Different options are available to a creditor to recover debt from a defaulting party. One of these is by initiating bankruptcy proceeding. This article will discuss what bankruptcy proceeding is and its legal implication on the debtor where the proceeding is successful.

Many consider the option of initiating a bankruptcy proceeding as an extreme remedy to recovering debt. However, it has also been said that it is the wicked that borrows without paying back (Psalm 37:21). Hence when there is wrong, there should be a remedy and one of such remedy lies in Bankruptcy Proceedings.

What is Bankruptcy:

Bankruptcy has been defined as the status of a debtor who has been declared by judicial process to be insolvent or unable to pay his debts as they fall due out of his assets(See Crystal and Nicholson; Bankruptcy Law and Practice (London, Oyez Publishing) p. 1).

According to Section 868 of the Companies and Allied Matters Act 2020 being an insolvent person means any person who in respect of any judgment, act or court order against him, is unable to satisfy execution or other process issued thereon in favour of a Creditor and the execution or other process remains unsatisfied for not less than six weeks.

The Bankruptcy Act did not define the term but describes the act of Bankruptcy to occur in the following instances:

  1. When creditor obtain final judgment or final order for any amount against the debtor; there is no subsisting order of stay of execution; served with a bankruptcy notice and does not, within fourteen days after service of the notice, comply with the requirement of the notice or satisfy the Court that he has a counterclaim, set off or cross demand which equal or exceed the judgment debt.
  2. Where execution has been levied against the Debtor and his properties sold or held by the bailiff for 21 days. (Where an interpleader summons has been taken out with regards to the goods seized, the period of the inter pleader proceeding will be excluded on calculating the 21 days. (An interpleader summon is issued by a third party whose property has been mistakenly seized as that of the debtor))
  3. When a Debtor file in court, a declaration of his inability to pay his debts or presents a bankruptcy petition against himself.
  4. Where Debtor suspend or give notice that he is about to suspend payment of his debts to any of his creditors.
  5. Where the creditor become entitled to file a bankruptcy petition under a credit agreement.
  6. When a debtor making of a conveyance or assignment of his property to a trustee or trustees for the benefit of his creditor generally.
  7. If a Debtor makes a fraudulent conveyance, gift, delivery or transfer of his property or any part thereof with intent to defeat or delay the claim of his Creditor whether in Nigeria or outside Nigeria.
  8. Where he makes any conveyance or transfer of his property or part, or creates a charge which could be void or incompetent under any Law in the event that he is declared bankrupt. (See Section 1 and 2 of Bankruptcy (Amended) Act )
  9. Where a Debtor executes a conveyance or Assignment of his property to a Trustee or Trustees for the benefit of his Creditors. It does not matter if this event occurs in or outside Nigeria.

Other Condition precedent to presentation of Bankruptcy petition:

In addition to the requirement of disclosing acts of bankruptcy, the Petitioner must satisfy the following requirements:

  1. That the amount of debts owed by the debtor is not less than N2,000;
  2. That the debt is a liquidated sum and is payable immediately or at a future time;
  3. That the act of bankruptcy upon which the petition is predicated occurred within three months before the presentation of the petition; and
  4. That the debtor is ordinarily resident in Nigeria or within a year before the date of the petition has resided, have a dwelling house or place of business, carried out a business in Nigeria or a member of a firm or partnership in Nigeria.

The Law Governing Bankruptcy:

In Nigeria, the primary legislation on bankruptcy is The Bankruptcy Act, Cap B2. Laws of the Federation of Nigeria 2004 while the primary rules of procedure are set out in Bankruptcy Rules 1990, made pursuant to Sections 15(2), 34, 110 and 111 of Bankruptcy (Amended) Act of 1992. Other relevant sources of law on Bankruptcy are Companies and Allied Matters Act 2020 (which repealed the Companies and Allied Matters Act Cap. C20 Laws of the Federation of Nigeria 2004; Asset Management Corporation of Nigeria Act 2010(as Amended); The Case Law; The Legal Texts/Publications among others.

Objective of the proceeding:

The objective of the Bankruptcy proceeding is clearly stated in the preamble to the Bankruptcy Act as - “An Act to make provisions for declaring as bankrupt any person who cannot pay his debt of a specified amount and to disqualify him from holding certain elective and other public offices or from practicing any regulated profession (except as an Employee)”

Where can the Bankruptcy Petition be filed:

The Federal High Court is vested with exclusive jurisdiction in respect of bankruptcy proceedings. The Bankruptcy petition is to be filed in the division of the Federal High Court where the debtor carried on business for the greater part of the six month immediately preceding the presentation of the petition even where the petitioner no longer resides in such a division. The Rules gives primacy to the place where the debtor carried on business rather that where he resides.

Who can file:

A debtor, or a creditor may institute bankruptcy proceeding. Where the petitioner is a debtor, it appears that it suffices for such a debtor to merely allege that he is a debtor and he is unable to pay his debt. The allegation in the petition is deemed to be an act of bankruptcy and the debtor is not required to have previously filed a declaration of his inability to pay his debts (Section 8(1) of the Act).

The court is vested with discretion to refuse to make a receiving order on a debtor’s petition if the Court is not satisfied that the assets for division among the unsecured creditors after payment of all costs, charges and expenses, and the debts which are preferential under the Act, will be sufficient to pay a dividend of fifteen per cent, or if the court considers for other sufficient cause that no order ought to be made. Other sufficient cause includes the non-attendance of the debtor; or in the case of a firm, of at least one of the partners thereof; or at the hearing of the petition, the absence of any material book of account; or any fraud or misconduct not amounting to fraud by the debtor in relation to his affairs; or in the case of a firm or person carrying on business under a foreign firm name and the non-production of the partnership book or of the receipt used in connection with the business.

Where the petition is filed by a creditor, he must disclose the following:

  1. That the debtor has committed an act of bankruptcy.
  2. That the creditor is entitled to present the petition within the ambit of the provision of the Bankruptcy Act.
  3. Due service of the Petition in a manner required by Law.

Effect of the order of Bankruptcy:

Where a debtor is declared Bankrupt:

  1. Notice of the order, with the particulars of the debtor shall be published in the official gazette and two national newspapers.
  2. The debtor ceases to administer his property, business or trade as same will be put under the control of trustee appointed for that purpose.
  3. Property of the debtor shall become divisible among his creditors.
  4. All the property which the debtor has at the commencement of the bankruptcy or acquires before his discharge will be vested in a trustee for distribution amongst his creditors equitably according to their rights.
  5. The debtor will be disqualified from:
    1. Being elected into Public Offices
    2. Being appointed into Governing Boards of Institutions or Board of Corporations and Companies.
    3. Being appointed as Justice of the Peace.
    4. Being appointed or acting as a Trustee of a trust Estate.
    5. Being admitted to practice any profession for the time being regulated by law except as an employee
  6. The debtor will be released from the liability to those creditors.

Discharge Of Bankrupt:

A bankrupt person may on a successful application to the Court be discharged. This is after a public examination. The Court on its own also can call on the debtor to appear for the purposes of his discharge as a bankrupt.

Effect Of Discharge:

Where a bankrupt is discharged, the discharge releases him from all the bankruptcy debts. However an order of discharge shall not release the bankrupt- from any debt or liability incurred by means of any fraud or fraudulent breach of trust to which he was a party, or from any debt or liability whereof he has obtained forbearance by any fraud to which he was a party.


Parties to a credit transaction may specify the circumstances under which the creditor will become entitled to file a bankruptcy petition, and where such circumstances occurred the debtor will be deemed to have committed act of bankruptcy(Section 1(e) of The Bankruptcy Act as amended.) Hence, it is advisable to include bankruptcy clauses in all credit agreements particularly those involving individuals, sole proprietor and partnership business. This is because bankruptcy deals with only individuals and partnership firms.

Bankruptcy frees the bankrupt from pursuit by creditors for debts which is owed. However, the stigma and other restriction of bankruptcy are severe enough to make most people think twice before taking this step.

Though Bankruptcy procedures connote that all creditors will have to share the asset as the proceedings involve the equitable distribution of the insolvent’s estate amongst all his creditors, there is no assurance of recovery of all the total sum owned if there are many creditors. Notwithstanding the challenge, exploring bankruptcy proceeding for recovery of debt is likely to protect the public from the abuse of commercial credit and promote a higher standard of commercial morality wherein debtors desist from diverting creditors money on social media show biz and frivolous spending rather than investing the loan in accordance with the purpose of the advancement.

Lastly, let all "Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed." (Romans 13:7 Psalm 37:21) It is an act of wickedness to borrow without paying back.