Extreme Garnishee Proceedings: The Machinery For Exposing Hidden Debtors And Attaching Hidden Assets

Copyright ©  2019 By O. Chigoziri Onwumere

First published on 2 October 2013 by Nigerian Law Resources (successor of Nigerian Legal Research)

Oxford University Standard for the Citation of Legal Authorities (OSCOLA) citation:
O Chigoziri Onwumere, ‘Extreme Garnishee Proceedings: The Machinery for Exposing Hidden Debtors and Attaching Hidden Assets’ (Nigerian Legal Research, 6 March 2019) <https://nigerianlawyersdirectory.com/research/o-chigoziri-onwumere-extreme-garnishee-proceedings/> accessed [insert the date you last visited this webpage]

It is one thing for a claimant to win a case but it is another thing to realize the fruits of the victory. To realize the fruits of a judgment may involve another round of battles. This is especially so where the judgment debtor is unwilling to obey the judgment or may be inclined to challenging the judgment on appeal on real or frivolous grounds. The business of a judgment creditor should be to realize the judgment regardless of the antics of a recalcitrant judgment debtor; and he must be ready to follow the procedure permissible by law to do so. The procedure to be followed will depend on the nature of the relief granted in the judgment or order. This article is concerned with money judgments that must be enforced against a recalcitrant judgment debtor.

The Constitution of the Federal Republic of Nigeria, 1999 (as amended) in section 287(3) thereof makes it the duty of all authorities and persons to ensure that the judgments and orders of all courts established under the Constitution are obeyed in every part of Nigeria. This is the backbone for enforcement of money judgment and all other types of judgments and orders by lawful means. The Sheriffs and Civil Process Act and the Judgments (Enforcement) Rules make detailed provisions as to the modus operandi for realizing a judgments or orders whether by way of enforcement, execution, sequestration, attachment and sale of immovable properties, etc. Enforcement of judgment is the term that best describes the method for realizing money judgments through garnishee proceedings. Garnishee proceedings are also known as garnishment or attachment of account. The case of Diamond Bank Ltd v. Ndubuisi (2002) F.W.L.R (Pt 105) 727 sheds light on the judicial and statutory policy inherent in garnishment of account. Aderemi JCA held at page 735 of the report, thus:

“It behooves a successful plaintiff who does not want to lose the fruits of his victory to move fast against the assets of the judgment–debtor to realize the fruits. One of such methods is to obtain the order of court to attach any debt owing to the judgment debtor from any person or body within the jurisdiction of the lower court to satisfy the judgment debt. That process is known as “attachment of debt”. And it is a separate and distinct action between the Plaintiff/Judgment creditor and the person or body holding in custody the assets of the judgment–debtor, although it flows from the judgment that pronounces the debt owing. A successful plaintiff in his quest to move fast against the assets usually makes an application ex-parte for an order in that direction. If the application brought ex-parte is adjudged meritorious, a judge will make an order which is technically known as “Garnishee Order Nisi” attaching the debt due or accruing due to the judgment debtor from such person or body who from the moment of making the order is called the garnishee. The order also carries a directive on the garnishee to appear and show cause why he should not pay to the judgment–creditor the debt owed by it to the judgment–debtor or so much of it as may suffice to satisfy his claim. However, the order must be served personally on the garnishee. Upon personal service, that order binds the debt in his hands and he must therefore pay the debt or liability by it to the judgment – creditor. However, if the garnishee wishes to dispute the debt or liability by it to the judgment–debtor, he must appear before the court. If the garnishee does not appear in obedience to the order Nisi or does not dispute the liability, the court may then make the order Nisi absolute pursuant to the provisions of section 86 of the Sheriffs and Civil Process Act…”

The Judgment Debtor is only a nominal party in garnishee proceedings because the real parties to the proceedings are the Judgment Creditor and the garnishee. See Denton–West v. Muoma (2008) ALL FWLR (Pt 433) 1423 at 1441 where Kekere–Ekun JCA (as he then was) held:

“There is no doubt that garnishee proceedings are separate proceedings between the judgment creditor and the person or body who has custody of the assets of the judgment debtor, even though it flows from the judgment that pronounced the debt owing: In Re: Diamond Ltd (2002) 17 NWLR (Pt 795) 120 at 133D-E; Purification Techniques (Nig) Ltd V. Att-Gen, Lagos State (2004)9 NWLR (Pt 879) 665.”

Garnishee proceedings have the added advantage of being immune to the usual applications for stay of execution. In Denton-West v. Muoma (Supra) Galadima JCA held as follows:

“With regard to the applicant’s prayer to set aside the garnishee proceedings, I must observe this: The garnishee proceedings are legitimate exercise of his right to employ auxiliary methods to enforce the judgment obtained in his favour and they are competent notwithstanding the pendency of a motion for stay of execution: Vaswani Trading Co. Ltd V. Savalakh & Co Ltd (1972) 12 SC 77; (2000)  FWLR (Pt 28) 2174; Purification Techniques (Nig) Ltd V. A-G Lagos State (2004) 9 NWLR (Pt 879) 665 at 677”.

In Federal Mortgage Bank Of Nigeria Ltd v. Desire Gallery Ltd & Anor (2004) 13 NWLR (Pt  891) 522, it was held that any purported payment out of a garnisheed account without the prior leave of court is null and void and the garnishee is bound to pay the same over to the judgment creditor who is adjudged to receive it.

Generally, a garnishee is a third party who has in his custody or control the money assets of the judgment debtor. In a simple case, a garnishee is the judgment debtor’s banker or direct debtor.

There are complex situations in which the garnishee may be someone who is not clearly a debtor to the judgment debtor even though on a closer examination, he is found with the assets of the judgment debtor. Tracing the assets of the judgment debtor to such a person is a real problem. Examples include, where “A” holds the assets of the judgment debtor and hands it over to “B” for safe-keeping; or where “A” as the alter ego of the judgment debtor company, converts the assets of the judgment debtor to own use or takes it to “B”for safe-keeping while maintaining that judgment debtor has nothing; or where the judgment debtor or its directors, shareholders or other officers creates a phoney company and transfers her assets to the phoney company to avoid the prying eyes of judgment creditors. In fact, there could be a long chain of persons separating the hidden asset from the real owner. This is the case in sophisticated drug trafficking and money laundering matters, habitual “smart” debtors.

Solicitors must realize that garnishee proceedings is meant to be used to trace the assets of a judgment debtor to remote custodians or controllers  such as nominees, trustees, attorneys, proxies, agents, alter egos, employers and brokers.  By this means, it is permissible to go beyond the usual third party to fourth, fifth and sixth parties. It may thus involve the lifting or piercing the corporate veil that was designed to protect shareholders, directors and other separate entities from liability for the debts of someone else. Piercing or lifting the corporate veil is a legal decision to treat the rights or duties of a company as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, who is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owes. In exceptional situations, a court may “pierce” or “lift” the corporate veil to find some other persons within or outside the company who are liable for being in possession of the assets of the debtor.

This article will consider the usefulness and practicalities of lifting the corporate veil in the course of garnishee proceedings.

There are two easy situations in which a judgment creditor would ask the court to tear down the corporate veil to effect garnishment. They are (1) where the judgment debtor company is but a mere conduit pipe for a director, shareholder or other officer of a company; and (2) where the assets of a judgment debtor has been taken away and handed over to another company incorporated under a scheme of deceit and phoney contract or as a trustee, nominee, agent, etc., the aim being to hide the assets from a judgment creditor or the like.  Such companies are referred to as “off the shelf” or “shell” companies.

In these cases, it would be proper for the court to consider evidence showing that the other company or shareholder, director or other officer of the debtor company is in fact liable to account for the assets of the judgment debtor and pay the same over to the judgment creditor. Evidence of dishonest practices by the officers, directors, alter ego or shareholder of the debtor company will suffice because such evidence operates to negative the presumption that the company is separate from its subscribers and human agents. Such evidence may disclose some of the following:

• Concealment or misrepresentation of members;
• Absence or inaccuracy of corporate records;
• Failure to observe corporate formalities in terms of behaviour and documentation;
• Intermingling of assets of the corporation and of the shareholder;
• Manipulation of assets or liabilities to effect concealment;
• Non-functioning corporate officers and/or directors;
• Siphoning of corporate funds/assets by the dominant shareholder(s);
• Treatment by an individual of the assets of corporation as his/her own;
• Use of the corporation as a “façade” for dominant shareholder’s personal dealings.
• Intention to defraud.

A case from Malawi – National Bank of Malawi Ltd v. Continental Traders Ltd & Anor. (2003) MWHC 107 decided on 12 December 2003 provides a useful example of the point here. The facts of the case are as follows:

The Bank commenced an action for a debt against Continental Traders Limited. The action was commenced on 14^th August 2000 in Civil Cause No. 2484 of 2000.  The Bank was claiming the sum of MK910,740.00 being an unpaid overdraft facility drawn by the Company. As a matter of fact, Mrs. Nyandovi-Kerr (the Real debtor) was a shareholder and director of the company and undertook to furnish security for the overdraft facility. She was to execute a charge over her real property. This security was never executed by the real debtor. In point of fact, she instead sold the property to a third party.

The company defaulted in its repayment of the loan given to it. The Bank could not realise the security because of the sale of the property. The company, although represented by Counsel, never defended the action. As a result of this, a default judgment was entered against the company. The said judgment in default was issued on 17 October 2001.

The Bank did not seek to enforce the judgment it obtained against the company. It, however, made an application to court to have the veil of incorporation of the company lifted. The application was made under Section 337(1) of the Companies Act. The application was by way of an ordinary summons. Neither the company nor Mrs. Nyandovi-Kerr made any appearance on the appointed day for the hearing of the summons. The Bank invited the court to lift the said veil of incorporation on the ground that the real debtor (Mrs. Nyandovi-Kerr) had defrauded the bank by selling property on the security of which the overdraft was granted to the company. Further, the bank wanted the veil of incorporation lifted on the premise that the overdraft was meant for Mrs. Nyandovi-Kerr and the company was just used as a front. The court, on 21 February 2003, lifted the veil of incorporation in respect of the company. The court further ordered that Mrs. Nyandovi-Kerr should pay the Bank the sum of MK910,796.00, costs and interest to be assessed.

The Bank then set in motion processes to enforce the court order of the 21 February 2003. Consequently, the Bank issued a writ of fifa and commenced garnishee proceedings against Mrs. Nyandovi-Kerr.  The real debtor reacted to the execution and enforcement proceedings by taking out an application to strike out the proceedings in Miscellaneous Application No. 11 of 2003 on grounds of irregularity. The Real-debtor contended that the application to lift the veil of incorporation of the company was improperly made. It is said that the application was not made in compliance with the provisions of Section 337(1) of the Companies Act. The said Section 337(1), which is similar to section 506 (1) of Nigeria’s Companies and Allied Matters Act, provides:

”In any proceedings against a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court on the application of— any creditor— may if it thinks proper so to declare that any person who was knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court direct.”

Counsel for the Bank was of the view that there was no irregularity in the way he proceeded to apply for the lifting of the veil of incorporation of the company. He submitted that in terms of the said Section 337(1) there was no need to commence a separate cause of action by any of the originating processes. He further contended that, in point of fact, the Bank’s application was filed and presented within existing proceedings against the company in Civil Cause No. 2484 of 2000.

The court held that the:

“provision does not require an applicant to commence a fresh or separate cause of action. Indeed, the applicant need not plead fraud in the proceedings against the company. The applicant must only show that there was an intention to defraud the creditors of the company. It is pertinent to observe that to defraud means nothing more than to cause loss to a person by deceit. Further, this court agrees with the argument, advanced on behalf of the Bank, to the effect that in order for one to proceed under Section 337(1) of the Companies Act, you need not commence a separate cause of action by way of any originating processes under Order 5 of the Rules of the Supreme Court. This court is of the opinion that all the applicant needs to do is to take out an application within an existing proceeding commenced against the company concerned.

There is no doubt in the mind of this court that there were proceedings commenced against the company. These are the proceedings in Civil Cause No. 2484 of 2000. The said proceedings were for the recovery of a debt that was incurred by the company at the instance of the real debtor (Mrs Nyandovi-Kerr). The Bank, as a creditor, was entitled to make an application, under the said Section 337(1), once it became apparent to it that it had been duped.

The court further held that itis a trite proposition of law that although a company is a separate legal person from its shareholders the alter ego rule will be used if it will assist in meeting the ends of justice. It is evident from this matter that Mrs Nyandovi-Kerr took an active part in the negotiations for the overdraft facility. She is a shareholder as well as one of the Directors of the company. The overdraft was negotiated by Mrs Nyandovi-Kerr on behalf of the company. She was to surrender her real property as a security for the overdraft facility that was to be given to the company. There is evidence to prove the fact that instead of executing the security for the facility she obtained on behalf of the company, she sold the property. In point of fact, she never informed the Bank that she was withdrawing the would be security for the overdraft facility. There is no doubt in my mind that she was a party to the transaction that resulted in the Bank losing both its money and the security that it ought to have had. Indeed, it is in evidence before this court that Mrs Nyandovi-Kerr, is a Director and shareholder of the company. As such shareholder and director of the company she set out to implement a scheme that duped the Bank. The Director and shareholder of Continental Traders Limited entered into a transaction with the Bank without involving other Directors. It is obvious that this transaction, of availing the company with an overdraft facility, resulted in the Bank being defrauded. How else does one describe the conduct of a Director and shareholder of a company who, upon offering her property as security for an overdraft facility, sells it without informing the Bank that the property that was meant to be security for the facility was being sold. Mrs Nyandovi-Kerr did this with an intention to defraud the Bank. The intention of Mrs Nyandovi-Kerr, who acted on behalf of the company, must be imputed on the company. If the intention of the Real debtor was not to defraud then what more did she have to do, so that it constituted an intention to defraud? The court holds that Mrs Nyandovi-Kerr was knowingly a party to the scheme to defraud the Bank of the security for the overdraft facility. Hence the lifting of the veil of incorporation in terms of Section 337(1) of the said Companies Act. For this reason, it was right and proper for this court to order that she be liable to pay the liability adjudged against Continental Traders Limited. “

The principles elucidated in the above-cited case from a common law jurisdiction should apply in Nigeria because the provision of the Malawian Companies Act is in pari materia with section 506(1) of CAMA.

It is wrong for anyone to suggest that the veil of incorporation cannot be lifted by any court except the Federal High Court that is vested with jurisdiction in certain matters under CAMA. Such a proposition has no substance. First, lifting the corporate veil does not raise a jurisdictional issue pertinent to the Federal High Court at all. See the reasoning in Sun Insurance (Nig) Plc v. Umez Engineering Construction Co. Ltd (2008) ALL FWLR (Pt 426) 1976 to the effect that jurisdiction of the Federal High Court (including special procedure) is not a matter for conjecture. Second, a court that gave judgment has jurisdiction to enforce it by any lawful method under the Sheriffs and Civil Process Act and the Judgment (Enforcement) Rules. Indeed, even a magistrate court has jurisdiction to enforce or execute the judgment of any court in the Federation. Third, section 287 (3) of the Constitution has vested a duty on all authorities and persons to ensure that the judgments and orders of every court established under the Constitution is enforced or executed in every part of Nigeria. Therefore, any court has power to pierce the corporate veil if only to enforce or execute a judgment or order. Fourth, under our laws, the corporate veil should be lifted whenever the evidence before the court discloses a ground for so doing. It does not require a special procedure because it is available under the common law, equity and statutory provisions in the interest of justice or to meet economic realities. In Adeyemi v. Lan & Baker Nig. Ltd (2000) 7 NWLR (Pt. 663) 33 at 51, it was held that there is nothing sacrosanct about the veil of incorporation of a company. Thus, if it is discovered from the materials before a court that a company is a device or a sham or mask which the director or shareholder holds before his face in an attempt to avoid recognition by the eyes of equity, the court must be ready and willing to open the veil of incorporation to see the characters behind the company in order to do justice.

The second scenario is where the assets of a judgment debtor has been taken away and handed over to another company incorporated for the purpose or with the aim of hiding the assets from a judgment creditor or the like. The case of Jones v. Lipman (1962) 1 WLR 832, a UK company law case concerning piercing the corporate veil exemplifies the situation in which the corporate veil will be lifted when a company is used as a “mere facade” concealing the “true facts”, which essentially means it is formed to avoid a pre-existing obligation. Mr Lipman contracted to sell a house to Mr Jones for £5,250. He changed his mind and refused to complete. To try and avoid a specific performance order, he conveyed it to a company formed for that purpose alone, which he alone owned and controlled. The court ordered specific performance against Mr Lipman and the company and held “the defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity”.

The English Court of Appeal held in Re a Company (1985) 1 BCC 99,421 that a court would use its powers to pierce the corporate veil if it were necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration. In the case of Hare v Commissioners of Customs and Excise (1996) TLR 121 the same court, while accepting the general principle in Solomon v Solomon (1897) A.C 22, namely that a duly formed company is a separate legal entity and should be treated like any other independent person with its own rights and liabilities distinct from those of its shareholders, nevertheless went on to approve the statement of Dankwerts LJ in Merchandise Transport Ltd v British Transport Commission (1962) 2 QB 173 at p. 206 that:

“. . . where the character of a company, or of the nature of the persons who control it, is a relevant feature the court will go behind the mere status of the company as a legal entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance.”

In Company Law and Practice in Nigeria (Third Edition) by J. O. Orojo, the principle of lifting the veil of incorporation was noted to apply to a variety of situations in Nigeria at pages 85-90 of the book, thus:

“. . . there are certain exceptional circumstances in which the law disregards the corporate entity and pays regard instead to the economic realities behind the legal façade, i.e. when the veil of incorporation is lifted in accordance with statute or by the court in the interest of justice. In such cases, the law goes behind the corporate personality to the individual members, or ignores the separate personality of each company in favour of the economic entity constituted by a group of associated companies.”

The learned author noted a number of statutory provisions in CAMA dealing with the issue such as sections 93, 236(3), 290, 506(1), 336-338, 316, and concluded that:

“quite apart from those cases where statutes permit a disregard of the legal personality of the company, the courts will, in appropriate cases, especially in the interests of justice, also disregard its legal personality and treat it as the “alias, agent, trustee or nominee” of its members.”

The learned author posited at page 89-90 as follows:

“Furthermore, the veil of incorporation may be pierced to discover the realities of a situation, e.g. where a group of companies is virtually a partnership or where one of the companies is a trustee of the other in respect of some property in issue.

The effect of such an account is to detract from the independent legal personality of each of the companies and to show that they are related and are subject to examination behind the incorporation veil.”

Relying on the case of Akande v. Omisade (unreported), the learned author opined that where the company is the mere agent of a controlling corporator, it may be said that the company is a sham, cloak or alter ego…It was further held that a person, who, being a director of a company, is accountable as a fiduciary, cannot escape liability by incorporating or acting through another company which is his alter ego as a façade for receiving profits which would have been rightly due to the company of which he is a director.

For practical purposes, the judgment creditor must name as garnishees the persons through whom the judgment debtor exercises control and custody of the assets. The affidavit evidence in support of the garnishee order nisi must condescend on particulars to explain the causal link between the judgment debtor and the garnishees that are in control or custody of the asset sought to be garnisheed.

CONCLUSION

From the authorities it is clear that no special procedure is required for the purpose of lifting the corporate veil should it become necessary in the course of garnishee proceedings. It is a matter of evidence, which could be complete by affidavit, unless there are material conflicts that must need be resolved by oral evidence. In that case, it is for the court to direct the parties to call their witnesses. Courts do not act in vain. Therefore, every court must ensure that a subsisting judgment or order is satisfied. There is a constitutional duty on all authorities and persons to ensure that a judgment is enforced or executed. That way the dignity of the courts and the rule of law are preserved.