One of the foremost challenges businesses face in Nigeria, especially foreign-owned companies, is the recovery of outstanding debts. The inability to swiftly recover funds owed by customers or business debtors can threaten a company’s liquidity, growth, and sustainability. In fact, many profitable enterprises have struggled or even closed due to funds being tied up in unpaid debts. For this reason, negotiated debt recovery in Nigeria has become an increasingly attractive option. It allows businesses to recover outstanding debts through structured legal mechanisms that avoid the delays and costs of traditional litigation.
While initiating court proceedings to recover debt is a conventional option, it often comes with significant drawbacks such as, lengthy delays, high costs, and potential damage to ongoing business relationships. As experienced business lawyers, we advise creditors to explore alternative, legally recognized methods for debt recovery that are more cost-effective, timely, and conducive to preserving commercial goodwill.
This article outlines the key mechanisms for negotiated debt recovery in Nigeria, including arrangement and compromise, company voluntary arrangements, debt restructuring and rescheduling, and payment through assets such as equipment or shares. Furthermore, it highlights how creditors can initiate these processes to maximize recovery without resorting to litigation.
LEGAL FRAMEWORK SUPPORTING NON-LITIGATION DEBT RECOVERY IN NIGERIA
1. Arrangement and Compromise Under the Companies and Allied Matters Act (CAMA) 2020: Section 715 of CAMA 2020 empowers companies to propose arrangements or compromises with their creditors to restructure outstanding debts. This provision allows creditors and debtors to agree on:
- Debt Restructuring: Negotiated revision of payment terms to make repayment more manageable, this may include reducing outstanding principal or waiving accrued interest.
- Debt Rescheduling: Adjusting repayment schedules to align with the debtor’s financial capacity after meaningful discussions and meetings.
- Debt Forgiveness: Partial forgiveness of debts, often contingent on timely payment of the remaining balance within agreed deadlines.
How creditors can initiate: Typically, arrangement and compromise discussions arise after court action has commenced, often during case management or pre-trial conferences. The parties negotiate terms which can be recorded as terms of settlement and subsequently incorporated into a court judgment. While it is advisable to institute court proceedings first to compel seriousness, these negotiations can occur at any stage before judgment. This process provides legal certainty and makes the arrangement enforceable, encouraging debtors to comply responsibly.
2. Company Voluntary Arrangement (CVA): A Company Voluntary Arrangement (CVA) is a formal, court-supervised agreement under CAMA 2020, allowing indebted companies to avoid liquidation by repaying debts over time under structured terms.
Key points for creditors:
- Where a debtor company owes N200,000 or more (per Section 572(a), CAMA 2020), creditors have the right to file a winding-up petition. However, a CVA offers an alternative to liquidation.
- The company retains control of its business operations while bound by the CVA repayment terms.
- Once approved by a majority of creditors and sanctioned by the court, the CVA is binding on all creditors, including dissenting parties.
- Creditors should stay alert to CVA proposals involving their debtors and participate actively in negotiations to protect their interests.
This mechanism balances creditors’ interests with business continuity, often yielding better recoveries than liquidation.
3. Debt Restructuring and Rescheduling: Under Nigerian contract law and commercial practice, creditors and debtors can mutually agree to:
- Extend repayment periods to ease the debtor’s cash flow challenges.
- Reduce interest rates to make repayment affordable.
- Convert debt to equity by exchanging outstanding debt for shares, thereby reducing liabilities and potentially giving creditors ownership stakes. Note: This must comply with the debtor company’s articles of association and CAMA’s provisions on share issuance.
Additionall, debt rescheduling focuses solely on adjusting repayment timelines without altering principal or interest terms.
Initiation by creditors: These options usually arise from direct negotiations or mediation. Creditors should proactively engage debtors, assess their financial standing, and propose feasible restructuring terms.
4. Payment Through Equipment or Shares Agreements: Creditors may accept alternative forms of payment such as equipment, assets, or company shares. This approach requires:
- Clearly documented agreements governed by contract law to avoid disputes.
- Compliance with CAMA 2020 regarding asset transfers and share issuances, including necessary corporate approvals and adherence to the company’s governance framework.
- Use of legal tools such as security interests or liens to protect creditor rights over transferred assets.
This method enables debt settlement without draining the debtor’s cash resources, helping maintain operational viability.
ADVANTAGES OF NEGOTIATED DEBT RECOVERY
Compared to litigation, negotiated debt recovery in Nigeria offers clear benefits:
- Cost-efficiency: Avoid costly court fees and prolonged legal expenses.
- Time-saving: Achieve faster resolutions through direct negotiation or court-managed settlements.
- Preservation of Relationships: Maintain goodwill and future business opportunities with debtors.
- Flexibility: Tailor repayment plans to the unique circumstances of each case.
- Legal Enforceability: Court-approved settlements or formal agreements provide binding and enforceable outcomes.
PRACTICAL STEPS FOR CREDITORS TO INITIATE NEGOTIATED DEBT RECOVERY
- Review existing agreements: Ensure contracts include provisions enabling negotiation, restructuring, or alternative payment methods.
- Issue formal demand letters: Clearly communicate outstanding amounts and propose negotiation to resolve payment.
- Engage in direct negotiations or mediation: Seek to understand debtor capacity and propose practical restructuring or compromise.
- Consider commencing court proceedings: This may be strategic to compel debtor engagement and set the stage for arrangement or compromise under court supervision.
- Monitor debtor company insolvency developments: Participate in CVA proposals or winding-up petitions to safeguard your interests.
- Seek expert legal advice: Ensure all agreements and settlements comply with Nigerian law and protect your rights.
HOW STARR ATTORNEYS CAN SUPPORT YOUR DEBT RECOVERY EFFORTS
At Starr Attorneys, we understand the critical importance of timely and effective debt recovery for businesses operating in Nigeria, especially for international companies navigating complex cross-border commercial landscapes. Leveraging our deep expertise in Nigerian corporate and commercial law, we guide creditors through every stage of the debt recovery process, whether by facilitating negotiated arrangements and compromises under CAMA 2020, structuring Company Voluntary Arrangements to preserve debtor businesses while securing creditor interests, or advising on innovative debt restructuring and alternative payment solutions such as asset or equity settlements.
Our tailored approach combines robust legal strategies with practical commercial insight, ensuring that your debt recovery efforts are both legally sound and strategically aligned with your broader business goals. Partnering with Starr Attorneys means having a trusted legal advisor who not only understands the nuances of Nigerian law but also appreciates the unique challenges faced by international businesses, empowering you to recover outstanding debts efficiently while preserving vital business relationships.
CONCLUSION
Nigerian law offers creditors robust, practical, and enforceable tools to pursue negotiated debt recovery in Nigeria without protracted litigation. By leveraging these tools, creditors can maximize recoveries while preserving valuable commercial relationships by understanding and utilizing available legal mechanisms. These include arrangement and compromise under CAMA 2020, Company Voluntary Arrangements, debt restructuring, and asset-based payments.
If you require assistance in drafting settlement agreements, negotiating with debtors, or initiating these processes, you can book a consultation with our team here, and let’s walk you through the best strategy for your business.
Written by: Temitope Odeyinka
International Business lawyer
Managing Partner, Starr Attorneys.
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