THE UNFORTUNATE FATE OF UNSECURED CREDITORS
By Victor O. Okotie
A Receiver/Manager will usually be appointed to manage the affairs of the debtor company towards realizing the debts owed to a (secured) creditor. Consequently, the moment the debt owed to the Receiver’s appointor has been realised, the Receiver/Manager’s duty ceases.
This marks the genesis of the deplorable predetermined course of unsecured creditors; as supported by provisions of the Company and Allied Matters Act, 1999 (‘CAMA’), where claims of unsecured creditors are ranked lower than that of secured creditors, in the liquidation of a debtor company.
As such, the Receiver/Manager has no duty to pay debts owed by the company to unsecured creditors, in dealing with the proceeds or realisation of the assets of the debtor company over which he was appointed a Receiver/Manager. This is the duty of a liquidator.
Against this backdrop, a Receiver appointed by the Asset Management Corporation of Nigeria (AMCON), is not mandated to pay to the exclusion of its appointor (‘AMCON’), other creditors; or pay the creditors without first paying AMCON. This is in line with the provisions of the AMCON Act, 2010 (as amended). Consequently, once the debts of AMCON are fully paid, the Receiver’s duty to his appointor is fully completed and he is liable to be discharged.
Unfortunately, this is often not understood and appreciated by most creditors. Most creditors believe that once their claims are filed with the Receiver/Manager, he is obligated or bound to pay them from any income that is realised from the company.
So, after a long wait for the Receiver/Manager to conclude the repayment of the debts owed to his appointor by the debtor company, the unsecured creditors are eventually faced with a harsh reality. From experience, some receiverships have taken over 5 years before adequate funds were generated to offset the debts owed to the Receiver/Manager’s appointor. In a present situation, it has taken over four years and counting, due to the restructuring plans and technical repairs of the Company’s highly technical equipment (that generated funds for it). Indeed, the wait can be longer depending on other circumstances, including series of litigations, industrial actions of the workers, etc.
Unfortunately, most (unsecured) creditors continue to advance credit to debtors, without due regard to the fact that those debtors are financially unstable. To avoid falling into this trap, below are a few indicators which could guide or caution an unsecured creditor in such situations:
- working capital deficiency
- consistent incurrence of trading losses
- several demands/legal action by creditors
- non/late payments of tax, insurance premiums
- creditors being paid in part payments
- poor accounting records
- post-dating cheques in almost all transactions
- dishonoured cheques etc.
In their transactions, unsecured creditors may also protect themselves with some form of security. Perhaps, in the event that a creditor is still willing to advance credit to a debtor, such creditor may insist on a post-dated cheque. As such, once same is presented and returned unpaid due to lack of funds in the debtor’s account, it becomes a criminal offence, for which the debtor is liable to be prosecuted. The fear of such prosecution usually ensures quick payment of the debt.
Lastly, it is imperative that lending institutions ensure that the loan is secured with a deed of debenture or legal mortgage.