Legal Strategies for Debt Recovery: A Step-by-Step Guide
Introduction
Recovering debts in Nigeria can be challenging, particularly when debtors become evasive or unresponsive. Whether you are a business owner, professional, or financial institution, understanding the legal framework and practical steps for debt recovery is critical to protecting your cash flow and maintaining commercial discipline. This article provides a clear, step-by-step overview of effective legal strategies for debt recovery in Nigeria.
Understanding Debt and What Debt Recovery Means
What is a Debt?
In simple terms, a debt arises when one party (the debtor) owes money to another (the creditor) that is legally enforceable. It usually results from a contract, such as a loan agreement, a supply of goods, a provision of services, or a credit transaction, in which payment is due but remains unpaid after the agreed date. Examples of debt include unpaid invoices, loans, credit sales, rent arrears, or service fees.
What is Debt Recovery?
Debt recovery refers to the legal and procedural steps taken by a creditor to reclaim money owed by a debtor. It may be carried out amicably through demand letters, negotiation, and reminders or formally through court action and enforcement mechanisms.
The Legal Framework for Debt Recovery in Nigeria
The legal frameworks guiding the recovery of debt in Nigeria includes but is not limited to:
| Legislation | What it Does |
| Companies and Allied Matters Act (CAMA) 2020 | Provides the legal foundation for corporate entities. It also empowers creditors to initiate winding-up proceedings against companies unable to pay their debts (Sections 571–580) |
| Central Bank of Nigeria (CBN) Regulations and Guidelines | Regulate how financial institutions recover loans, including fair debt collection practices, credit reporting, and management of non-performing loans. |
| Bankruptcy Act, Cap B2, Laws of the Federation of Nigeria (LFN) 2004 | Provides procedures for declaring an individual bankrupt and distributing their assets among creditors. |
| Secured Transactions in Movable Assets Act (STMAA) 2017 | Enables creditors to register security interests in movable property and, upon default, realize those assets without necessarily resorting to lengthy court proceedings. |
| Federal Competition and Consumer Protection Commission (FCCPC) Guidelines | Regulate ethical debt collection, prohibiting harassment, defamation, and privacy violations by creditors or third-party collection agencies. |
| Sheriffs and Civil Process Act (Cap S6 LFN 2004) | Governs the enforcement of judgments, including writs of execution, garnishee orders, and attachment of property. |
| High Court of the FCT (Civil Procedure) Rules 2018 and the High Court Rules of various States. | Provides procedural guidance for filing and prosecuting debt recovery suits within the FCT and similar rules in respective states. |
Analysis of Debt Recovery Strategies
Effective debt recovery in Nigeria requires a structured, strategic approach. Below is a step-by-step outline of the key stages and tools available to creditors.
- Notification and Letter of Demand: It is very important step for a creditor to notify the debtor (in writing) of the debt payment becoming due or late, and demanding for the said payment
- Alternative Dispute Mechanism: It is sometimes ideal that before instituting an action for debt recovery, a creditor should initially explore alternative dispute resolution (ADR) options such as negotiation or mediation with the debtor, where relations are still amicable and the debtor is cooperative. Some typical resolution at this stage includes flexible repayment plans, or restructuring of the debt, etc. These approach could save time, preserve business relationships, and reduce typical recovery costs.
- Commence Legal Action: When amicable efforts fail and the debt remains outstanding, the creditor may commence legal proceedings. It is important to note that the process typically begins with a formal demand letter, which should:
- Outline the debt amount;
- Specify the due date and terms of repayment; and
- Demand payment within a reasonable timeframe.
This letter serves as a pre-action notice, as no action for debt recovery should be filed unless a demand has been made and remains unsatisfied. The amount claimed and the nature of the transaction usually determines the appropriate court to approach in a debt recovery action.
| Courts | Nature of Debt Recovery Actions |
| Magistrate Court | Handle smaller claims within its monetary jurisdiction. |
| High Court (States) | Handle larger or complex commercial claims. |
| Federal High Court | Handle the matters involving federal jurisdictional issues such as banking, company law, or maritime transactions. |
Expedited Procedures
In most debt recovery actions, time is an important factor. As such, Nigerian courts also provide summary mechanisms for fast and effective recovery of debts where liability is clear and undisputed, including:
| Summary Mechanism | When it can be Used |
| Summary Judgment | Granted where the debtor has no real defence; judgment may be entered based on affidavit evidence and documents. |
| Undefended List Procedure | Suitable for straightforward, liquidated money claims where the debtor has acknowledged the debt or cannot present a defence. |
| Default Judgment | Granted when the debtor fails to respond to the court’s summons or file a defence. |
Enforcement:
A creditor upon winning a judgment may also proceed to enforce it, this can be done by relying on various enforcement options under the Sheriffs and Civil Process Act, including: the use of garnishee proceedings whereby the court directs the debtor’s bank or third party holding funds to pay the judgment sum to the creditor, or authorizes the seizure and sale of the debtor’s movable or immovable property in order to realise the debt owed.
When must you commence an action for debt recovery?
One of the most crucial considerations in debt recovery is timing. The right to recover a debt is not indefinite. Under Nigerian law, actions such as debt recovery must be brought within six (6) years from the date the cause of action arose (i.e. the date after the debt becomes due but unpaid). Once the 6-year limit lapses, the action for debt recovery becomes statute-barred, meaning it can no longer be enforced through the courts.
Conclusion
It is important to emphasize that debt recovery is a civil action under Nigerian law. Creditors must never resort to self-help measures such as threats, intimidation, unauthorized access to the debtor’s property, or public shaming on social media. Such conduct may amount to criminal offences under the Criminal Code, Cybercrimes (Prohibition, Prevention, etc.) Act, or FCCPC Guidelines, and could expose a creditor to liability for breach of privacy, or harassment, among others. The appropriate and lawful recourse for a creditor is to follow due legal process either through amicable settlement, or the courts.
While debt recovery in Nigeria can be complex, success depends on adopting the right legal strategy, acting promptly, and adhering strictly to due process. Ultimately, effective debt recovery requires a balance of legal diligence, professionalism, and procedural compliance, ensuring that creditors protect their interests while upholding the rule of law.
This article is intended to provide general information on the subject matter and does not, by itself, create a client-attorney relationship between readers and Hamu Legal, nor does it serve as professional legal advice.
We are available to provide specialist legal advice on the readers’ specific circumstances when they arise. For further enquiries, please reach out to esosa@hamulegal.com
