Debt obligation can be transferred by novation

A debtor can validly transfer, by novation, his debt obligations without the written consent of the creditor.

 

Crushing Dragon (Nig.) Ltd & Anor. v. Skye Bank Plc & Anor. Suit No. LD/ADR/534/2013, page 9, per Animahun J.:

“In Pat Onegbedan, Esq. v. Unity Bank Plc (2014) LPELR-22186 (CA), novation was described thus: “Contract by novation is a form of assignment in which by consent of all parties thereto, a new contract is made and substituted for an existing contract. Hence one of the essentials of the new contract, that is, novation, is that the consent of all the parties must be obtained. However, such consent need not be in writing; it may be inferred from the conduct of the parties, without express words…” See also African Continental Bank Ltd & Anor v. Ifeanyi Ajugwo (2011) LPELR – 3637 (CA). So, the issue is not (as argued by Counsel for the 1st Defendant) that the novation is invalid because the 1st Defendant did not consent to it. Rather, it is whether the 1st Defendant can be heard to deny the validity of the novation having taken benefit thereunder. The additional benefit gotten by the 1st Defendant is the property of the deceased used as a collateral for the debt.”

Blogger’s Note:

The facts of the above case are quite interesting. The 2nd Claimant (The Chairman of the 1st Claimant) and one Engr. Banasko (now deceased) were the foundation directors of the 1st Claimant under a form of partnership arrangement. The said partnership arrangement was later dissolved vide a Dissolution of Partnership Agreement. Upon the said dissolution, both parties to the arrangement were assigned specific obligations and one of such obligations was that the deceased Engr. Banasko would take over the indebtedness of the 1st Claimant to its creditors including the N30 Million which the 1st Claimant owed the 1st Defendant (Skye Bank Plc) and secure a Deed of Release from the 1st Defendant in favour of the 1st Claimant. This was what the trial Court rightly referred to as a NOVATION. The 1st Defendant was informed of the novation and in furtherance of same, the deceased, began the repayment of the N30 Million by making an initial payment of N15 Million to the 1st Defendant. He also used his property as security for the balance. The Court found that the deceased made this payment and entered into the new arrangement with the 1st Defendant in his personal capacity and not as a director of the 1st Claimant. The deceased and the 1st Defendant exchanged correspondences in this regard. In one of the letters written by the 1st Defendant, the 1st Defendant acknowledged the novation and confirmed receipt of payment of the N15 Million by the deceased. The 1st Defendant also expressly stated that in view of the novation, the 1st Claimant was free of every obligation to the Bank. Everything went fine.

Novation agreement is binding

However, crisis began when the deceased died, while leaving the balance of N15 Million unpaid. The 1st Defendant now smartly reverted to the 1st Claimant to pay this balance. The 1st Defendant continued to file a negative credit report at the Credit Registry of the Credit Bureau against the 1st Claimant. The 1st Claimant became aware when it tried to access credit facility from another bank to undertake a capital intensive project. It approached the 1st Defendant but all efforts to get the 1st Defendant to issue a valid Deed of Release to the Claimants in view of the novation proved abortive. The 1st Defendant insisted that the only condition to be fulfilled for the issuance of a Deed of Release which will enable the 1st Claimant access the said facility from another bank was that the 1st Claimant should execute a contract whereupon the 1st Claimant would undertake to repay the outstanding indebtedness left unpaid by the deceased, inclusive of interests. A new contract was drawn but cleverly, the 1st Defendant never referred to the novation. It treated it like it never existed and recited facts showing that the 1st Claimant had been and remained the debtor at all material times. Faced with the predicament of losing the huge facility it wanted to access from another bank, the Claimants signed the new contract, undertaking to repay the balance in question. Upon signing, the 1st Defendant then issued the Claimants with a Deed of Release. The Claimants proceeded with its business. Of course, aggrieved, the Claimants thereafter filed this action. The 1st Defendant counter-claimed based on the new contract.

Novation of debt

At the trial, the 1st Defendant argued that it was not a party to the novation arrangement between the Claimants and the deceased and that it never consented to the novation. Counsel to the Claimants, Stephen Azubuike Esq., argued that the Claimants did not receive any benefits whatsoever for executing the new contract other than that the Claimants were issued with a Deed of Release, being an instrument the Claimants were ordinarily and originally entitled to, but which the 1st Defendant dishonourably and in abuse of banking ethics, unlawfully withheld just to hold the Claimants to ransom.

The learned trial Judge was persuaded by the arguments of learned Counsel to the Claimants. Upon considering the facts and surrounding circumstances, he held that:

“The issue is not (as argued by Counsel for the 1st Defendant) that the novation is invalid because the 1st Defendant did not consent to it. Rather, it is whether the 1st Defendant can be heard to deny the validity of the novation having taken benefit thereunder. The additional benefit gotten by the 1st Defendant is the property of the deceased used as a collateral for the debt… My view based on reasonable inference is that the exhibits show that the debt was negotiated by the deceased in his personal capacity and not as a Director of the 1st Claimant.”

See page 9 to 10 of the Judgment.

The Court further held that:

“The effect of Exhibit 9 (one of the letters written by the 1st Defendant to the deceased acknowledging the novation and discharging the Claimants) in law is that the 1st Defendant acquiesced to the novation between the 2nd Claimant and the deceased; it is therefore estopped from contending otherwise.”

The trial Court concluded that the new contract which the Claimants signed, undertaking to repay what was otherwise the debts of the deceased, was invalid and unenforceable for failure of consideration.

The trial Court is highly commended for its sound reasoning in this case.

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2 thoughts on “A debtor can validly transfer, by novation, his debt obligations without the written consent of the creditor.”

  1. The reasoning of the Learned Judge is really commendable. Consent of the creditor irrespective of the provision of Facility Agreement can be procured either prior to or after the act(s) of the debtor.

    There is another aspect to this reasoning which we have debated time and time over during my time at Sefton Fross. Supposing the Facility Agreement had provided that Novation would only be valid where the Debtor obtains a prior consent of the Creditor and also provides that the Agreement can only be varied in writing and endorsed by both parties; the second ambit (variation clause) would also be a useless provision if the court is faced with a similar issue with this case. The conduct of the parties post execution of contract defines the fate of the contracting parties.

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