DEBT RECOVERY FOR BANKS: LESSONS FROM NIGERIAN LITIGATION AND ENFORCEMENT TRENDS
Loans are central to modern business and banking practice, enabling businesses and individuals to finance commercial activities and contributing to economic growth. Inevitably, however, a proportion of these facilities become non-performing, requiring banks to resort to legal mechanisms to recover outstanding debts. In Nigeria, debt recovery has become an increasingly significant aspect of commercial dispute resolution, with banks frequently approaching the courts to enforce loan agreements, guarantees, and security interests.
Notably, many debt recovery disputes do not arise from a denial of indebtedness but from contests to the manner in which banks structure, document, and enforce credit facilities. Debtors often challenge the computation of interest and charges, the validity of security instruments, and inconsistencies in loan documentation.
This article examines common setbacks encountered by banks in debt recovery through litigation and highlights key lessons from Nigerian enforcement trends. It argues that weaknesses in securitisation, documentation, and enforcement strategy frequently undermine recovery efforts, and that a more structured approach to loan documentation and recovery management is essential for effective debt recovery.
Setbacks for Banks in Debt Recovery Litigation
3.1 Irregular Interest Charges and Debt Computation
A recurring issue in debt recovery through litigation in Nigeria is debtors’ disputation of debt computation. Most often, debtors do not dispute the existence of underlying loans but rather challenge the manner in which the amounts due are determined. Disputes typically arise from the application of compound interest, unexplained bank charges, penalty fees, and unilateral variations of agreed interest rates. Where computation of debts appears excessive or inconsistent with contractual terms, courts scrutinise banks’ claims and, in appropriate cases, reject or adjust claimed sums.
The courts have consistently held that the relationship between a bank and its customers is primarily contractual and governed by the terms of the agreement executed by the parties. Consequently, a bank cannot impose charges or interest rates outside the terms expressly agreed between the bank and its customer. In UNION BANK OF NIGERIA PLC V AJABULE (2011) LPELR-8239 (SC) and UNITY BANK v. AHMED (2019) LPELR-47395(SC), the Supreme Court emphasised that banks must strictly comply with the terms of the loan agreement when computing interest and charges on a facility. The Court, per Adekeye, JSC held that:
““Section 15 of the Bank Act, 1969 mandates all licensed banks to charge interest rates on advances, loans, credit facilities or deposits in accordance with the Central Bank of Nigeria Guidelines on minimum and maximum rates of interest. Where the terms of the agreement between the bank and the customer are clear with regard to the agreed rate of interest and there is no provision for variations, the Bank cannot vary the agreed interest rate of accord with the Guidelines of the Central Bank on interest rate. The law will always frown at any arbitrary charges by banks on the account of their customers.” Where a facility is granted to a customer and by agreement, the interest rate to be charged was fixed for the facility, a bank or financial institution has no right to unilaterally change, vary or alter the rate of interest to be charged on the facility without consultation and/or consent of the customer.”
The Court, in essence, held that where the agreement does not authorise unilateral variation of interest rates, the bank cannot impose additional charges beyond what was contractually agreed.
Similarly, courts have repeatedly stressed the need for transparency in the computation of debt. Where the bank fails to demonstrate clearly how the outstanding debt was calculated, the claim may be successfully challenged by the debtor. To avoid disputation, banks and financial institutions involved in loan transactions should ensure that their interest calculations are reasonable, transparent, and fully supported by the contractual terms governing the facility.
3.2 Poor Securitisation
Another significant challenge encountered in debt recovery litigation arises from the failure of banks to adequately secure lending facilities. In many instances, facilities are granted without sufficient collateral, thereby leaving the bank with no other immediate enforcement mechanism than conventional litigation. Where a loan is unsecured, the recovery process is typically narrow and tortuous.
By contrast, properly secured lending arrangements provide banks with more effective enforcement options, including the exercise of statutory power of sale, appointment of receivers or receiver-managers, and enforcement of charges over the debtor’s assets. The courts have repeatedly affirmed the rights of secured creditors to enforce security as far as they are in accordance with the terms of the security instrument.
In Savannah Bank (Nig.) Ltd. v. Ajilo (1989) 1 NWLR (Pt. 97) 305 SC, the Supreme Court examined the consequences of defects in mortgage transactions and the implications of such defects on enforcement rights. The practical implication is that the absence of properly structured security often transforms what might otherwise have been a straightforward enforcement process into prolonged litigation.
3.3 Poor Loan Documentation
Defective or incomplete loan documentation is another common factor that weakens banks’ recovery claims. Courts require strict proof of indebtedness, and where loan documentation is ambiguous, inconsistent, or incomplete, the debtor may successfully challenge the bank’s claim.
Common documentation deficiencies include unexecuted guarantees, ambiguous loan terms, inconsistent facility letters, and failure to clearly state repayment obligations. In such circumstances, the courts are often impelled to interpret the agreement strictly against the party that drafted the documents, which is usually the bank. It is trite law that documents speak for themselves and that documentary evidence is the best form of evidence there is (see the Supreme Court case of Amobi v. Ogidi Union Nigeria (2023) 1 NWLR [Pt. 1864] 153 SC).
The importance of clear documentary evidence in banking disputes cannot be overemphasised. The court reiterated that the banker–customer relationship is fundamentally contractual and must be established through documentary evidence. See UBN PLC v. AJABULE & ANOR (2011) LPELR-8239(SC). Where documents fail to show clearly the obligations of the parties, the bank’s recovery claim may be weakened. Inconsistencies in documents and poor loan documentation can create uncertainty regarding the rights and obligations of the parties, which weighs on the mind of the judge and can be capitalized on by the customer.
3.4 Failure to Perfect Security Interests
Even where security is created, failure to properly perfect the security interest can significantly undermine enforcement efforts. In Nigeria, certain security interests must be registered with relevant statutory authorities to become enforceable against third parties. For example, charges created by companies must be registered at the Corporate Affairs Commission within the 90-day statutory period prescribed under the Companies and Allied Matters Act 2020. Failure to comply with these registration requirements may render the security void against liquidators and other creditors. Consequently, a bank that fails to register its security interest may lose priority in insolvency proceedings or find its security unenforceable.
The courts have consistently emphasised the importance of compliance with statutory registration requirements. In A.I.B. Ltd. v. LeeTee Ind. Ltd.(2003) 7 NWLR (Pt. 819) 366, the Court of Appeal held that
“The effect of non-compliance with the provisions of section 94 of the Companies Act, 1968 is quite grave. Non-registration at the companies registry of charges created by the company, as opposed to existing charges acquired by the company, destroys the validity of the charge. Unless the prescribed particulars are delivered to the Registrar within 30 days of the creation of the charge, it will, so far as any security on the company’s assets is conferred thereby be void against the liquidator and any creditor of the company”. However, this is without prejudice to any contract or obligation for repayment of the money thereby secured, and when a charge becomes void under section 94 of the Companies Act, 1968, the money secured thereby shall immediately become payable. It is the security only which is void against any creditor and the liquidator of the company for non-registration.”
This decision highlights the risks associated with incomplete or improperly perfected security arrangements.
In the same vein, failure to perfect mortgages with the relevant land registries also opens up lenders and financial institutions to rival claims, including claims from purchasers for value without notice.
3.5 Delay in Registering Security
Closely related to the issue of perfection is the delay in registering security interests. In practice, some banks disburse loan facilities before completing the registration or perfection of security instruments. This practice exposes the bank to significant risk, as the borrower may dispose of or encumber the asset before it is secured.
Such delays may also result in loss of priority to other creditors who subsequently obtain properly registered security interests over the same asset. In insolvency, the bank’s claim may, therefore, rank behind those of other secured creditors who perfected their security earlier.
3.6 Discrepancies Between Loan Agreements and Registered Instruments
A further complication arises where there is a discrepancy between the amount reflected in the loan agreement and the amount stated in the registered mortgages or debentures. In practice, some banks deliberately undervalue loan instruments during registration in order to reduce statutory fees payable. While this may reduce upfront costs, it creates significant legal risks for enforcement.
Debtors frequently exploit such discrepancies, even when they have a full understanding of the rationale, by arguing that the bank cannot recover more than the amount reflected in the registered instrument. Such arguments may be hinged on provisions, such as Section 222 of the Companies and Allied Matters Act 2020, governing the registration of charges, which stipulates a maximum of 90 days for registration.
Where the registered instrument does not accurately reflect the true value of the facility, the debtor may challenge the bank’s claim, thereby complicating enforcement proceedings and prolonging litigation.
3.7 Inconsistent Litigation Narrative
Another factor that frequently prolongs debt recovery litigation is the presentation of inconsistent or poorly structured claims by banks. A recovery action must clearly establish the history of the loan transaction: the offer by the bank, the board resolution of the borrower approving the acceptance of the loan (in the case of a company), the formal acceptance of the loan and its terms, presentation of guarantors (personal or corporate, as the case may be), execution and registration of the security instruments (guarantee and collateral), disbursement of the loan, establishment of default, and demand upon default by borrower. Then the bank’s enforcement rights over the security are crystallised and recovery of the debt through receivership, foreclosure of assets, monetary judgment enforcement begins, depending on the terms and the structure of the transaction. Where the bank’s pleadings omit any of these crucial elements, the debtor may exploit the omission to create a factual dispute
Once the foundational facts of the claim are put in issue, the matter may no longer be suitable for a summary procedure and may instead lead to a full-blown trial, thereby significantly prolonging the recovery process. The courts have emphasised the importance of clarity and consistency in pleadings. In N.B.N. Ltd. v. S.C.D.C. Co. Ltd. (1998) 5 NWLR (Pt. 548) 144 CA, the Court of Appeal stressed that a claimant seeking recovery of debt must present clear and consistent evidence establishing the debt claimed.
Any ambiguity in the presentation of the claim may weaken the claimant’s case and open the door to protracted litigation.
Conclusion
The practical lessons from recent litigation trends are that effective debt recovery begins long before a dispute reaches the courtroom. Banks and Financial Institutions must adopt more disciplined lending and recovery practices, including proper securitisation of facilities, accurate and transparent documentation, timely perfection of security interests, and careful preparation of recovery claims. By strengthening these foundational aspects of credit transactions, banks can significantly reduce litigation setbacks and improve the efficiency and success of debt recovery efforts.
Recommendation: Loan Recovery Audit
A practical strategy that banks may adopt to improve the effectiveness of debt recovery is the implementation of periodic loan recovery audits. This process involves a systematic review of the bank’s portfolio of non-performing loans with the aim of assessing the enforceability of each facility and identifying the most appropriate recovery strategy. During such audits, banks can examine the quality of loan documentation, the status of security interests, the accuracy of debt computation, and the overall legal position of the bank in relation to each debtor. This preliminary assessment enables banks to identify potential weaknesses that may affect enforcement and to take corrective steps, where possible, before commencing recovery proceedings.
A loan recovery audit also allows banks to determine the most suitable dispute resolution pathway for each case. While some facilities may be appropriate for immediate litigation due to the strength of the documentation and security available, others may be better resolved through negotiation, restructuring, or alternative dispute resolution mechanisms. By categorising debts based on their recoverability and legal strength, banks can adopt a more strategic and efficient approach to enforcement rather than pursuing a uniform recovery strategy for all delinquent facilities.
Furthermore, conducting a recovery audit enables banks to evaluate the commercial viability of pursuing recovery actions. Litigation and enforcement proceedings can be time-consuming and costly, and in certain cases, the cost of recovery may outweigh the value of the debt itself. Through a structured audit process, banks are better positioned to estimate potential recovery costs, assess the likelihood of successful enforcement, and make informed decisions on whether a debt should be aggressively pursued, restructured, or written off. Such a proactive approach ultimately strengthens credit risk management and improves the overall efficiency of debt recovery efforts.