the Limitation Law of Rivers State, 2004; Sections 16 and 22(1) of the Limitation Law Cross River State; Okonta & Anor v. Egbuna (2013) LPELR-21253(CA)

       7.     Nigeria Social Insurance Trust v. Klifco Nigeria Ltd (2010) LPELR-2006(SC), (2010) 13 NWLR (Pt.1211) 307 S.C.

       8.     Magistrate’s Court of Rivers State Direction No. 1 of 2023

       9.     Imoniyame Holdings LTD. & Anor. v. SONEB Enterprises LTD. & Ors (2010) 4 NWLR (PT. 561)

       10.   Fastech (Nig) Ltd v. Zamfara State Govt & Ors (2019) LPELR-48135 (CA)

       11.   Sections 452 and 463 of the Companies and Allied Matters Act, 2020

       12.   Sections 573(1)(b) and 570(1) of the Companies and Allied Matters Act, 2020

       13.   Section 552 of the Companies and Allied Matters Act, 2020

       14.   Section 572(a) of the Companies and Allied Matters Act, 2020

       15.   Economic and Financial Crime Commission (EFCC) v. Diamond Bank PLC., Petro-continental (Nigeria) Limited, and H.R.H. Eze (Dr.) Peter Opara (2018) LPELR-44217 (SC) 

| Contributors: OBASEOPUWHOI ETIOWO, UJONG OKPA