The recent introduction by the extant Banks and other Financial Institutions Act 2020 ( the "Act") of Bail-in, as a tool for resolving bank insolvency is a critical discussion point for the comity of international lenders, lending to Nigerian banks and other financial institutions. This is especially important given the wide implications which the Nigerian regulatory construct of the Bail-in procedure has for the contractual and property rights of bank creditors. For instance, the application of a Bail-in, effectively suspends any existing judgements regarding an Eligible Instrument (defined below). By law, any such existing judgement debts becomes unenforceable by creditors against the relevant bank upon the application of the Bail-in procedure. What one finds generally, in the Act, is a terse Bail-in framework which also provides the Central Bank of Nigeria ("CBN") Governor with wide discretionary powers. While it is acknowledged that regulatory discretion is important for bank regulation, the breadth of discretionary powers which the CBN Governor wields becomes obvious when one considers the bail-in framework in the UK and EU. In this update, we provide a highlight of some of the key legal issues for bank creditors under Nigeria's bank Bail-in framework.

1) Application of the Bail-in Tool/Procedure

The Bail-in process commences with a sole determination by the CBN to apply Bail-in as a stabilization tool. This determination is made at the sole discretion of the CBN who may exercise the discretion where it believes that the Eligible Instruments of a failing bank ought to be bailed-in to facilitate the rescue of a failing bank or where the available assets of a failing bank are unlikely to support the payment of its liabilities.1 In its sole discretion, the CBN may decide to apply a Bail-in, as an internal matter or perform an independent assessment. The highlight of the application of the Bail-in tool in Nigeria, is the issuance by the CBN of a Bail-in Certificate2 which essentially states the terms and conditions upon which the Bail-in tool will be applicable to a failing bank. It is noteworthy that the Act does not provide for any especial conditions which need to exists for the CBN to apply a Bail-in tool. The level of discretion which the CBN Governor has in this regard, is a marked departure from the Bail-in regime in the UK, where Bail-in applies under strict conditions and where certain general and specific conditions, must exist for the exercise of Bail-in powers.

2) Legal Effect of a Bail-In in Nigeria

(a) Modification, Cancellation or Conversion of Securities

The legal effect of a Bail-in in Nigeria is to, in the hands of a creditor, cancel, modify or convert the relevant Eligible Instrument of a failing bank as deemed necessary by the CBN to rescue a failing bank. The CBN solely determines which and how many of such Eligible Instruments to cancel or the extent of such modification or conversion. Such cancellation takes precedence over and overrides any law or contract which suggests otherwise. Accordingly, a Bail-in operates despite any restrictions arising in any written contract or any law in force before the effective date of the Bail-in Certificate.

(b) Suspension of Judgements & Enforcements

Another legal effect of the application of a Bail-in in Nigeria is, that all claims and judgements debt enforcement in respect of any Eligible Instrument existing or being pursued shall become suspended and unenforceable against the bank3. The wording of this provision suggests that the suspensory effect of a Bail-in will have a retroactive effect.

3) Pre-Resolution Rights of Shareholders and Security Holders

The CBN is bound not by priority rights that bank creditors would have enjoyed under a pre-resolution contract. However, if the CBN decides to exercise its Bail-in powers in accordance with the priority and treatment a pre-resolution creditor or shareholder would have enjoyed, had a bank be wound up, the CBN may take into consideration (a) any widespread adverse impact that the bank's failure would have on the financial system in Nigeria or the economy of Nigeria(b) the need to maximize the value for the benefit of creditors of the bank,, specialized bank or other financial institution as a whole (c) public interest (d) any other matter the CBN considers relevant. The wording of this provision is expressed in discretionary terms suggesting that the CBN does not have a firm obligation to consider the interest of bank creditors. This section of the Act appears to refer to the No-Creditor-is Worse-Off (NCWO) principle, which is the principle that creditors should not bear higher losses in a resolution than they would bear if the bank under resolution had been liquidated under normal insolvency proceedings. However, the language of the Act does not mandate the CBN Governor to comply with the NCWO principle.

4) Contractual Recognition of Bail-in Powers

The CBN also has the statutory powers to mandate banks, by way of regulation, to include a provision in the relevant contracts of a bank, where parties expressly recognise the Bail-in powers of the CBN and also expressly agree that the Eligible Instruments underlying such contract, as well as the parties, would be bound by the provisions of a Bail-in Certificate issued by the CBN.4

5) What Securities qualify as Eligible Instruments?

The Act defines "Eligible Instrument" to mean

  • equity instrument or other instrument that confers or represents a legal or beneficial ownership in the bank, except an ordinary share
  • unsecured liability or other unsecured debt instrument that is subordinated to unsecured creditors' claims of the bank, specialised bank or other financial institution that are not so subordinated
  • instrument that provides for a right for the instrument to be written down, cancelled, modified, changed in form or converted into shares or another instrument of ownership, when a specified event occurs.

It is clear from the definition of "Eligible Instrument" in the Act that the "secured liabilities" of a failing bank are "excluded liabilities" and would not ordinarily be subject of a Bail-in Certificate. This is consistent with international Bail-in practice. However, it remains unclear, the extent to which, liabilities representing protected deposits, short term liabilities, liabilities owed to a pension scheme and to employees and liabilities owed to providers of critical services, can be subject to the Bail-in powers of the CBN Governor.

Comments

It is standard and internationally-accepted practice for Bail-ins to be governed by clear and very specific rules regarding , (a) the procedures which the CBN and other stakeholders must follow in a Bail-in and (b) the rules clarifying the hierarchy according to which creditors claims are converted into equity. A clear statutory backing for the NCWO principle is consistent with international practice and often necessary in order to achieve proportionality among bank creditors and to provide comfort to investors. Accordingly, we fully expect the CBN to shortly issue relevant Bail-in Regulations to provide clarifications as necessary.

Footnotes

1. Section 37 of the Act

2. Section 38 of the Act

3. See Section 39 (1) of the Act

4. See Section 39 (2) of the Act

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.