An analysis of the judicial approach to disputed debts in winding-up proceedings in Nigeria

March 2018 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING

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A company may be wound up for its inability to pay its debts according to section 408(d) of Nigeria’s Companies and Allied Matters Act, 1990 (CAMA). Under section 409(a), a company shall be deemed to be unable to pay its debt if it owes a sum exceeding NGN2000 and has failed to repay three weeks after the creditor issues a statutory demand for payment. It is not uncommon for companies faced with winding-up petitions to dispute the alleged debts. This article analyses the judicial attitude in Nigeria to disputed debts.

Disputed debts in winding-up proceedings

Where a respondent in a winding-up proceeding disputes the debt on genuine and substantial grounds, the court will typically dismiss the petition, much as it did in Parmalat Capital Finance Ltd v. Food Holdings Ltd and Alipour v. Ary. The dismissal of petitions founded on disputed debts is premised on at least three grounds.

Firstly, the wording of section 409(a) of CAMA indicates that only a creditor has the locus standi to present a winding-up petition. Where a petition is based on a disputed debt, the petitioner is not a ‘creditor’ as envisaged in section 409(a). In Weide & Co (Nig) v. Weide & Co Hamburg, the petition was based on a debt the respondent denied owing. Having failed to prove the existence of the debt, the court held that the petitioner did not qualify as a creditor. In In Re JN 2 Ltd, Brightman J. explained that the dismissal of a winding-up petition was premised on the grounds that the petitioner ought to first establish his right to present the petition before doing so.

Secondly, Nigeria’s Federal High Court (FHC) does not have jurisdiction to determine the existence of a simple debt. Exclusive jurisdiction is vested in the High Court of the appropriate state. Hence, courts would not allow a winding-up petition to be used in deciding a disputed debt. A prospective petitioner whose debt is disputed ought to seek remedy in an action for debt recovery to establish the debt owed before filing a winding-up petition against the debtor.

Thirdly, recovery of a debt is not a relief that can be sought in a winding-up petition pursuant to sections 408(d), 409(a) and 410(1)(b) of CAMA. The relief available in a winding-up petition is the winding-up of a company on account of inability to pay debt. Accordingly, courts would not permit winding-up proceedings to be used as a means of pressurising respondents to pay disputed debts. In Hansa Int’l Construction Ltd v. Mobil Producing Nigeria, the petition was founded on an amount which the petitioner alleged it unilaterally expended and from penalties unilaterally calculated by the petitioner. Upon the respondent’s denial and counterclaim, the petition was dismissed on the ground that the debt was founded on an alleged breach of contract and clearly sounding in damages and disputed.

An additional reason often given for dismissal of petitions founded on disputed debts is the adverse effect on the respondent. Winding-up proceedings may paralyse a respondent’s business and severely injure its reputation. In Air Via Ltd v. Oriental Airlines Ltd, Tate Industries Plc v. Devcom MB Ltd, Parmalat Capital Finance Ltd v. Food Holdings Ltd and Oriental Airlines Ltd v. Air Via Ltd the courts acknowledged that filing winding-up petitions could put undue pressure on respondents to pay disputed debts rather than risk the adverse consequences.

The shortcoming of the additional reason is that injury may be caused to the respondent by merely filing a winding-up petition, notwithstanding its subsequent dismissal. The knowledge of the existence of the winding-up petition may deter dealings with the respondent, given that transactions may be avoided, pursuant to section 413 of CAMA. A subsequent dismissal of the petition by a court (without advertising the same) may only limit the injury to the respondent.

A party who is aware of an intention to file a winding-up petition against it (following the issuance of a statutory demand) may seek for an order of interlocutory injunction against the prospective petitioner.

What constitutes a disputed debt?

Whether or not there is a dispute on substantial grounds will depend on the facts of each case. In all cases, there ought to be disputed questions of fact requiring oral evidence. In Tate Industries Plc v. Devcom MB Ltd, in response to a winding-up petition, the respondent claimed it repaid most of the debt, that part of the debt was waived, that the parties were unable to work out the balance and that the petitioner had refused to give a statement of account of the outstanding debt. The court held that the debt was disputed.

The petition in Onochie v. Alan Dick & Co Ltd was based on an alleged debt arising from retirement benefits. The respondent argued that the petitioner had, upon termination of his employment, absconded with the respondent’s properties worth millions, and there was no basis for determining how the appellant computed the alleged aggregate debt as retirement benefits. The petition was dismissed on the ground that there was substantial dispute as to the alleged debt.

In Hansa Int’l Construction Ltd v. Mobil Producing Nigeria, the petition was based on a debt of NGN3.9m, which the petitioner alleged it unilaterally expended and from penalties unilaterally calculated by the petitioner. The respondent denied liability on the ground that auditing was necessary and ongoing. The respondent also counterclaimed for over N5m from the same contract. The Court of Appeal upheld the dismissal of the petition on the grounds that the debt was founded on an alleged breach of contract, clearly sounding in damages and disputed.

Significantly, in Re Great Britain Mutual Life Assurance Society, Jessel MR said: “in my opinion it is not sufficient for the respondents upon a petition of this kind, to say, ‘we dispute the claim.’ They must bring forward a prima facie case which satisfies that court that there is something which ought to be tried, either before the court itself, or in any action, or by some other proceeding.”

However, in Air Via Ltd v. Oriental Airlines Ltd, the Supreme Court rejected this approach on the ground that the statement was merely persuasive and served no useful purpose given that it failed to give a clear illustrative example of how a party to a case can dispute a debt other than by denying it. The Supreme Court further held that a debt can only be disputed by denying or counterclaiming against it.

It is submitted, with respect, that a more coherent approach would be for the facts of each case to determine whether or not a mere denial suffices. A denial may be sufficient where allegations are made in a petition without any documentary evidence, as was the case in Air Via Ltd v. Oriental Airlines Ltd. However, where the petitioner has presented substantial documentary evidence to prove the existence of a debt, a simple denial of the debt ought not to suffice. The respondent ought to bring forward a case which satisfies the court that there is something which ought to be tried, either before the court itself, or in any action, or by some other proceeding as suggested in Re Great Britain Mutual Life Assurance Society. Curiously, this principle was applied by the Court of Appeal in Durumugo Resources Ltd v. Zenith Bank.

Further, in Durumugo Resources Ltd v. Zenith Bank the court suggested that there should be evidence that the debt is disputed after a demand letter is served. This flies in the face of the position in Hansa Int’l Construction Ltd v. Mobil Producing Nigeria. In that case, the petitioner’s contention that it was too late for the respondent to dispute the debt having not done so on receipt of statutory demand was held to be immaterial in determining the substantiality of the grounds of dispute.

A creditor has a mandatory obligation, under section 409(a), to issue a statutory demand. An alleged debtor who does not admit an alleged debt has no reciprocal obligation to respond to a statutory demand or dispute the alleged debt. Accordingly, the failure of a respondent to dispute a debt when a demand letter is issued ought not to bar the respondent from subsequently disputing the debt in winding-up proceedings.

However, where a respondent has expressly admitted a debt before the commencement of winding-up proceedings, the respondent may not be allowed to dispute the same during the proceedings.

Dr Kubi Udofia is a senior associate at Fidelis Oditah & Co. He can be contacted on +234 81 0289 1800 or by email: kudofia@oditah.com.

Dr Kubi Udofia

Fidelis Oditah & Co.