Liquidation of Heritage Bank Plc: Matters Arising (2)

Treatment of Debtors

The revocation of Heritage Bank’s licence and on-going liquidation, does not extinguish the repayment obligations of its debtors. Rather, NDIC Act 2023 places NDIC in a stronger position than Heritage Bank was, with a view to recovering such debts. Below are the notable rights and powers which the NDIC may exercise in dealing with debtors of Heritage Bank, for the purpose of recovering outstanding debts due to Heritage Bank.

Power to Name and Shame Debtors

NDIC is empowered to name and shame recalcitrant debtors of Heritage Bank. In this regard, NDIC may publish names of such debtors in the media based on Heritage Bank’s records. In 2015, the Central Bank of Nigeria directed banks to publish information of delinquent debtors in national newspapers on a quarterly basis. There have often been concerns that such publications may expose banks and media firms to claims for personal data breach. Section 62(1)(n) of NDIC Act 2023 seeks to address this concern by providing for protection to NDIC and media firms against any liability resulting from such publications.

Power to Appoint Receiver

NDIC (as Heritage Bank’s liquidator) is empowered to appoint a receiver for any obligor of Heritage Bank in respect to loans, advances or any credit facility which Heritage Bank had granted. NDIC may exercise the power to appoint a receiver whether or not the debtor’s asset had been charged, mortgaged or pledged as security for the loan/credit from Heritage Bank. Furthermore, the receiver which NDIC has appointed is endued with all the powers of a receiver under CAMA: Section 62(1)(l) NDIC Act 2023.

Power to assume rights under GSI Scheme

NDIC is also entitled to exercise the rights of Heritage Bank under the Global Standing Instruction (GSI) Scheme: Section 27(1) NDIC Act 2023. The GSI is a policy of the CBN and Bankers’ Committee whereby creditors (i.e. banks) are authorised to recover debts of defaulting customers by resorting to deposits held by such debtors in any other banks in Nigeria. The policy was introduced in August 2020 and is aimed at facilitating an improved credit repayment culture, reducing non-performing loans in Nigeria’s banking system and watch-listing intransigent loan defaulters. 

According to CBN’s Guidelines released on 13 July 2020, the GSI Scheme applies only to individual debtors and not to corporate debtors. However, Section 27(3) of NDIC Act 2023 appears to widen the reach of NDIC to deposits in accounts of corporate debtors of Heritage Bank in other banks. The provision says that, “without prejudice” to Section 27(1) and (2) (which confer NDIC with the rights of Heritage Bank in the GSI Scheme), NDIC as liquidator is “entitled to deposits held in any bank account maintained by an obligor” with any other bank in satisfaction of any debt owed to Heritage Bank. This provision clearly does not differentiate between personal debtors and corporate debtors.

In the exercise of powers under the GSI Scheme, where NDIC has made a written demand to any bank, Section 27(4) of NDIC Act 2023 requires such bank to cause the debtor’s bank accounts stated in NDC’s written demand “to be immediately debited with the amount stated in the written demand and cause the said amount to be immediately paid over to the Corporation [NDIC]”. Accordingly, the banks are required to act without recourse to the debtors.

Power to avoid Security Interests created over Debtor’s Assets

NDIC is given limited power to avoid legally enforceable security interests (such as mortgages and charges) created over the property or assets of a debtor to Heritage Bank or Heritage Bank’s assets. In this regard, NDIC may avoid enforceable security interests which were created: (i) in contemplation of insolvency of the debtor or Heritage Bank; or (ii) with the intent to hinder or defraud Heritage Bank or its depositors, other creditors or shareholders: Section 71(4) of NDIC Act 2023.

Power to Wind-up Debtors of Failed Banks

The NDIC is empowered to initiate winding-up proceedings, against recalcitrant debtors of Heritage Bank. In general corporate insolvency, a creditor may petition for the winding-up of a debtor for inability to pay its debts: Section 571(d) of CAMA 2020.  Section 68 of NDIC Act provides what is apparently an additional route which NDIC may initiate the winding-up of a defaulting debtor of a failed bank. Under this provision, NDIC is required to serve the debtor with a written demand notice and where the debtor fails or neglects to make payment within 30 days of the service of the written demand, the NDIC may apply for the winding-up of the debtor via an originating motion.

The Court will not make a winding-up order where, at the hearing of the originating motion, the debtor proves that: (I) it does not owe the demanded sum at all, or (ii) it has a counter-claim, a set off or a cross demand which equals or exceeds the sum owed to Heritage Bank. Certain provisions of CAMA 2020 apply to winding-up by NDIC under Section 68 of NDIC Act 2023. For instance, (i) a winding-up order made under Section 68 is deemed to have been made under CAMA 2020 and the provisions of CAMA 2020 will have effect, with appropriate modifications, to the winding-up proceedings: Section 68(5) of NDIC Act 2023; and (ii) a liquidator appointed upon the making of the winding-up order has all the powers of a liquidator under CAMA 2020 and is required to discharge his duties in accordance with CAMA 2020: Section 68(3) of NDIC 2023. 

There are also diverging features between the winding-up framework in Section 68 of NDIC Act 2023 and the regime under CAMA 2020. First, for a creditor to be eligible to petition for the winding-up of a debtor under CAMA 2020, the creditor must show that the debtor is indebted in a sum specified in Regulations by the Corporate Affairs Commission (previously N200,000:, Section 572(a) of CAMA 2020). In comparison, any liquidated sum may ground a winding-up petition under Section 68(1) of NDIC Act 2023. In contrast, under Section 68(1), a Court may decline granting an originating motion “if the debtor proves … that it does not owe any liquidated sum at all”. 

Second, under section 571(d) of CAMA 2020, a winding-up petition may be lawfully filed on the expiration of three weeks after the issuance of a statutory demand on the debtor. In contrast, under section 68(1) of NDIC Act 2023 an originating motion for winding-up may be lawfully filed on the expiration of thirty days after the issuance of a written demand notice on the debtor by NDIC.

Impact on Contracts

Avoidance of Antecedent Transactions:

NDIC may void the transfer of an interest in any asset of Heritage Bank which was fraudulently transferred within five years before the commencement of its liquidation: Section 70 of NDIC Act 2023. NDIC may also trace and recover from subsequent transferees who are not purchasers in good faith. This is in furtherance of a liquidator’s traditional responsibility of swelling the assets of an insolvent for beneficial distribution to its creditors.

Instructively, Section 73 of the Banks and Other Financial Institutions Act (BOFIA) 2020 embodies more extensive avoidance provisions which NDIC may also employ. NDIC may set aside transfers and recover assets from: (i) gratuitous transfers to insiders or affiliates made within 5 years before liquidation; (ii) gratuitous transfers to third parties made within 3 years before liquidation; (iii) transactions at an undervalue made within 3 years of the liquidation; (iv) transactions based on forged or fraudulent documents to the detriment of creditors; (v) actions intended to withhold assets from creditors or impair their rights within 5 years before liquidation; (vi) preferences to creditors done one year before liquidation; and (vii) attachment of security interest within 6 months before the liquidation. 

Unenforceability of Ipso Facto Clauses

The NDIC is empowered to enforce any contract or deed entered into by Heritage Bank notwithstanding that such contract or deed provides for termination in the event of insolvency or liquidation of Heritage Bank: Section 71(1) NDIC Act 2023. From an insolvency law perspective, this is a typical anti-ipso facto provision. Ipso facto clauses are contractual clauses which provide for the termination of contracts upon the occurrence of insolvency or insolvency-related events. They are often inserted in contracts to protect non-insolvent parties from the unpleasant consequences of a counterparty insolvency.

In addition to the broad anti-ipso facto provision, Section 71(2) of NDIC Act 2023 prohibits the exercise of certain contractual rights against a failed bank like Heritage Bank within 180 days of the commencement of liquidation without the consent of the NDIC. These rights include, (i) exercising the right to terminate any agreement; (ii) declaring a default in any such agreement; (iii) obtaining possession of or exercising control over any asset of Heritage Bank; and (iv) revising any contractual rights of Heritage Bank.

In similar vein, Section 71(5) invalidates agreements which diminish NDIC’s interest in any asset of Heritage Bank. Such agreements may only be valid where they are in writing and were executed contemporaneously by Heritage Bank and the counterparty. In addition, such agreements must have been approved by Heritage Bank’s board and has continuously been on the record of Heritage Bank. 

Repudiation of Burdensome Contracts

The NDIC may repudiate contracts or deeds which Heritage Bank is a party to where NDIC determines that they are burdensome and that the repudiation would promote the orderly winding-up of Heritage Bank: Section 71(3) NDIC Act 2023. A person aggrieved by such repudiation may institute an action for special damages which would be limited to actual loss suffered due to the repudiation. A repudiation of a contract does not amount to, or have the effect of, a rescission.

NDIC’s power to repudiate a contract is substantially analogous to a liquidator’s power to disclaim onerous contracts in general corporate insolvency: Section 663 CAMA 2020. A liquidator in general corporate liquidation may only disclaim executory contracts and not executed contracts. Executory contracts are contracts in which the obligations of parties are substantially unperformed. In contrast, executed contracts are those in which obligations are fully performed or in which property rights have already vested. Instructively, the wording of Section 71(3) of NDIC Act 2023 does not suggest that the NDIC’s power to repudiate contracts is limited to only executory contracts.

To be Continued