Introduction
Business entities raise funds to keep them in operation. These funds may be sourced from the profits earned from the business (retained earnings), through borrowing (debt capital), through the issuance of shares (equity capital) and other sources such as crowdfunding.
In Ghana, debt financing is an attractive option for many businesses since it offers some tax benefits. One of such advantages is the deductibility of interest payments which can reduce a company's taxable income.
Companies obtain debt capital through bank loans or by issuing debentures, leases, or mortgages. Companies that receive the debt capital are the borrowers or debtors while those that give out the debt capital are the lenders or creditors. This relationship is regulated by the Borrowers and Lenders Act, 2020.
Debt recovery techniques
When businesses are granted loans or debt capital, they must repay the principal amount in addition to the interestaccrued over time depending on the interest rate agreed on by the parties. If a borrower defaults in the payment of the principal amount and the interest, the lending company or creditor takes steps to recover the debt due and owing, hence the term debt recovery. Debt recovery offers creditors the avenue to recoup their funds when borrowers default.
The legal mechanism first attempts at amicable settlement using the alternative dispute resolution (ADR) methods. If these methods fail, the creditor can pursue a court action against the debtor. This approach combines legal precision with effective negotiation. The effective techniques needed for a successful debt recovery are as follows:
Step 1: Case Review
Tailor debt recovery strategies by analyzing each delinquent account based on debts size, risk, and complexity. Key actions include:
- Prioritizing high-value debts for immediate recovery efforts.
- Creating risk mitigation strategies.
- Efficiently allocating resources, focusing on cases that require specialized expertise.
- Making informed decisions on the next action to take.
Step 2: Communication
Debtors are sent reminders of the outstanding debt for confirmation. Subsequently, a formal demand letter detailing:
- Information on the debtor and creditor.
- The debt amounts.
- The circumstances leading to the debt owed.
- The payment timeline.
By adopting a structured communication, creditors can resolve the debt without resorting to more aggressive recovery actions.
Step 3: Engagement
This is an attempt at recovering the debt by negotiating favorable settlement terms or engaging a mediator for voluntary settlement without court proceedings.
Key points include:
- Discussing terms that suit both parties' financial circumstances, and preserving the business relationship.
- Establishing settlement options and payment deadlines to reduce the likelihood of default in future.
Step 4: Legal Recourse
Typically, the last resort after other efforts at recovering the debt have failed is legal recourse. Taking legal action is a more formal, structured, and enforceable way of recovering debts. Although it involves more time, cost, and complexities, the debtor is compelled to repay the debt with added interest and/or penalties.
The creditor (plaintiff) may cause a Writ of Summons to be issued against the debtor seeking an order from the court for the repayment of the debt with the accrued interest. In the writ, the debtor (defendant) is to enter appearance within eight (8) days after the writ is issued. If the defendant does not do so, judgment will be given without further notice.
The plaintiff can apply for Summary Judgment where he believes that the defendant has no reasonable defence to the claim endorsed on the writ. When this application is moved in court, the parties are saved the headache of going through a full trial.
An application for a Mareva Injunction can be filed while the legal proceedings are ongoing. The goal of a debt recovery procedure is to recoup outstanding debt. To achieve this, there is the need for the plaintiff to apply for a Mareva Injunction to freeze the assets of the defendant. Although this is a discretionary remedy, the court is likely to grant it in order not to render its judgment nugatory and to prevent the defendant from disposing of his assets before the end of the trial process.
Step 5: Enforcement
A judgment creditor may need to take further steps to enforce the judgment of the court after trial. The judgment may be enforced with writs of execution which include the following;
- Writ of Fieri Facias
This writ directs the sheriff of the court to seize the property of the judgment debtor and sell through a public auction in satisfaction of the judgment debt. It is worth mentioning that movable properties are attached first before immovables properties. - Writ of Sequestration
A judgment creditor may, with leave of court, issue a Writ of Sequestration directed at Commissioners who are required to pay money within a given time. They take hold of properties owned by the debtor without selling them until the debt is satisfied or enter any immovable property of the debtor, collect rent, and pay same into court. - Garnishment Orders
A garnishee order is a two-step-legal process used by a creditor to collect a debt from a debtor. It allows the creditor to take money directly from a third party (garnishee) who owes the debtor money, such as a bank or an employer. - Firstly, the court gives a Garnishee Order nisi which directs the garnishee to attend court and to show cause why it should not be ordered to pay the judgment debt. This order shall specify the date the garnishee is expected to attend court and show cause. Secondly, if the debt is not disputed by the garnishee, the court gives an order absolute against the garnishee to pay the money in its custody to the judgment creditor.
- Charging Orders
This is the imposition of a charge on the judgment debtor's interest in any property (eg. stocks, shares, immovables) to secure the payment of monies due under a judgment debt. An order absolute is made with the appointment of a receiver to enforce the charge. The charge created prevents a valid disposition of the property by the judgment debtor.
Step 6: Closure
This step marks the end of the recovery process. The necessary documentation is prepared, and the case concluded. The amount recovered is clearly and accurately reported to the creditor. This report will also contain the costs incurred, unrecoverable debt, the period and the method of recovery used. Closure ensures that the debt recovery process is complete, transparent, and compliant, allowing both the creditor and the debtor to move forward.
Conclusion
Court-enforced judgment executions offer creditors a reliable method for debt recovery, deterring potential debtors through the demonstration of creditors' resolve. This approach also allows creditors to recover interest, legal fees, and other costs in addition to the debt. This makes this approach financially advantageous.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
