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Creditors are gaining the upper hand in Africa

02 September 2009 Werksmans Incorporating Jan S. de Villiers

The scales are slowly tipping against debt-defaulting governments and serial fraudsters in Africa. Innovative debt collection tactics are paying off for creditors who had all but written off their claims as hopeless, says Roger Wakefield, a specialist in cross-border asset recovery and enforcement of foreign money judgments.

“The successful recovery of both sovereign and commercial debt is increasing, demonstrating that there is hope in even the most difficult cases involving seemingly untouchable debtors,” says Wakefield, a director at Werksmans Incorporating Jan S. de Villiers.

The firm, which is part of Lex Africa, a 26-country network of leading African law firms, has been closely involved in a number of recent recovery successes against debtors in Democratic Republic of Congo, Libya, Nigeria and Sudan – all widely regarded as notorious debt-defaulting nations.

“The creditors concerned had been treating the debt as distressed, meaning totally irrecoverable,” he says. “They had tried their best to recover their money through all traditional avenues, including the courts, and failed. In effect, the creditors were at the head-banging stage - they had hit a brick wall and were unwilling to put any more time or money into a lost cause.”

Instead of completely writing off their losses, however, the creditors were able to recoup a portion by "selling the debt to a third party, in the shape of companies specialising in the recovery of distressed debt. Having bought all or part of the debt, the recovery company in turn sets out to recover it from the original defaulter.

“In sovereign debt cases, one of the most effective recovery methods is to track down assets held in another country and to seize or threaten to seize these,” says Wakefield. “Many African countries have laws against seizing government assets in the home country but external assets do not necessarily enjoy the same protection.”

For example, the Kenyan constitution forbids a Kenyan from seizing Kenyan government assets. However, commercial assets in South Africa belonging to the Kenyan government are subject to South African law, and hence can be seized if a valid court order has been issued.

Wakefield notes that South Africa is a leader in Africa in doing away with laws that effectively allowed the government to disregard court judgments against it.

“Our Constitutional Court recently declared invalid an Act that prohibits execution of judgments against state assets,” he says. “Previously, if you had a judgment against the South African government, you could not execute it by going and physically taking the assets. Following the Constitutional Court ruling, you can now enforce judgments against state assets in South Africa.”

In Africa generally, many creditors have been reluctant to consider seizing government assets because of commercial sensitivities – the fear of repercussions if they wished to continue doing business in that country afterwards. “Externalising a case – by using a third party that does not need to consider such sensitivities – makes this kind of action easier,” says Julian Sale of Commercial Intelligence Alpha Funds, which specialises in the purchase and recovery of distressed sovereign and commercial debt in Africa including in notorious debt defaulting nations such as the Democratic Republic of Congo, Libya, Nigeria and Sudan. “Furthermore, people tend to take more notice of a foreign action against sovereign debt than a local one.”

Sale, whose organisation reviews more than 100 debt portfolios a year in Africa, says commercial debt recovery is also increasing. “Again, asset seizure is proving effective, especially against serial fraudsters who use loaned funds to buy foreign property and assets in Europe or South Africa and avoid loan repayments.”

Another welcome trend is the establishment of credit bureaus in various African countries. “Five years ago, there were few credit reference bureaus in Africa except for South Africa but certain countries are now establishing these bureaus to exchange information in an attempt to identify repeat offenders,” he says.

“This is good news. Our experience in Asia, where distressed debt was commonplace in the 1980s, was that debt issues decrease as corporate governance and credit referencing increase. We expect the same pattern to unfold here in Africa, where there is growing intolerance for corruption, whether on the part of government or business. People are getting tired of corruption and creditors are realising that they have options and can take action – that there is hope of recovering at least some of their money.”

Wakefield adds: “In good times, profits are good and people are more inclined to write-off money owed to them. In bad times, people want to enforce debt because they need to get in all the money they can.”

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The South African authorities are hard at work to ensure the country is removed from the global Financial Action Task Force grey-list by February or June 2025. What do you think about their ongoing efforts?

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End-2025 exit is too optimistic.
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