The Propriety of Debt Recovery and Settlement in Winding-up Proceedings

April 13, 2022


A creditor may petition for the winding-up of a corporate debtor for its inability to pay its debts. A winding-up petition is a class action with a communal remedy. Although usually instituted by individual creditors, winding-up orders “operate in favour of all creditors… as if made on a joint petition”: section 581 of the Companies and Allied Matters Act, 2020 (CAMA). Nevertheless, many winding-up petitions are presented with the aim of exerting pressure on debtors to pay the debt owed to the petitioning creditor. This practice is partially fueled by the desire to avoid time-consuming debt recovery suits. When winding-up is used in this manner, there is a tendency for the petitioner to pursue individual (as opposed to collective) claims against the debtor. This discourse examines the propriety of the pursuit of such remedires in winding-up proceedings.

 Recovery of Undisputed Debts in Winding-up Proceedings

A court would readily make a winding-up order if a creditor shows that (i) the debtor is indebted to the creditor in a sum exceeding N200,000.00, (ii) the debt is due, (iii) the creditor has issued a demand to the debtor for payment and the debtor has neglected to pay the debt at least three weeks after receipt of the demand: section 572(a) CAMA.

Time and again, courts have cautioned against using winding-up petitions to exert pressure on companies to pay debts: Oriental Airlines Ltd v Air Via Ltd [1998] 12 NWLR (Pt 577) 271 at 181D. Nevertheless, a court would not refuse a winding-up petition (where the above conditions are satisfied) merely because a creditor’s motive is debt recovery. As was rightly stated in Oriental Airlines Ltd v Air Via Ltd [supra] at 280H-281A, “when the debt is established and a formal demand is made, the court has no discretion in the matter but to wind-up the company.” Accordingly, a winding-up petition may be presented against a financially healthy company which has neglected to pay an undisputed debt. In Mann v Goldstein [1968] 1 WLR 1091 at 1096C-F, the court stated as follows: “when the creditor’s debt is clearly established … this court would not, in general at any rate, interfere even though the company would appear to be solvent.

A primary objective of compulsory winding-up is to realize the debtor’s assets and make distributions to its creditors. Winding-up is therefore a (special) collective debt recovery procedure. It is collective in the sense that it operates for the benefit of all creditors of the debtor. Brightman LJ highlighted this point in Re Lines Bros Ltd [1983] 1 Ch 1 at 20, where he stated thus: “The liquidation of an insolvent company is a process of collective enforcement of debts for the benefit of the general body of creditors…its purpose is to enforce, on a pari passu basis, the payment of the admitted or approved debts of the company.”  Accordingly, presenting a petition with the aim of compelling payment of an undisputed debt is unobjectionable. What is objectionable is seeking judicial assistance in the pursuit of individual remedies in winding-up proceedings. The Federal High Court (FHC) lacks jurisdiction to make orders relating to recovery of individual debts in winding-up proceedings:  Tate Industries Plc v D.M.B. Ltd [2004] 17 NWLT (Pt 901) 182 at 219C-D.

In Re Yanju International Motel Ltd Oriental [1990] FHCLR 17, the petitioning creditor sought for a winding-up order and an order for the debtor to pay its debt to the petitioner. The court rightly pointed out that the two prayers amounted to eating one’s cake and having it, to wit: winding-up a company and also asking it to pay the debt for which it was wound-up. The court struck out the latter prayer following its withdrawal by the petitioner. Similarly, In Akono v C-P.M.B. Ltd [1996] FHCLR 269, a debtor sought for an order compelling the petitioning creditor to accept an amount from the debtor as monthly installment in settlement of a debt owed to the creditor. The court rightly held that it had no jurisdiction to make such order in the winding-up proceedings.

Compromise and Settlement in Winding-up Proceedings

Parties to civil actions may settle their disputes on whatever terms they desire. Courts have a duty to encourage settlement in appropriate cases. In Eyo v Okpa [2010] 6 (Pt 1191) 611 at 640D-E, it was held that courts have a “legal”, “moral” and “bounding” duty to promote amicable settlement between parties. The foregoing does not extend to winding-up proceedings. First, insolvency rules are mandatory with no latitude for pursuit of goals outside those contemplated under CAMA. Second, collectivity (among creditors) is a cardinal feature/objective of insolvency law, with limited scope for individual remedies.

A creditor’s decision to engage in out-of-court settlement with the debtor may not terminate a winding-up action where other creditors are desirous of proceeding with it. In S.B.N. v Maiden Electronics [1979] 5 FRCR 88 at 92, the court held that it had the discretion to grant a creditor’s application seeking to be substituted for the petitioner with whom the debtor had settled before the hearing of the petition.

Where the debtor has a single creditor, the creditor may be able to terminate or abandon the winding-up action for out-of-court settlement. However, it will amount to improper exercise of judicial power for a court to stay or adjourn proceedings for such “settlement”. Such order would be antithetical to the objective of winding-up.

The FHC lacks jurisdiction to enter judgment on terms of settlement in winding-up proceedings. In N.B.N. v Kuta Shipping Ltd (1974) 1 FRCR 210, the petitioner and debtor filed terms of settlement defining how the debt would be paid and asked the court to give judgment on the terms. The court refused on the grounds that the terms of settlement were not in consonance with the claim of insolvency, and that the court lacked jurisdiction to enter judgment on the terms of settlement. This decision was applied in F.M.B. Ltd v Imarsel Chemical Co Ltd (1993) FHCRL 205, where the petitioner applied to court to enter consent judgment on agreed terms of settlement embodying the debtor’s admission of indebtedness and a payment schedule.

In contrast, Agbo JCA’s leading judgment in U.H.S. Ltd v CPL Industries Ltd (2009) 7 iLaw/CA/L/716M/06, indicates that at the lower court, the petitioner and the debtor “negotiated a settlement which was reduced into writing and by consent of both parties made the judgment of the trial court”. With respect, the lower court acted without jurisdiction in entering judgment on the terms of settlement in the winding-up action.

In Folawiyo & Sons Ltd v Hammond Projects Ltd [1977] 3 FHCR 143, the debtor in a winding-up action applied to court for leave to convene a creditors’ meeting to settle a scheme of arrangement for pro-rata payment of a specified amount to creditors. The court refused the application on the ground that the debtor had not disclosed sufficient facts to enable the court exercise discretion in its favour. With respect, the court lacked jurisdiction to sanction the scheme in a winding-up action and ought to have refused the application on that basis.

A winding-up order and its consequences are mandatory and cannot be compromised. A winding-up order may only be set aside by a court of competent jurisdiction. This is In contrast to judgments in civil actions which confer private rights for the benefit of the successful parties, who may compromise the terms of such judgments: S.P.M Ltd v Adetunji [2009] 13 NWLR (Pt 1159) 647at 662-663E-C.

Recovery of Disputed Debts in Winding-up Proceedings

It is impermissible to use winding-up to extort disputed debts: Oriental Airlines Ltd v Air Via Ltd (supra) at 281D, 280H. Where a debt is genuinely disputed on substantial grounds, the proper course is for the court to dismiss the petition: Hansa Construction Ltd v Mobil Nigeria [1994] 9 NWLR (Pt 366) 76 at 87G. Winding-up petitions are often fiercely contested on the ground that the debts are disputed. Consequently, a considerable number of reported winding-up cases relate to disputed debts.

Sound reasons underpin the impermissibility of grounding winding-up petitions on disputed debts. First, the FHC has no jurisdiction to entertain simple debt disputes: section 272 of the 1999 Constitution; Pharma-Deko Plc v FDC Ltd (2015) 10 NWLR (Pt 1467) 225 at 252C-E. Second, only a “creditor” has the locus to present a winding-up petition under section 572(a) of CAMA: Weide & Co (Nig) v Weide & Co Hamburg (1992) 6 NWLR (Pt 249) 627 at 640H. Where the debt is disputed, it affects the status of the petitioner as a “creditor” and his right to present the petition. Third, the only relief which a court may grant in a winding-up is the winding-up of the debtor on the ground of insolvency pursuant to sections 571(d), 572(a) and 573(1)(b) of CAMA: Oriental Airlines Ltd v Air Via Ltd (supra) at 281B-C.

 The Risk of Void Dispositions

A debtor’s payment to a creditor after the presentation of the petition may constitute a void disposition: section 576 of CAMA. Accordingly, a petitioner who receives payment of its debt may be required to repay same to the insolvent’s estate upon the making of a winding-up order. In Re Liverpool Civil Service Association (1874) 9 Ch App 511, the debtor paid the petitioner part of the debt and promised to pay the balance on a future date. When the debtor defaulted, the petitioner proceeded with the petition and obtained a winding-up order. On the liquidator’s application, the court held that the part-payment received by the petitioner after the presentation of the petition was a void disposition and ordered the petitioner to repay.

A cardinal objective/feature of insolvency law is equal treatment of similarly situated creditors. Permitting the debtor to make any payment to the petitioner, amounts to giving the petitioning-creditor an advantage over other similarly situated creditors. To avoid the risk of receiving a void disposition, a petitioner who has received payment from the debtor may terminate the winding-up action. However, this may not be possible where there are (unpaid) creditors who are desirous of proceeding with the petition. A court has jurisdiction to substitute a creditor for a petitioner who is unwilling or unable to continue with the petition: Rule 26 of Company Winding-up Rules 2001; Communications Associates Ltd v Pharmacia Nigeria Ltd [1987] FHCLR 77 at 89.

Dr Kubi Udofia