WHAT ARE THE BEST MECHANISM IN RECOVERY OF DEBT?

The best mechanisms to adopt when recovering debt.

CHAMAN LAW FIRM

2/28/202211 min read

WHAT ARE THE BEST MECHANISM IN RECOVERY OF DEBT?

Here are some of the practical ways debt can be recovered depending on the best style applicable in the circumstance.

1. Summary Judgment: Summary judgment is a fast approach to recover the indebtedness of a person or entity especially when the debt is undisputed or has been admitted by the writing of letters or issuance of cheques or other forms of communication. The sum being claimed must be arithmetically ascertainable and precise. The Creditor must also have the belief that the Debtor has no defence to the sum being claimed. To arrive at this belief that the Debtor has no defence to the claim, he is expected to furnish the Court with some relevant documents which will aid in proving the liquidated sum. The documents are:

- Contract documents such as loan offer letters, duly executed deeds of guaranty and indemnity {where suing the guarantor of the loan} from which the claim or debt arose

- Statement of account or other instruments like receipts, invoices, vouchers, tellers establishing the debt that is being claimed

- Letters of demand from the Creditor and letters from the Debtor showing admission of some debt or obligation on the part of the Debtor,

Once the above conditions and criteria are met, then the applicant can proceed with the summary judgment procedure or the undefended list procedure to recover the indebtedness of the Debtor. Once judgment is obtained, the creditor can enforce the judgment against the debtor, without further delay.

2. Insolvency - Bankruptcy and Winding Up: Insolvency occurs where the Debtor's liabilities exceed his assets or in another instance, where his liabilities do not exceed his assets but his liquid cash is insufficient to settle his indebtedness. Insolvency usually occurs in two ways – Bankruptcy, and Winding Up

BANKRUPTCY

A person is said to be bankrupt where he is indebted to the tune of not less than N2000 and he is unable to pay within 14 days of service of 'bankruptcy notice' on him. It applies only to natural persons.

Conditions for the Presentation of A Bankruptcy Petition

1. The Debtor's indebtedness must not be less than N2000

2. The debt must be a liquidated sum and arithmetically ascertainable

3. The Debtor has committed any acts of bankruptcy under section 1 of the Bankruptcy Act

How to Recover the Debt of A Person Through Bankruptcy Proceeding

Where a Debtor is unable to pay his debt which must not be less then N2000.00, the Creditor will apply to the Court for issuance of a bankruptcy notice alongside his petition that the Debtor is declared bankrupt. The bankruptcy notice gives the Debtor notice of the bankruptcy action against him and also to pay his debt. Where after the issuance of the notice the Debtor refuses to pay or unable to defend the bankruptcy petition filed against him, the Court would then issue a receiving Order.

The implication of a receiving Order is that the Debtor has now become bankrupt and his assets now vested in a receiver. [Section 7{1}{c} of the Bankruptcy Act]. Once a receiving Order is made against the Debtor, the Debtor would file a statement of affairs or arrangement stating how he intends to distribute his assets to liquidate his debt. The Creditors are at liberty to accept the Debtor's arrangement or refuse same.

Priority of Payment in Bankruptcy Proceedings {SECTION 36 BANKRUPTCY ACT}

- All debts due from the bankrupt to the State

- All wages or salary of any employee in respect of services rendered 4 months before the date of the receiving Order, not exceeding N300;

- A landlord or other persons who have a right or lien over any goods or effects of a bankrupt within three months before the date of the receiving Order was made

- All debts proved in the bankruptcy shall be paid pari passu.

If there is any surplus left after these payments have been made, the surplus will be applied to payment of interest from the date of the receiving Order was made

Who Can Apply for the Discharge of A Bankrupt?

- The bankrupt or Debtor can apply to the Court for an Order discharging him from bankruptcy.

- The Court on its own application or on the application of the receiver or trustee [Section 28 (2) of the Act]

- By effluxion of time: a bankrupt shall be discharged after five years from the date a receiving Order was made against him. [Section 31 of the Act]

Implications of Declaring A Person Bankrupt

- A bankrupt person is disqualified from holding public offices like being voted as president or vice president, he is also disqualified from being appointed or sit or vote in any governing board whether corporate or unincorporated bodies.

- Disqualified from being appointed as a justice of the peace or an allowed to practice in any regulated profession {Section 126 of the Bankruptcy Act}

- It Disqualifies the Debtor from access to credit or loans

Winding Up:

Where a company is unable to pay its debt as at when due, such company can be wound-up in pursuance to Section 408 {d} of the Companies and Allied Matters Act, 2004. A Creditor who desires to present a winding-up petition against a company for its inability to pay its debt must present his petition to the Court registry stating the grounds upon which he is relying.

Upon application by the Creditor and after the requirement for the advertisement of the petition is met, the Court can then appoint a provisional liquidator. A provisional liquidator has the power to bring or defend an action in the company's name or carry on the business of the company for the purpose as may be necessary for its winding up. When the petition has been proved, the Court will make an Order for winding up the company.

When an Order for winding up has been made, or for a provisional liquidator, the Official Receiver is to be notified of such Order by the Registrar not later than 5 days after the Order was made. The registrar is to send the Official Receiver 3 sealed copies of the Order. One copy of the Order would be served on the company at its registered office or at its principal or last known principal place of business. If the Order is for the company to be wound up by the Court then a copy of the Order shall be forwarded to CAC.

Priority of Payment

- The costs, charges and expenses involved in the liquidation.

- All wages and salaries payable to employees, including holiday pay.

- Unsecured Creditors and any interest that is attached to any debt (but only if the debt became due before the liquidation process began).

- Any debt owed to shareholders of the company, such as dividends or profits.

3. Receivership: According to Black's Law Dictionary, a receiver is a person appointed by Court for the purpose of preserving the property of a Debtor pending the action against him or applying the property in satisfaction of a Creditor's claim, whenever there is a danger that if such appointment does not take place, the property will be lost, removed or injured. There are certain people that need receivers:

- An infant

- Any person found by a competent Court to be of unsound mind

- An undischarged bankrupt,

- A director or auditor of the company

- Any person convicted of any offence involving fraud, dishonesty or official corruption

Duties and Powers of A Receiver

- The right to take possession of the property and assets of the company and protect the company;

- Receive rents and profits and discharge all out-goings in respect of the company and realize the security for the benefit of those on whose behalf he is appointed;

- To sell or otherwise dispose of the property of the company by public auction or private contract;

- Power to do all acts and to execute in the name and on behalf of the company any deed, receipt or other document and

- Power to draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company.

Distribution of Proceeds

All monies realized from a sale of assets, rents or debts shall be distributed by the receiver in accordance with his instrument of appointment or in a manner set out by the Court to liquidate the Debtor's indebtedness. Distribution is done in the following areas:

- The cost of realizing the assets

- Other expenses of the receiver including remuneration and costs;

- Costs, exchanges, other outgoings and the expenses of trustees under the debenture trust deed, if any, including their remuneration;

- Cost of debenture holder's action (if any);

- Preferential debts out of the property subject to a floating charge in priority to the claims of the debenture holder

- The debenture debt with interest accruing thereon up to the date of payment.

4. Foreclosure of Mortgage Property:

A foreclosure Order gives the Creditor or mortgagee the right to acquire the mortgaged property used as security for the loan free from the mortgagor's equity of redemption.

Conditions Necessary for A Foreclosure Order

- The debt must have become due.

- The power of sale must have become exercisable

Who Can Apply for A Foreclosure Order?

- Legal Mortgagee

- Equitable Mortgagee

- Assignee

How to Recover A Debtor's Debt by Foreclosure

Where the Debtor defaults in repaying his loan or fails to completely liquidate same, the Creditor will take out a writ of summons or originating summons seeking the following reliefs:

- A declaration that due to the mortgagor's default or failure to liquidate partly or wholly his indebtedness to the mortgagee the mortgagor's right to equity of redemption has ceased.

- An Order of Court to foreclose the mortgagor's right of equity of redemption, the mortgagee

- Where the applicant is an equitable mortgagee, he may seek a declaration that due to the default of the mortgagor, he is entitled to be considered as a legal mortgagee.

- Documents/Facts the Applicant Must Disclose in Seeking A Foreclosure Order

- Full particulars of the mortgage deed, including:

- The amount due {principal and interest} which can easily be ascertained from the Debtor or mortgagor's statement of account or other relevant documents;

- The date the sum was due {date fixed for redemption};

- Nature of the security furnished for the loan;

- Relevant covenants in the deed of mortgage, description of the mortgaged property, title documents of the mortgaged property.

- The default giving rise to the right of foreclosure

- Steps the Creditor or mortgagee has taken so far to recover the debt

The Court having heard the Creditor's application may foreclose the Debtor or mortgagor right of redemption. An Order of foreclosure of the mortgaged property must be stamped and it must also be consented to by the governor of the state. Non-compliance with this provision renders any transaction or instrument which purports to vest in any person an interest in the mortgaged property null and void {Section 22 and 26 of the Land Use Act}.

5. Mareva Injunction: it is always advised for Creditors/Banks to approach the court for Mareva Order when there is the likelihood or suspicion that the Debtor may dissipate or dispose of his assets before the case is concluded in court. The Creditor has the right to apply to the Court for an Order of Mareva injunction to restrain the Debtor from removing or dissipating such assets till the final determination of the case so as not to render the judgment of Court nugatory.

Conditions for the Grant of A Mareva Injunction

- There must be a real and imminent risk of the Debtor removing his assets from the jurisdiction and thereby rendering nugatory any judgment which the Creditor/Bank may obtain.

- The applicant must make full disclosure of all material facts relevant to the application i.e. the nature of debt owed and the sum being owed, documents showing the debt being owed and a document showing how the debts came to be.

- The applicant must give full particulars of the assets of the defendant within the jurisdiction which he seeks to preserve.

- The balance of convenience must lie on the side of the applicant; and

- The applicant must be prepared to give an undertaking as to damages.

A Mareva injunction restrains the Debtor from removing or interfering with his assets the suit is completely decided. However, it must be noted that a Mareva injunction is preservatory in nature and does not operate to attach the assets of the defendant in executing the judgment of the Court.

Procedure for the Grant of A Mareva Injunction

The Creditor is required to make an application to Court usually by motion exparte {except Court Orders otherwise} supported by an affidavit clearly disclosing facts and reasons which clearly supports the conditions for the grant of the application. It is also necessary for the Creditor to also file his originating processes alongside the motion for Mareva injunction.

6. Recovery of the Indebtedness of a Deceased Debtor: In law, one must be a legal person before he can sue and be sued and a person who is dead can no longer sue or be sued. In trying to recover debt from a deceased person, the only way available to the Creditor is to go after the deceased's "estate". The Black's Law Dictionary defines "estate" as "the property that one leaves after death; the collective assets and liabilities of a dead person".

As a general rule by the doctrine of privity of contract, only a party to a contract that can be bound by it. However, there are some exceptions to this rule:

- Where the beneficiary is a co-owner of the asset where the debt arose from.

- Where the beneficiary guaranteed the debt of the deceased Debtor.

- Also, in some jurisdictions, where any property acquired by a spouse during a marriage is considered as a communal property/jointly owned property and both spouses have joint rights and liabilities irrespective of one spouse's death.

The Administration of Estates Law of Lagos State provides that Creditors are among persons who can apply to administer the estate of the deceased. Hence after 21 days, he is entitled to apply to the probate registrar for grant of letter of administration to administer the estate.

The Priority of Payment When Estate of the Deceased is Insolvent

- The funeral, testamentary and administration expenses.

- All rates due from the deceased from the date of his death and payable within 12 months after his death.

- All wages and salaries of servants in respect of services rendered during 4 months before his death

- All wages of any labourer or workman in respect of services rendered to the deceased two months before his death.

- All amounts due in respect of compensation under the Workman Compensation Act which accrued before the death of the deceased.

7. Criminal Petition for Illegal Diversion of Funds, Obtaining by Fraud and Issuance of Dud Cheque: Generally, debts are not recoverable through criminal petitions or presentation against Debtors since loans resulting in debts arises from contractual obligations. However, Creditors sometimes employ criminal petition against the Debtor for issuance of dud cheques in liquidating debts, illegal diversion of funds and obtaining by fraud which will ensure the debts are paid back, in Order to ensure the petitioner withdraws his petition for possible criminal petition.

Criminal Petition In Respect of Dud Cheques

A dud cheque, popularly known as "bounced cheque", is a cheque issued by a bank customer whose account is in debit or whose credit balance is lower than the amount indicated on the cheque. A Creditor can proceed to petition against the Debtor where the Debtor issues a dud cheque or other instrument to the Creditor to liquidate his debt. Section 1(a) (b) of Dishonoured Cheques Offences Act, 1977 criminalizes the act of offering dud cheques for credit, goods and services as an offence. On conviction under Dishonoured Cheques Offences Act, 1977; an individual shall be sentenced to imprisonment for 2 years without an option of fine, while in the case of a body corporate (Companies, Business and Non-Government Organisations, etc) it shall be sentenced to a fine of not less than N5,000. A company involved in the issuance of dud cheques is liable as a corporate body while its owners and staff by whatever title or description that consented, connived or was negligent in duty are punishable and liable individually.

Criminal Petition With Respect to Obtaining by Fraud or Illegal Diversion Of Funds.

Where a Debtor obtains funds by false pretence or fraud or misappropriates credit facility granted to him for other purposes other than for the purpose for which it was granted, the Creditor is at liberty to proceed against such a Debtor by filing petitions to appropriate agencies against such Debtor. In Nigeria, a Creditor can proceed under Sections 311 and 312 of the Penal code Act for criminal breach of trust, that is, where the Debtor misappropriates or uses credit availed to him in a dishonest manner or diverts the credit on other purposes other than for which it was granted. Anyone found guilty of committing a criminal breach of trust is liable to a term of imprisonment which may extend to seven years or with fine or with both.

WRITTEN BY: CHAMAN LAW FIRM TEAM

E-MAIL: chamanlawfirm@gmail.com / info.chamanlawfirm.com

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