Nigeria: Overview Of The Repeal And Re-Enactment Of The Companies And Allied Matters Act Cap C20 LFN 2004

Last Updated: 2 November 2018
Article by Michael Orimobi

INTRODUCTION

The economy of any country has to be sustained and encouraged through effective legislative policies geared towards encouraging the ease of doing business. In Nigeria, the economy is in dire need of sound policies that will stimulate investments, encourage business to shore up the dwindling Gross Domestic Product of the country and open market frontiers. To this end, the Act regulating businesses in Nigeria which is the Companies and Allied Matters Act Cap C20 LFN 2004 (the "CAMA") seems insufficient and does not reflect the actual intentions of the promoters of the Act, which was solely economic growth.

Nigeria is currently the 145th country in the World Bank Ease of Doing Business Index. This ranking does not portray Nigeria as a good investment destination and will discourage investors from tapping from the abundant investment opportunities in Nigeria. This ranking created apprehension for investors and market drivers in the Nigerian economy, as institutions and organizations such as The Nigeria Bar Association - Section on Business Law; Ecobank Transnational Incorporated; the FMDQ OTC Securities Exchange; and the Nigerian Network of Non-Governmental Organisations ("NNNGO") made various recommendations to the Senate Committee on Trade and Investment to review the Act as a way of encouraging investment in Nigeria. The recommendations were urgent steps needed to tighten or relax some CAMA provisions affecting the ease of doing business in Nigeria.

In response to the recommendations, on May 15th 2018, the 8th Senate of the Federal Republic of Nigeria at its plenary passed the Bill for an Act to Repeal the Companies and Allied Matters Act 2004 and enact the Companies and Allied Matters Act 2018 (the "Bill"). If the Bill does receive presidential assent, it will expectantly boost Nigeria's ranking in the World Bank Ease of Doing Business Index. The Bill seeks to enhance shareholders' active engagement in company practices, promote long term investments and make Nigeria the African hub for the set up and operation of businesses.

In doing justice to this topic, it is pertinent to examine the CAMA and the Bill as well as its corresponding effect on the Nigerian economy. The proposed amendments to the Act are:

Single-member Companies

According to section 18 of the CAMA, any two (2) or more persons may form or incorporate a public or private company. The implication is that an individual cannot form a company. The Bill has removed this requirement by allowing a single individual to incorporate a company and it also makes provision for single directorship of small companies. This provision encourages individual and entrepreneurs that crave independence to form companies with ease and engage in commercial activities that will improve the economy.

Formation of LImited Liability Partnership

The Bill permits the creation of a Limited Liability Partnership. This combines the organizational flexibility and tax status of a partnership with limited liability for its members.

Financial Assistance

Under Section 159 2(a) of the CAMA, companies and their subsidiaries are expressly prohibited from giving financial assistance such as gift, loans and credit to their members to acquire their own shares. The intentions were that the financial assistance might reduce the net asset of the company or erode the Company's asset. However, under the Bill, companies can provide financial assistance to their shareholders. The argument is that this provision would not erode the net asset of the company rather it would consolidate the shareholders' ownership structure in the company.

Reduction in share capital

In Section 105 of CAMA, a company is only permitted to reduce its share if so authorized by its Memorandum of Association and Article of Association, where a special resolution is passed at the General Meeting and a confirmation is obtained from the Federal High Court. However, the Bill has provided that reduction of share capital of a private company can be done if a special resolution is passed to that effect without the added burden of applying to court for a confirmation of the process.

Resolving Insolvency

The Bill introduces a company rescue and insolvency regime focused on rescuing companies from insolvency rather than allowing them to wind-up. The objective is to save viable businesses and ensure that non-viable businesses can easily exit the market, thereby allowing deployment of assets to more productive firms.

Company Secretary

Under Section 293 of CAMA, companies are mandated to have a Company Secretary. To ease the rigors of compliance with this provision, the requirement for the appointment of a Company Secretary is limited to only public companies in the Bill. The Bill has made it optional for private companies and all companies with a single shareholder to appoint a Company Secretary.

Annual General Meeting (AGM)

Section 213(1) of the CAMA states that, the AGM of companies must be held at least every fifteen (15) Months from the previous AGM. Also, Section 213 (1a) of the CAMA mandates every company to convene its first Annual General Meeting within 18 months of its incorporation. Where there is a default in holding the AGM, the company and the officers in default will be liable to a fine as provided in section 213 of the CAMA. In the Bill, private and small companies would no longer be compulsorily required to convene and hold AGMs.

Minority Shareholder's Rights

Under Section 299 of the CAMA, any wrong done against the Company can only be remedied by the Company. Section 300 of the CAMA provides for instances where members and minorities can sue on behalf of the company through a derivative action. Shareholders in the Bill can now institute actions in court in respect of the Company, its subsidiaries and other companies related to the parent company. This enables the members to accelerate seeking redress where their interest in the Company is threatened or otherwise denied.

Beneficial Ownership

Section 94 of the CAMA mandates holders of beneficial interest of shares in a company to indicate in writing and disclose the identity of the owners to the company. Failure to disclose this information attracts six months (6) imprisonment or a fine of N25 for every day of default. The Bill reiterates this provision and makes a mandatory provision to disclose beneficial interests in a company's shares and prescribes sanctions for failure to adhere to the Bill.

Exemption from Audit

Section 317 of the CAMA mandates Companies to appoint Auditors. However, small companies are not required to appoint Auditors. Other companies are also exempted if;

(a) it has not carried on business since its incorporation or in a particular financial year;

(b) the company's turnover is not more than ten million naira (N10,000,000) and its balance sheet total is not more than five million naira (N5,000,000).

Also, the Bill has abolished the mandatory use of common seal for companies. Companies may obtain a common seal and regulate its use and design through their articles of association. This approach will in turn encourage the growth of Small and Medium Enterprises in Nigeria.

Conclusion

The amendments in the proposed Act are very laudable and impressive as they have so many benefits which are geared towards making private companies viable and investment friendly. The Bill if finally enacted into law, will encourage faster registration of business, better business environment, job creation, reduction of financial obligations of small companies, enhancing creation of micro, small and medium enterprises. The effect is that there will be an increase in investment and this will definitely lead to economic growth in Nigeria.

As laudable as these provisions seem to be, the provision on single member companies defeats the purpose of distinct legal entity and this may also reduce the potentials of good corporate governance that can be experienced in a company. This brings some of the amendments of the bill into scrutiny in terms of entrenching a forward looking corporate entity where good corporate governance prevails. Also, the provision that seeks to repeal the requirement of at least two

(2) directors could result in arbitrary use of power since it may defeat the purpose of checks and balances in the decision making process of companies and expose companies to individual mismanagement.

The Bill is a step in the right direction. Nigeria is indeed ready for business!

Originally published in Aurora, 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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