08 Jul DEBT RECOVERY LAWS IN NIGERIA AND HOW IT AFFECTS FINANCE PROVIDERS
Debt recovery is a critical aspect of financial services in Nigeria. The Nigerian financial industry can be regarded as the backbone of the Nigerian economy, and finance providers play a crucial role in providing funding for economic development. However, with lending comes the risk of default, and as a result, the need to recover debts arises. Debt recovery laws in Nigeria are crucial for finance providers as they provide a legal framework for recovering outstanding debts. This article provides an overview of debt recovery laws in Nigeria and how they affect finance providers, the legal procedures involved, and the implications of non-compliance with this procedure.
DEFINITION OF RELATED TERMS
Debt is an obligation or liability to pay a sum of money or other considerations owed to another party. It can arise from a loan, credit purchase, or unpaid bills.
In the case of In Re: Yabuku (1997) 5 NWLR (Pt. 506) 549 at 559, the court defined debt as “a sum of money due by agreement or otherwise which can be enforced by law.”
In the case of Guaranty Trust Bank Plc v. Innoson Nig. Ltd (2018) 2 NWLR (Pt. 1601) 1, the court defined debt as “an obligation to pay a sum of money or other consideration arising from a transaction, whether such obligation is present or future, absolute or contingent, or whether such obligation is owed jointly or severally.”
Merriam-Webster defines debt as an amount of money that one person or group owes to another.
Oxford English Dictionary defines debt as a sum of money that is owed or due
- Debt Recovery
Debt recovery is the process of collecting outstanding debts that are owed to a creditor. It involves taking legal action or using other means to recover the money owed.
It can also be defined as the process of recovering debts owed by a debtor to a creditor, either through amicable settlement or legal means. It involves a range of activities, such as contacting the debtor, negotiating a repayment plan, and taking legal action if necessary
In the case of Continental Merchant Bank Plc v. Azikiwe (2007) 10 NWLR (Pt. 1042) 168, the court defined debt recovery as “the process of enforcing a legal obligation to pay a debt owed by one party to another.”
Merriam-Webster defines debt recovery as the process of regaining possession of something (such as a debt) by force or skill
Oxford English Dictionary defines debt recovery as the process of recovering (money) owed by debtors
- Finance Providers
Finance providers are entities or institutions that offer financial services, products, or assistance to individuals or organizations in need of funding. In Nigeria, finance providers include banks, microfinance institutions, leasing companies, and other financial institutions.
In the case of Union Bank of Nigeria Plc v. Eriose (2012) 2 NWLR (Pt. 1285) 44, the court defined a finance provider as “an entity that provides financial services, products, or assistance to customers or clients, including banks, microfinance institutions, and other financial institutions.”
In the book Introduction to Nigerian Law by Abiola Sanni, finance providers are defined as “entities or institutions that provide financial services, including loans, credit facilities, investment opportunities, and other financial products or assistance to individuals or organizations.”
Merriam-Webster defines a finance provider as a business that makes loans or investments to help other businesses grow or to buy property, vehicles, etc.
Oxford English Dictionary defines a finance provider as a company or organization that provides financial services, especially relating to the provision of loans or investment
COMPARISON WITH OTHER SIMILAR TOPICS
Debt recovery laws in Nigeria are similar to debt recovery laws in other countries, such as the United States, the United Kingdom, and India. However, there are some differences in the legal procedures and the legal consequences of non-compliance
Just as earlier stated, debt recovery is a process of collecting unpaid debts from individuals or businesses. It involves a range of activities, such as contacting the debtor, negotiating a repayment plan, and taking legal action if necessary. Some other related topics and how they compare to debt recovery:
- Debt management: Debt management is the process of managing debt to prevent it from becoming a problem in the first place. It involves creating a budget, reducing expenses, and paying off debt as quickly as possible. Debt management is focused on avoiding debt problems, while debt recovery is focused on solving them after they have occurred.
- Bankruptcy: Bankruptcy is a legal process that allows individuals or businesses to eliminate or restructure their debts. Bankruptcy is typically seen as a last resort when debt recovery efforts have failed. While debt recovery is focused on collecting unpaid debts, bankruptcy is focused on eliminating or restructuring debts to provide a fresh financial start.
- Credit counseling: Credit counseling is a service that helps individuals and businesses manage their debts. It involves working with a credit counselor to create a debt management plan, negotiate with creditors, and provide financial education. Credit counseling is focused on helping individuals and businesses manage their debts, while debt recovery is focused on collecting unpaid debts.
- Collections: Collections is the process of collecting unpaid debts on behalf of a creditor. It involves contacting the debtor, sending collection letters, and taking legal action if necessary. Collections is similar to debt recovery, but it is typically done by a third-party agency or law firm on behalf of the creditor.
Debt recovery is focused on collecting unpaid debts from individuals or businesses, while other related topics such as debt management, bankruptcy, credit counseling, and collections are focused on preventing debt problems or providing solutions for them. The laws governing them also differ in this regard.
LAWS GUIDING DEBT RECOVERY IN NIGERIA
There are several laws that guide debt recovery in Nigeria. These laws include but are not limited to:
- The 1999 Nigerian Constitution (as amended): No section in the constitution specifically talks about debt recovery. However, the constitution being the apex law in Nigeria and the grundnorm, if the provisions of any other law contradict or is inconsistent any provision of the constitution, then that other law would not apply and would be void. (Section 1(3))
- The Nigerian Civil Procedure Rules of various courts in various states in Nigeria,
- The Bankruptcy Act, CAP. B2, L.F.N. 2004
- The Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act, CAP. F2, L.F.N. 2004
- The Companies and Allied Matters Act, (CAMA)2020
The various guidelines of the Central Bank of Nigeria (CBN) regulate debt recovery in Nigeria.
HOW DEBT RECOVERY LAWS IN NIGERIA AFFECTS FINANCE PROVIDERS
Debt recovery is an essential aspect of financial transactions, especially in Nigeria, where the economy is heavily reliant on credit. However, the process of recovering debts can be a daunting task, often leading to financial losses for creditors. To address this issue, Nigeria has put in place various debt recovery laws and regulations to protect the rights of creditors and ensure that debts are recovered in a timely and efficient manner.
The CAMA also provides legal protection to finance providers by allowing them to register charges over the assets of their debtors. This registration creates a security interest in the assets, which the creditor can seize and sell if the debtor fails to repay the debt. The CAMA also allows creditors to initiate legal proceedings against defaulting debtors.
In addition to these laws, the Central Bank of Nigeria (CBN) has also issued regulations to guide the debt recovery process. For example, the CBN’s Prudential Guidelines for Deposit Money Banks (DMBs) require banks to establish effective debt recovery systems and procedures to ensure that they can recover bad debts promptly.
The debt recovery laws and regulations in Nigeria have significant implications for finance providers. On the one hand, these laws offer legal protection to creditors by providing a framework for the recovery of debts. Creditors can use the legal mechanisms provided by these laws to recover their debts efficiently, thereby minimizing their financial losses.
On the other hand, the debt recovery laws in Nigeria can also pose significant challenges for finance providers. For example, the legal process for recovering debts can be lengthy and expensive, particularly in cases where the debtor is unwilling to cooperate. In some cases, creditors may be forced to write off bad debts entirely, leading to financial losses.
Therefore, debt recovery laws and regulations play a crucial role in protecting the interests of finance providers in Nigeria. While these laws provide legal protection to creditors, they can also pose significant challenges. It is, therefore, essential for finance providers to have effective debt recovery systems and procedures in place to minimize their financial losses and ensure that debts are recovered efficiently.
Legal Procedures for Debt Recovery in Nigeria
Debt recovery in Nigeria is primarily done through the courts. The procedure for debt recovery in Nigeria is as follows:
- Demand for Payment: The first step in debt recovery is for the creditor to make a formal demand for payment of the debt owed. The demand should be in writing and should state the amount owed and the deadline for payment.
- Commencement of Legal Action: If the debtor fails to respond to the demand for payment, the creditor can commence legal action by filing a writ of summons in court. The writ of summons should be accompanied by a statement of claim, which should contain the facts of the case and the relief sought by the creditor.
- Service of Process: The next step is the service of process on the debtor. The creditor must serve the debtor with a copy of the court process to inform the debtor of the suit. Note that the debtor must enter an appearance and file a statement of defence. If the debtor fails to do so, the creditor can apply for judgment in default.
- Hearing of the Case: If the debtor files a statement of defence, the case proceeds to trial. The court will set a hearing date for the case. At the hearing, the creditor will present evidence to support its claim, and the debtor will have an opportunity to cross-examine the creditor’s witnesses and present its own evidence.
- Judgment: After the trial, the court will deliver its judgment. If the court finds in favor of the creditor, a judgment will be issued against the debtor. The judgment will order the debtor to pay the outstanding debt, as well as any interest and costs incurred by the creditor in the debt recovery process.
- Enforcement of Judgment: If the debtor fails to comply with the judgment, the creditor can enforce the judgment by using legal remedies such as garnishment, attachment, and execution. These remedies allow the creditor to seize the assets of the debtor to recover the outstanding debt.
Legal Consequences of Non-compliance with debt recovery laws.
- Legal Liability: Finance providers who fail to comply with the relevant sections of Nigerian laws can be held liable for any damages suffered by their clients. This means that a debtor can sue a finance provider for damages if they suffer any harm as a result of the finance provider’s violation of debt recovery laws.
- Regulatory Sanctions: The Central Bank of Nigeria and other regulatory bodies can impose sanctions on finance providers who fail to comply with the relevant sections of Nigerian laws. These sanctions can include fines, suspension of operations, and revocation of licenses.
- Reputational Damage: Non-compliance can lead to reputational damage for finance providers, which can affect their ability to attract and retain clients.
- Loss of Revenue: Non-compliance can also lead to the loss of revenue, as clients may seek alternative providers who comply with the relevant laws and regulations.
- Criminal Liability: In some cases, non-compliance with debt recovery laws can lead to criminal liability. For example, if a finance provider uses illegal means to recover debts, they may be charged with a criminal offense such as extortion or fraud.
What is obtainable in Practice?
From my personal experience, my line of thought on the procedure of debt recovery in Nigeria as it is obtainable in practice is as follows:
- Informal Communication: The first step towards debt recovery in Nigeria is informal communication. This involves reaching out to the debtor and attempting to resolve the issue through dialogue. You can do this via phone calls and emails. It is advisable to document all communications in writing, including phone calls, text messages, and emails.
- Formal Demand Letter: If the debtor fails to respond to informal communication, the creditor can send a formal demand letter. This letter should outline the debt owed, the terms of the loan or credit agreement, and a deadline for repayment. The demand letter should be sent by registered mail or courier service and should be copied to the debtor’s lawyer if they have one.
- Legal Action: If the debtor still refuses to pay after receiving a demand letter, the creditor can commence legal action. The creditor can file a claim in court seeking a court order compelling the debtor to pay the debt. The court will hear the case and make a ruling based on the evidence presented.
- Enforcement: If the court rules in favor of the creditor, enforcement of the court order is the next step. The creditor can use various legal methods to enforce the court order, including garnishing the debtor’s wages or bank account, seizing their assets, or obtaining a court order to sell their property.
- Bankruptcy Proceedings
To mitigate legal liabilities in relation to debt recovery laws in Nigeria, finance providers should consider the following recommendations:
- Engage a Law Firm: Finance providers should engage the services of a law firm to advise them on the legal procedures for debt recovery in Nigeria. A law firm can also represent the finance provider in court if the need arises.
- Ensure Compliance: Finance providers should ensure that they comply with the relevant sections of Nigerian laws and regulations on debt recovery. This includes ensuring that they have proper documentation and processes in place for debt recovery.
- Seek Legal Advice: Finance providers should seek legal advice from reputable law firms with expertise in debt recovery laws in Nigeria. This can help them to understand the legal implications of their actions and avoid legal liabilities.
- Implement Best Practices: Finance providers should implement best practices in debt recovery, such as using alternative dispute resolution mechanisms, establishing debt recovery departments, and engaging the services of debt recovery agencies. Finance providers should detest the use of illegal means such as intimidation, harassment, or violence can lead to criminal liability.
- Training and Awareness: Finance providers should provide training and awareness programs for their staff on debt recovery laws in Nigeria. This can help ensure that staff members know the legal framework and procedures for debt recovery.
HOW LIVINGSPRING SOLICITORS CAN HELP YOU
Here at Livingspring Solicitors, we can help mitigate legal liability when it comes to debt and recovery of debt. Our services are provided not only for investors and creditors but also debtors also as well as money lenders.
Where we represent our debtor client, our approach to debt repayment involves considering various options, including debt restructuring and reconsolidation, among others. We strive to create a practical repayment plan that is approved by the creditor and followed strictly until all outstanding
debts are fully paid. By doing so, we aim to protect our clients from potential embarrassment, insolvency, and bankruptcy.
Furthermore, we assist our creditor clients in recovering funds and devising strategies for maintaining a steady cash flow, such as invoice discounting, while the recovery process is underway.
For our investor clients, we guide them in their investment choices, be it in savings accounts, stocks, certificates of deposits, bonds, mutual funds, real estate, commodities, annuities, cryptocurrencies, etc. Furthermore, before our clients invest in a company, we conduct comprehensive due diligence to verify its authenticity and security. We then provide advice on the optimal investment strategies and procedures to maximize their return on investment (ROI), prevent costly legal errors, and shield them from fraud. Moreover, we guarantee that our client’s investments are safeguarded, so if the invested company or entity goes bankrupt, winds up, or undergoes liquidation, our client’s interests are protected and have priority status as creditors for repayment.
Additionally, We provide proactive legal and risk compliance processes for our client in the business of money lending both in the private, public or government sector whether they are Banking Financial Institutions (BFI) such as Bureaux-de-Change (BDCs), Commercial Banks, Development Finance Institutions (DFI’s), Discount Houses, Finance Companies (FCs), Holding Company (HCs), Merchant Banks, Micro-finance Banks (MFBs), Non-Interest Banks, Primary Mortgage Banks (PMBs), Payment Service Banks (PSBs) or they are Non-Banking Financial Institutions (NBFI) such as Savings Associations, Credit unions, Money market funds, Mutual funds (investment companies), Hedge funds, Security brokers and dealers, Finance companies, Financial holding companies, Life and property/casualty insurance companies.
We take additional steps to strategically position our clients to mitigate any future risks and avoid unpaid loans resulting from potential customers. We pay close attention to the loan procurement process, consumer credit, and credit management, providing a preventive strategy to minimize potential risks rather than curative measures. This approach reduces the likelihood of future problems for our clients.
Debt recovery laws in Nigeria are important for finance providers as they provide a legal framework for recovering outstanding debts. The legal procedures for debt recovery include the issuance of a demand letter, filing a suit in court, service of process, hearing, judgment, and enforcement of judgment. Non-compliance with debt recovery laws can lead to legal consequences such as liability for damages, regulatory sanctions, and criminal liability. To mitigate legal liabilities, finance providers should engage the services of a law firm, comply with regulatory guidelines, and use legal means for debt recovery
In conclusion, debt recovery laws in Nigeria play a critical role in protecting the interests of both debtors and finance providers. The laws provide a legal framework for debt recovery that ensures that debtors are not harassed or intimidated while also allowing finance providers to recover their outstanding debts. The legal procedures for debt recovery, as prescribed by Nigerian laws, must be strictly followed by finance providers to avoid legal consequences.
Finance providers must be aware of their legal obligations and take steps to comply with regulatory guidelines and use legal means for debt recovery. Engaging the services of a law firm is highly recommended to ensure compliance with legal procedures and mitigate legal liabilities. It is essential that finance providers approach debt recovery with professionalism, respect for the rule of law, and a keen understanding of the legal landscape in Nigeria.
Furthermore, Nigerian lawmakers should continue to review and update debt recovery laws in line with changing economic and business realities. This will ensure that the laws remain relevant and effective in protecting the interests of both debtors and finance providers.
WRITTEN BY AHMAD A ADEDIGBA ESQ. AICMC
Associate at Livingspring Solicitors