UNDERSTANDING BUSINESS DEBT

RECOVERY: PRACTICAL STEPS FOR

MANAGING UNPAID INVOICES
Bright Elolue & Adewale Mosuro

Introduction
Money is important for running any business. Without a certain level of revenue, it's only a matter of time before a
business ceases to be a going concern. It is however not uncommon for money that is meant for business operations to be
tied down in debt. Many business relationships are based on trust as monies are made payable after the delivery of
goods/services. It so happens also that the customer defaults in making payment as at when due. It is under such
conditions that the term “debt” arises. Debt is simply money owed to a business by its customers, contractors or
partners. From the foregoing it's evident that debt could be highly inimical to the health of a business. In such
undesirable situations, what should a business owner do? What steps can a business take to recover the debt from its
debtors? This article provides practical business and legal steps that a business can take to recover unpaid invoices from
debtors.

Business Debts: How They Come About

There is a general assumption that debts arise in business because customers cease to have the means to
make good the payment for goods or services rendered to them. This is not completely true. While lack of
ability to pay, i.e., insolvency, is one of the reasons why customers or business partners default in making
payments as at when due, it is not the only reason. In fact, it is not the most common reason. Some more
common reasons are unclear payment terms and dispute as to the actual amount payable.

a. Unclear payment terms or instructions: This happens when the invoice or contract does not
provide clear and adequate information on the payment terms and/or instructions. Situations like
this cause delay in payment, thereby leading to holding up of payment due and consequently
resulting in debt owed to the business.

b. Dispute as to the amount payable by the customer to the business: In the course of business,
there might arise dispute as to the amount payable for goods or services delivered. This may lead to
the invoice amount (including the undisputed sum) being held over thereby leading to debt owed to
a business.

How can a business avoid debts arising from disputed invoices?

i. Ensure that the invoice is clear as to the payment terms and instructions
ii. Take positive steps to reconcile all invoice disputes.
iii. Ensure that the contract provides for payment of undisputed amount of an invoice in the
event that a part of an invoice sum is disputed by the paying party or customer.

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 c. As already stated, insolvency is one of the reasons why business debt arises.

Preliminary Steps To Recovering Unpaid Balances

The most natural and desirable way of handling incidences of debt is by way of amicable settlement
between the parties involved. This way, the business relationship is not soured and opportunity for future
business interactions are kept open.
Nevertheless, steps need to be taken towards amicable settlement. The following preliminary steps should
be taken for recovering debt from a business partner.

1.Sending reminders for payment of the unpaid balances of an invoice in order to get feedback on
reasons for delayed payments.

2. Negotiations or formal procedure to settle all disputes arising from the invoice in case the invoice
is disputed. Depending on the nature of the business, especially one where the propensity for
disputing invoices is somewhat likely, it is advisable that the contract provide for an interparty
reconciliation mechanism or a resolution by a third party arbitrator. The contract will specify how
the cost of this process will be borne by the parties. Undisputed sums should be made payable
under the contract.

3. Where the debt is not a disputed sum and payment remains unduly delayed without reasonable
justification, a formal demand for the sum may have to be made.

All the while, client relationship should be carefully managed. It is in the interest of the business that it
recovers debt without raising dust. It may however be expedient to consider a more aggressive approach to
debt recovery where the debtor is not forthcoming in spite of all efforts to settle the debt amicably. This
entails a more formal legal process for the recovery of the debt.

Cost-Benefit Analysis
While considering a more formal legal approach to the recovery of debt, a cost-benefit analysis of the
recovery process should be carried out to determine its viability. This is because the debt recovery process
may incur considerable costs for the business. If the debt is insignificant or in the opinion of the company
not worth pursuing, it may be more expedient for the business to write off the debt as bad debt or to
renegotiate very liberal payment terms for the debt. It would not be wise, however, to continue to offer
credit to a customer who has been unable to meet the obligations of previous invoices.

LEGAL PROCESS FOR DEBT RECOVERY

In cases where the business is willing to pursue the debt by following the formal legal process for debt
recovery, the services of a lawyer would become necessary. The lawyer would ensure that the following
legal steps are adequately taken.

1. Issuance of Statutory Letter of Demand: A statutory letter of demand is as the name

implies—statutory. This means that it is a requirement of law, and its issuance is relevant for the
regularity of the legal process that may be predicated on it. This document, issued by a creditor to a
debtor company, typically requires the debtor company to pay the indebted sum within three
weeks (21 days) of receipt of the letter. As provided for in section 572(a) Company and Allied
Matters Act (“CAMA”) 2020, a letter of demand can only be issued for debts above ₦200,000. The
debt must have also become due when the demand was made. In Wema Bank V. Owosho (2018)
LPELR-43857(CA), the courted emphasized that the enforcement of a cause of an action for

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recovery of debt depended on a letter of demand for the payment of the debt from the creditor
and refusal or failure by the debtor to pay.

2. Court Action for the deb: Where the customer still fails to fulfil it's debt obligation, a court
action can be filed for the recovery of the debt. Where the debt is an undisputed sum, the
creditor can proceed by way of the summary judgment procedure. This procedure is usually
applicable to liquidated money demands. It is a very effective and expedient process for
recovery of such debts. Order 13 of the High Court of Lagos State (Civil Procedure) Rules
2019 provides that this procedure may be adopted where the claimant reasonably believes
that the defendant has no reasonable defence to his claims.

Depending on the amount owed, a Magistrate Court or the High Court would be the
appropriate court to file the action. (For example, in Lagos State, the monetary jurisdiction of
Magistrates Court is 10 Million Naira.) This process will typically take a period of a few months.
In Lagos state and in jurisdictions that have the Small Claims Court and Fast track procedure,
the recovery process can be wrapped up even faster. After judgment is given, a garnishee
order may be required to receive the judgment debt from the debtor's bankers. A garnishee
order is an order of court directed to the debtor's bank to pay a certain sum (the judgment debt)
from the debtor's bank account to the judgment creditor.

3. Winding Up proceeding: Where the debtor company does not respond favourably to the
demands of a statutory letter of demand, the legal effect is that the debtor company is deemed
no longer able to meet it's financial obligations. This is in accordance with section 572 of the
CAMA. The company may therefore be subject to a creditors' voluntary winding up proceeding
on the instance of the creditor, with this process culminating in an eventual dissolution of the
company and payment of its creditors from the realised assets of the company. Winding up
proceedings typically take longer than a simple action for the debt discussed above. It could
last for years depending on how quickly the liquidator, the creditors, and members can resolve
financial issues facing the company since the company is insolvent.

4. Criminal Action Against the Controllers of Debtor Company: A criminal action may
become expedient where there's a criminal element with respect to the transaction that gave
birth to the debt e.g fraudulent misrepresentation. Where the money cannot be recovered from
the company's books, the creditor company can proceed against the directors of the company
jointly and severally for the debt owed. Although the law protects the directors/officers of a
company from the liabilities of the company, they may however be liable for the company in
certain situations. This is the doctrine of piercing the corporate veil. In such a case the law not
offer protection to the controllers of the company where the company has been used to
perpetrate fraud.

In the case of Agbebaku v. State (2015) LPELR-25763(CA) the court held that a company may
be held liable for the criminal acts of its officers, especially the directors, who represent the
mind of the copy. The Court further stated that directors, officers and employees of a company
can be held criminally liable for any criminal acts that they personally commit regardless of
whether they were acting in furtherance of the company's interests. The directors, officers and
or employees must answer for any personal wrongdoing and cannot be shielded by the
corporate entity.

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Statutes of Limitations
The limitation laws prescribe a period within which an action for recovery of debt must be instituted in
court, otherwise it becomes unenforceable. The Supreme Court in Yare v. Nunku & Ors (1995) LPELR-3514
stated that “statute of limitation removes the right of action, the right of enforcement, the right to judicial
relief and leaves a plaintiff with a bare and empty cause of action which he cannot enforce”. In Lagos state
for example, the Limitations Law states that “the actions shall not be brought after the expiration of six
(6) years on which the cause of action accrued.” Section 8 (1) (e) and (6) of the Lagos. This means that an
action for recovery of debt must be instituted within 6 years from the date the debt arose or became due.
Thus, in determining the span of a limitation period, recourse is made to the time when the cause of action
arose and when the suit was filed.

Criminal actions are however not subject to limitations law. Therefore when a debt is connected to a
criminal activity, the perpetrators of the crime may still be prosecuted.

Use of Law Enforcement Agents For Debt Recovery

It's not uncommon to see law enforcement angels being use to hound debtors around. Why this may look
like a practically easy way to receive debts from. Debtors, it's not a lawful method of debt recovery. Law
enforcement agents are not debt recovery agents. The court is therefore quick to frown upon the use of law
enforcement agents to recover debts. In EFCC v. Diamond Bank PLC & Ors. (2018) LPELR- 44217(SC), the
Supreme Court decried the use of security agents to recover debts.

The Court emphasized that debt recovery is not part of the duties of thr Police and security agencies and
they must refuse to allow themselves to be used by overzealous and/or unscrupulous characters for the
recovery of debts arising from simple contracts, loans or purely civil transactions.

Conclusion
The debt recovery process may become expedient for the recovery of debt. Nevertheless, it is not desirable
for the reasons that it depletes resources and takes precious time off the company's hands that it spends
pursuing after debtors. It is therefore advisable that businesses take proactive measures to prevent or
reduce the incidences of debts. Some of these measures include:
I. Security deposits
ii. Credit limits
iii. Upfront payments or Payment upon delivery
iv. Onboarding due diligence to be sure directors are reputable and not people of dubious
character or previously bankrupt
v. Insurance

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 MEET THE AUTHORS

BRIGHT ELOLUE ADEWALE MOSURO

Drawbridge Law Partners

[email protected]
+2349063533831, +2348152137781

Corporate/Commercial, Property consultants & Dispute resolution lawyers