Michael K. Bielonwu Esq., MCIArb., FIDR.
U. L. Agada, Esq.
Fredrick O. Omatseyin Esq.
Jeremiah E. Aneji Esq.
Margaret E. Ogbonnah, Esq.
In Nigeria, debt recovery has always been an issue of concern for businesses, especially those in the financial sector, like banks and other money lenders, as it is increasingly becoming difficult to recover a debt owed using the coercive powers of the courts alone. This article considers debt restructuring, which is often less coercive but has, over time, proven to be a more effective way of debt recovery.
What is debt:
What is debt restructuring:
Debt restructuring is now defined as an event in which a debtor is in financial difficulty, and a creditor grants a concession to the debtor by a mutual agreement or court judgment. Under the old standard, ‘debt restructuring’ included all arrangements that resulted in modifications of the terms of a debt obligation (Deloitte 2006, pp. 21). The new standard requires the assets or equity interests received or surrendered by the debtor to the creditor to be measured at fair value.³
Debt restructuring under different regimes:
From our definition of debt restructuring above, debt restructuring can result from court judgment or by the mutual agreement of parties, that is, the creditor and the debtor. Therefore, we shall look at debt restructuring under these two regimes hereunder.
Debt restructuring under the court system:
Here, we are looking at debt restructuring as a result of an order of the court or judgment. This type of restructuring is usually referred to as an instalment payment ordered by the court.
Section 21 of the Sheriffs and Civil Process Act mentioned payment by instalments as another way of describing debt restructuring. The said section provides thus:
(1) Where a court has made an order for payment of any sum of money by instalments, no writ of execution for the enforcement of the judgment shall be issued until after the default in payment of some instalment according to the order.
(2) On any such default, execution or successive executions may issue for the whole of the said sum of money and costs then remaining unpaid, or for such part thereof as the court may order, either at the time of making the original order or at any subsequent time.
Under the 2004 Civil Procedure Rules of the High Court of the Federal Capital Territory, Order 39 rule 8 provides thus:
(1) Where a judgment or order directs the payment of money, the Court may, for any sufficient reason, order that the amount shall be paid by instalments, with or without interest.
(2) The order may be made at the time of giving judgment, or at any time afterwards and may be rescinded upon sufficient cause at any time.
Although the wording under the 2018 Federal Capital Territory Civil Procedure Rules under order 39 rule 4 is slightly different from that of the 2004 Rules, the effect is the same. The 2018 Rule provides that:
The court at the time of making any judgment or order or at any time afterwards, may direct the time within which the payment is to be made or other act is to be done, reckoned from the date of the judgment or order, or from some other point of time, as the court may deem fit and may order interest at a rate not less than 10% per annum to be paid upon any judgment.
A marked similarity between the 2004 and 2018 Federal Capital Territory Rules of court is the provision for interest on the debt to cushion the effect of devaluation.
Debt restructuring by mutual agreement:
The second regime is debt restructuring by mutual agreement of both parties involved.
Debt restructuring by mutual agreement of parties entails a situation where the creditor lowers the debtor’s payments so that he may remain in business. Restructuring by mutual understanding is typically accomplished in three ways: via an Extension, a Composition, or a Debt-for-Equity Swap. We shall go ahead and look at each of these briefly.
An Extension occurs when the creditor agrees to lengthen the debtor’s repayment period. Here, the Creditor often agrees to suspend both interest and principal repayments temporarily.
A Composition is an agreement in which the creditor agrees to receive less than the total amount they are owed.
A Debt-for-Equity Swap occurs when creditors surrender a portion of their claims in exchange for an ownership position in the debtor’s firm/company. Such actions increase the likelihood that a debtor firm will survive and remain in business.
Debt restructuring/instalment payment differentiated from other forms of enforcement of monetary judgments:
A proper understanding of debt restructuring will enable one to distinguish it from other available modes of enforcement of monetary judgments. Debt restructuring has become expedient in light of the delinquent nature of debtors in today’s world, as many debtors either cannot pay their debts or are simply unwilling to pay up what they owe, especially when such debts have accumulated over some time. This has made it practically impossible for debts to be recovered quickly despite the intervention of the courts in determining the extent of liability of parties or debt owed.
From the preceding, therefore, it is apparent that the intervention of the courts with its coercive powers has not helped much in debt recovery, so that debt restructuring may provide a more viable alternative.
At this point, we shall briefly look at other modes of debt recovery. These are the writ of Fieri Facias, the garnishee proceedings and judgement summons.
Before we proceed, we must note that although there is a common factor between all forms of enforcement of monetary judgment procedures, and that is that the judgment debtor failed or defaulted in the payment of the same at the time or times he was supposed to pay. This means that it is only after the default or failure of the judgment debtor to pay the judgment debt as required by the courts that other avenues of enforcement can be explored. However, there is a salient difference between the different modes and debt restructuring.
- a) Writ of Fieri Facias:
This is also known as a writ of Fifa, Writ of Attachment and Sale or Writ of Attachment. In essence, this writ directs the sheriff to attach, seize and sell the property and goods of the judgment debtor to satisfy the debt owed. In Olatunji Vs. Owena Bank Plc, ⁴ the apex court, validated this procedure and stated that this procedure could issue immediately after the judgement is pronounced with or without prior notice or recourse to the judgement debtor. This position provides a marked difference from the approach obtainable under debt restructuring, where both the Judgment creditor and judgment debtor are required to modify the terms of the debt or make concessions as may be necessary for complying with the Judgment sum.
b) Garnishee proceedings:
This is more frequently in use in the recovery of a monetary judgment. By this procedure, the judgment creditor applies to the court for an order called garnishee order absolute attaching the money of a judgment debtor in the custody of a third party, usually a bank, to satisfy the judgment sum. This procedure is primarily provided under the Sheriffs and Civil Process Act and the Courts Rules. Upon being satisfied that the garnishee has money belonging to the Judgment debtor, the court then makes an order compelling the garnishee to pay over the money to the judgment creditor. Like the procedure stated above, the Judgment creditor is not required to make any form of concession or modification of the terms of the debt but to satisfy the entire judgment sum. However, this procedure has not proved very effective as there are lots of instances where the garnishee, who is often commercial banks or the Central Bank of Nigeria, who is supposed to comply with the order of the court to attach the said sum, refuses to abide usually for reasons best known to them and instead start engaging the judgment creditor in a fresh round of usually on appeal.
Many times appeals from garnishee proceedings, the garnishee rather than the judgment debtor takes over the legal battle go as far as the Supreme in a legal battle spanning years.
However sad as it may seem, these legal battles are protracted because the judgment debtor may simply be fighting for his survival through the garnishee, fearing that enforcement of the judgment sum may leave him completely broke.
Compare this with the debt restructuring option, where the judgment debtor has the option of structuring the repayment of the indebtedness. This way, he can pay off his indebtedness while remaining solvent.
c) Judgment summons.
This applies to recalcitrant and unwilling debtors or where the debtors refused to satisfy the judgment debt. In such a situation, the summons requires the judgment debtor to appear in court to examine their means. If he refuses to attend court or intends to abscond to avoid being questioned on oath, the court may issue a warrant for their arrest and detention. After investigation, the court may
i. Commit the judgment debtor to prison.
ii. Attach the judgment debtor’s properties.
iii. Order instalment payment of the Judgment sum.
d) Writ of sequestration.
This procedure is seldomly used. It requires that the court appoints sequestrators to enter the immovable properties of the judgment debtor, collect and keeps rents and profits, and seize and detain the moveable properties of the judgment debtors until the debtor obeys the This procedure does not vest title on the sequestrators. It is provided under S. 82 of the Sheriff and Civil Process Act⁵.
The foregoing is inexhaustive and brief due to the approach adopted in taking a cursory look at the procedures outlined. More detailed work on each of the procedures will be for another occasion.
Advantages of Debt Restructuring over other modes of debt recovery:
As already pointed out in this work, debt restructuring comes in only when the Debtor has defaulted or is at the risk of defaulting on his obligation to pay a debt, and there is a high risk that the Creditor may not be able to recover the said debt in full.
In instances like this, strict enforcement of the original terms of the facilities or judgment sum (in the case of debt arising from an award of a Tribunal or Court of law) may foist hardship on both parties. On the creditor’s part, the Debtor’s assets may not be sufficient to meet the debts incurred. At the same time, on the debtor’s side, he might find payment of the debt a task that is not accomplishable due to near or complete impecuniosity.
Where a business fails due to its inability to meet its obligations to service its debt or when a lender is unable to recover the monies lent (or in the case of an award or judgment of the court, where the judgment debtor is willing but unable to liquidate the debt and the judgment creditor is unable to reap the benefit of the judgment gotten), both parties suffer the consequences which on the long run would cause a stale in the oil of business activities with far-reaching effect on the economy in general.
To correlate the above assertion, in the case of a judgment debt, where the Judgment Creditor exercises his option to garnish funds belonging to the Judgment debtor, he often may not find sufficient funds to satisfy the judgment debt. Where all the survival/operational funds of the Judgment debtor have become attached and turned in to the Creditor, the debtor immediately goes bankrupt/insolvent, and his business which may have been promising, may die out completely. The judgment creditor suffers loss in that the chances of being able to recover the judgment debt
in full becomes impossible as the company is no longer alive from whence it ordinarily could have leveraged to recover a substantial part of the sum. The same applies to where the judgment creditor attaches the tangible moveable assets of the debtor via a writ of fifa⁶ rendering the business incapacitated and unable to function to generate the necessary revenue needed to satisfy the judgment debt or a substantial part of it.
In all the instances above, debt restructuring becomes the most viable option or way out for both the creditor and the debtor. It creates a win-win situation for both the creditor and debtor in the situation, as the debtor who may be willing to liquidate the debt but is unable to do so and would need some allowance to prevent his business from total collapse, to structure out an instalment payment which will pay off the debt and still keep his business alive.⁷
The Nigerian Companies and Allied Matters Act (2020) also support debt restructuring through the engagement of various tools by debtors in concert with their creditors. One such tool is the Company’s voluntary arrangements.⁸ A CVA is a binding debt repayment agreement between a company and its unsecured creditors. It allows the company to negotiate achievable repayment terms with its creditors and avoid insolvent liquidation.⁹
Overall the benefits of debt recovery through restructuring are numerous, some of which are that:
- It frees up cash that enables the business to continue operations and run profits sufficient to liquidate the debt.
- It ensures a timely and transparent mechanism is present to support the debtor who is willing to liquidate his debt but is in financial distress.
- It seeks to keep debtors/businesses alive.
- It makes the debtor’s finance more organised. For instance, where the debtor has taken multiple loans for his business, debt consolidation under debt restructuring will help him plan his finances better. The debtor can make sound decisions by converting these loans into a single loan with a restructured repayment schedule to match the current and projected cash flows.
- Restructuring helps in reviving a business in distress.
- Restructuring helps the debtor gain a competitive advantage, such as assisting the company to reposition itself for growth, adding new accounts or enabling expansion into other geographical areas. Two words, however, sum up the overall benefits of corporate restructuring: survival and success.
- It also helps the creditor save time and resources often lost to protracted litigation.
- It helps the creditor avoid the uncertainties associated with litigation in that judgment can be upturned on appeal etc.
This article is for information purposes and is not intended as a legal opinion on any issue. Therefore, any usage of this article must be with the proper legal guidance as the position of the law may have changed.