Insolvency Discourse by Kubi Udofia info@kubiudofia.com
Introduction
On 1 August, 2020, the Global Standing Instruction (GSI) became operative. Conceived and initiated by the Central Bank of Nigeria (CBN) and the Bankers’ Committee, the policy authorises creditor banks to debit loan and accrued interest due from bank accounts of loan defaulters, across Nigeria’s banking system. According to CBN, the GSI initiative is aimed at facilitating an improved credit repayment culture, reducing non-performing loans in Nigeria’s banking system and watch-listing consistent loan defaulters.
Scope of the GSI Policy
The GSI policy has a somewhat retrospective effect considering that it applies to loans granted from 28 August, 2019. The policy is limited to individuals, and does not apply to companies. However, it should be borne in mind that the credit risk protection clause initiated by the CBN and Bankers’ Committee on 26 August, 2019 is still operative, and applies to corporates. The clause permits banks, upon default in loan repayment, to request CBN to utilise the debtor’s deposits in other banks in repayment of the loan. It is mandatory for banks to include the clause, in all loan documentation.
According to CBN’s Guidelines released on 13 July, 2020, the GSI policy is “for implementation by all banks and other financial institutions”. The GSI mandate may be used by these institutions to recover only due principal amount of the loan, and accrued interests. It cannot be used to recover any additional charges or penal rate, for default.
The Guidelines have highlighted the bank accounts which the GSI policy may be applied as: individual savings accounts, individual current accounts, individual domiciliary accounts, investment/deposit accounts (Naira and foreign currency) and electronic wallets. Curiously, the guidelines also state that the policy will apply to joint accounts. This point is examined in detail, below.
Stakeholders, Responsibilities, Violations and Sanctions
“GSI stakeholders” are the borrower, creditor bank, Participating Financial Institutions (PFIs), Nigeria Inter-Bank Settlement System (NIBSS) and the CBN. These stakeholders are saddled with differing vital responsibilities, in the GSI ecosystem. For instance, a borrower is required to execute the GSI mandate either in hard copy or digital form. The borrower is also required to understand the terms and conditions of the mandate, before execution. The borrower must ensure that all qualifying accounts are linked to his bank verification number (BVN). Where a borrower’s account which is not linked to his BVN is identified, the account will be watch-listed.
On its part, a creditor bank is required to, among other things, (i) include the GSI mandate in loan processes, and properly educate borrowers about the mandate and its implications, (ii) retain copies of executed GSI mandates and provide them when required, (iii) validate GSI mandate instruments before disbursing loans, (iv) indemnify the NIBSS and PFIs against liabilities arising from inappropriate use of the GSI, (v) exclude penal charges from the GSI trigger amount, etc.
PFIs are, among other things, required to (i) execute the GSI mandate agreement with NIBSS, (ii) ensure proper maintenance of qualifying accounts and visibility to NIBSS on the Industry Customer Accounts Database (ICAD), (iii) ensure that accounts in NIBSS’ ICAD are correctly tagged with BVN, (iv) honour all balance enquiry, debit advice and GSI recall instructions from NIBSS for GSI trigger, etc.
The NIBSS and the CBN, are also saddled with a number of responsibilities.
Certain abuse or misuse of the GSI, may attract sanctions. These include: (i) a creditor bank activating a GSI mandate in error, (ii) a creditor bank including penal charges in the GSI trigger amount, (iii) a PFI incorrectly placing a CBN approved restriction on an account in order to shield it from the GSI trigger, (iv) a PFI failing to grant the GSI permission to debit an eligible account, etc.
Enforceability
The enforceability of the GSI may be hinged on the ground of banker/customer contractual relationship, and/or on assignment of debt.
In a banker/customer contractual relationship, a banker has an obligation not to pay out money in the customer’s account, except to the customer’s order or by his instructions: FBN Ltd v African Petroleum Ltd (1996) 4 NWLR (Pt. 443) 438 at 444H, 445E. Viewed from this perspective, a GSI mandate executed by a borrower and his creditor bank suffices as an instruction to PFIs with the borrower’s accounts, to make payment to the creditor bank.
Alternatively, the GSI policy may be viewed from the prism of assignment. Monies deposited by a borrower in PFIs constitute a loan from the borrower to the PFIs, which creates a debtor/creditor relationship: UBN Plc v Ifeoluwa (Nigeria) Ltd [2007] 7 NWLR (Pt 1032) 71 at 83C-D. The executed GSI mandate constitutes an assignment by the borrower (to the creditor bank), of debt owed to him by PFIs.
Instructively, the GSI is to apply to loans granted since 28 August, 2019. The Guidelines for implementation of the policy were released on 13 July, 2020. It is unclear if creditor banks had ensured that borrowers executed GSI mandate instruments prior to 13 July, 2020. Any non-execution of such GSI mandates, would render the GSI unenforceable against such borrowers. One way of taking care of this concern, may be for creditor banks to rely on credit risk protection clauses in their loan documentations. The clause is functionally similar to the GSI.
Potential Impediments
Joint Accounts
Eligible accounts under the GSI initiative include joint accounts. This may not be objectionable, if the intention is to extend the GSI to joint accounts in which all signatories are borrowers in the same GSI transaction. On the other hand, there is no legal basis for using the GSI to claw deposits in joint accounts, where one or more signatories are not borrowers. A PFI which authorises such GSI transaction, may be liable in damages to the third party.
Given the nature of joint accounts, interfering with them will require the authorisation of all signatories. In Diamond Bank Ltd v Ugochukwu [2007] All FWLR (Part 384) 290 at 305G-H, the Court stated that (in relation to joint accounts): a bank would be correct to mark a cheque “incomplete mandate” where two signatories are required before the cheque is honoured and only one signs. In Ndoma-Egba v A.C.B. Plc (2005) 7 SC (Pt 111) 27 at 51, the Supreme Court held that where persons jointly executed a mandate form for a joint account, the bank owed each of the account holders a duty not to allow either of them to draw funds from the joint account, without the concurrence of the other.
Accounts not in Borrower’s own right
The GSI policy may not be applied to deposits in accounts which a borrower does not hold in his own right. An example is an account held by the borrower as a trustee: Hancork v Smith (1889) 41 Ch 456. Another example is, an account in a business name. A creditor bank’s right to claw deposits in PFIs, is analogous to a banker’s right to set-off. The settled position of the law in relation to a banker’s right to set-off is that in the absence of an express agreement, such accounts are to be kept separate: Asman Mechanical Ltd v Spring Bank Ltd [2012] All FWLR (Pt 613) 1824; Adejuwon v Co-op Bank Ltd [1992] 3 NWLR (Pt 228) 251.
Accounts subject to Security Interests
The GSI mandate may not be triggered in relation to a borrower’s account which is subject to a security interest. The GSI merely grants a creditor bank a contractual right. Where a borrower had created and perfected a security interest over his bank account with a PFI pursuant to the Secured Transactions in Moveable Assets Act 2017 (STMAA), this will trump the GSI: Sections 3(2) and 24(2) STMAA. It is also worth highlighting that, where deposits in bank accounts are traceable proceeds of the sale of a moveable asset which was subject to a perfected security interest, the security interest continues to such deposits: Section 7(1) STMAA.
Bankruptcy Proceedings
When a receiving order is made, creditors are restrained from exercising any remedy against the person or property of the debtor, save with leave of court. Creditors are also barred from commencing any action or legal proceedings: Section 10(1) Bankruptcy Act, 1979. Secured creditors are exempted from the foregoing. A creditor bank in the GSI arrangement is an unsecured creditor, and would be prevented from taking action on a GSI mandate. Further, an officeholder may explore challenging GSI transactions undertaken within three months prior to the commencement of bankruptcy proceedings, as constituting fraudulent preference: Section 46 of Bankruptcy Act.
Banker’s Right to Set-off
In the absence of an express agreement to the contrary, a banker is entitled to combine accounts of a customer where the customer has multiple accounts with the banker. The banker may use monies paid into one account, to cover missed payments on other accounts: National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785 at 819F. A banker may use money paid into one current account, to cover missed payments on other accounts: FBN Ltd v Osunsedo [1997] 11 NWLR (Pt 527) 132 at 142F-G. This right will have priority over a GSI mandate. It would be imprudent for a PFI to handover such deposits to a creditor bank, when the borrower’s debt to the PFI is due and unpaid. Although Fidelity Bank Plc v Okwuowulu (2012) LPELR-8497 relates to garnishee proceedings, it is authority for the proposition that a banker’s set-off right would trump third party interests.
Quote
“……THERE IS NO LEGAL BASIS FOR USING THE GSI TO CLAW DEPOSITS IN JOINT ACCOUNTS, WHERE ONE OR MORE SIGNATORIES ARE NOT BORROWERS. A PFI WHICH AUTHORISES SUCH GSI TRANSACTION, MAY BE LIABLE IN DAMAGES TO THE THIRD PARTY”
