An Appraisal Of The Legal Regime For Bankruptcy And Insolvency In Nigeria: Striking A Balance For Economic Stability

INTRODUCTION

The financial health of businesses and individuals is crucial for the overall economic stability of any nation. In connection with this, a robust legal regime for bankruptcy and insolvency is imperative for maintaining economic stability, protecting the interests of creditors and debtors, and facilitating the efficient resolution of financial distress. The legal framework governing bankruptcy and insolvency in Nigeria has undergone significant changes in recent years, aiming to address the challenges faced by debtors, creditors, and the overall business environment. This Article aims to provide a comprehensive appraisal of the legal regime governing bankruptcy and insolvency in Nigeria, examining relevant definitions, distinction, conditions, innovation and their implications.

UNDERSTANDING BANKRUPTCY AND INSOLVENCY

To set the foundation, it is important to define the key concepts of bankruptcy and insolvency. According to Black's Law Dictionary, bankruptcy refers to "the quality, state, or condition of not having enough money to pay back what one owes." ¹ It signifies a legal declaration of an individual's or corporate entity's inability to repay their debts. On the other hand, insolvency is "a legal process initiated when a company is unable to pay its debts" ² and involves the divesting of the company's right to administer its assets and business affairs. These definitions establish a clear distinction between the two concepts, with bankruptcy pertaining to individuals and insolvency primarily focusing on corporate entities.

DISTINCTION BETWEEN BANKRUPTCY AND INSOLVENCY

While often used interchangeably, bankruptcy and insolvency are distinct concepts under Nigerian law:

1. Bankruptcy: This applies to individuals and is governed by the Bankruptcy Act 2004 ³and the Bankruptcy Proceedings Rules. ⁴. It refers to the legally declared inability of an individual to pay their debt.
2. Insolvency: Applies to companies and is governed by Companies and Allied Matters Act 2020 ("CAMA 2020") and Companies Winding Up Rules 2010 ⁵. It refers to a company's inability to pay its debts as they become due.

A crucial distinction lies in the procedural pathways for each. Unlike insolvency proceedings, bankruptcy proceedings cannot be initiated as a primary action. Instead, bankruptcy proceedings serve as a secondary mechanism to enforce a debtor's obligations, only accessible after a separate judicial proceeding has established these obligations.

Bankruptcy is a question of law and does not cover registered companies in Nigeria as section 108 of CAMA prohibits the court from making a receiving order against any association or company registered under CAMA rather, in relation to corporate entities, CAMA 2020 establishes the focus on insolvency practice which is a question of fact that promotes business rescue culture to help prevent business liquidation.

CONDITIONS FOR BANKRUPTCY

To secure a successful creditor's petition under bankruptcy law, the creditor must satisfy certain requirements, including demonstrating that the debtor has committed an "act of bankruptcy" as defined by the Bankruptcy Act.⁷ The law identifies only four situations recognised as constituting acts of bankruptcy as follows:

1. Where a creditor obtains a final judgment or final order against the debtor and serves as bankruptcy notice on the debtor;
2. Where execution is levied against the property of the debtor under process in an action or proceedings in court and such property has been sold or held by the bailiff for twenty-one days;
3. Where the debtor files in court a declaration of his inability to pay his debts; and
4. Where the debtor presents a bankruptcy petition against himself.

With regards to the conditions to be considered before a petition is filed for a person to be adjudged bankrupt, the following must have occurred:

1. The act of bankruptcy must have occurred 3 months preceding the presentation of the petition.
2. The debt must be:
   • Due and payable either immediately or at a certain future date;
   • specific and liquidated sum;
   • Must not be less than N2000 (Two Thousand Naira).

1. The debtor must have, within a year prior to the presentation of the petition:
   • Been ordinarily resident in Nigeria;
   • Owned a dwelling house or place of business in Nigeria
   • Conducted business in Nigeria either personally or through an agent or manager
   • Been a member of a firm or partnership having business in Nigeria through a partner, agent or manager. ⁸

Upon satisfaction of these conditions, the creditor may initiate bankruptcy proceedings by applying to the Registrar of the Federal High Court for the issuance of a Notice of Bankruptcy. In practice, this process requires the creditor to first secure a judgment against the debtor in the High Court through a primary action. Only after obtaining this judgment can the creditor proceed to file a subsequent application in the Federal High Court to declare the debtor bankrupt, should the debtor fail to satisfy the judgment debt. This application in the Federal High Court must include a certified copy of the judgment obtained from the High Court and an affidavit confirming that execution has been levied on the debtor's goods, but that the proceeds from their sale were insufficient to cover the judgment debt. Once these requirements are met, the Registrar will issue a bankruptcy notice, which specifies a timeframe within which the debtor must settle the debt. Failure to do so will result in the debtor being deemed to have committed an act of bankruptcy.⁹

It is important to note that the Bankruptcy Act's jurisdiction is limited to individuals and does not extend to corporate entities. Section 108 of the Act explicitly prohibits the court from issuing a receiving order against any association or company registered under the Companies and Allied Matters Act, thereby delineating a clear distinction between personal and corporate insolvency proceedings.

CONDITIONS FOR INSOLVENCY

In cases of corporate insolvency, the primary question before the Court is whether a company is able to meet its financial obligations by paying its undisputed debts. CAMA 2020 provides a clear statutory test for assessing a company's ability to pay its debts, as outlined in Section 572 of the Act.

This section explicitly states that a company is deemed unable to pay its debts if:

1. a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding ₦200,000, then due, has served on the company, by leaving it at its registered office or head office, a demand under his hand requiring the company to pay the sum due, and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor;
2. execution or other process issued on a judgment, act or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
3. the Court, after taking into account any contingent or prospective liability of the company, is satisfied that the company is unable to pay its debts.

The intendment of the above provision is to ensure that when a company has the ability to pay its debt but still fails to do so is pronounced insolvent.

CAMA 2020 introduced significant reforms to corporate insolvency practices in Nigeria. Notably, the draftspersons of CAMA 2020 drew inspiration from the United Kingdom's Insolvency Act 1986,¹¹ adopting a business rescue-oriented approach rather than solely focusing on liquidation. CAMA 2020 marks a departure from its predecessor, CAMA 2004, which primarily emphasised liquidation. Instead, the current Act places greater emphasis on business rescue and restructuring strategies. This approach aims to provide ailing companies with viable alternatives to closure, potentially preserving jobs and economic value. Some CAMA 2020 innovations relating to Corporate Insolvency are highlighted below:

COMPANY VOLUNTARY ARRANGEMENT (CVA)

A Company Voluntary Arrangement (CVA) is a formal procedure initiated by a company's directors, administrator, or liquidator to propose a plan to its creditors for the settlement of debts or reorganisation of its affairs. The process begins with the appointment of a nominee, who must be a qualified Insolvency Practitioner, being appointed as a trustee or supervisor to oversee the voluntary arrangement. Within 28 days of their appointment, the nominee must report to the Court on whether a meeting of the company and its creditors should be held. If the nominee fails to report, they may be replaced upon application to the Court by the party proposing the arrangement. ¹²

At the meeting, the proposal can be approved with or without modifications. However, modifications cannot affect the rights of secured creditors without their consent. The Chairman of the meeting must report the outcome to the Federal High Court. The decision becomes effective if approved by both the company's and creditors' meetings or solely by the creditors' meeting pursuant to the order of the court.

Creditors dissatisfied with the supervisor's decisions can apply to the Court for modifications, reversals, or other orders as the court may deem fit. The supervisor can also seek Court directions on specific issues or apply for the company's winding-up or an administration order if necessary.

APPOINTMENT OF ADMINISTRATORS

Administrators can be appointed through a Court order, by holders of floating charges, or by the company and its directors. The Federal High Court can issue an administration order if the company is likely to be unable to pay its debts. The Court has broad authority to issue orders as it deems appropriate. ¹³

Holders of floating charges can appoint administrators, provided they give at least two working days' notice to prior floating charge holders or receive their written consent. This appointment is subject to the conditions outlined in the charge instrument. However, administrators cannot be appointed in certain situations, such as when the floating charge is unenforceable, a provisional liquidator is in place, or a receiver/manager is already in office.

An administration order halts any winding-up petition against the company, except under specific financial legislation. Administrators must notify relevant parties of their appointment within 14 days and prepare a proposal of how they intend to achieve the purpose of administration, which may include the proposal for the company's voluntary arrangement, scheme of arrangement and compromise, and explain where necessary why business rescue will not be achievable. This proposal must be sent to the Corporate Affairs Commission (CAC), creditors, and members within 30 days of the company being in administration. A creditors' meeting will then be convened to approve or modify the proposal, with the results reported to the Court and every other person prescribed by the Minister for Trade.¹⁴

INNOVATIONS IN WINDING UP PROCEEDINGS UNDER CAMA 2020

CAMA 2020 introduces several changes to winding-up proceedings. Only fixed charge holders can enforce security during winding-up, excluding floating charge holders. Priority is given to employee remuneration deductions, pension contributions, and obligations under the Employees' Compensation Act. Additionally, all company debts rank equally and are paid in full if assets allow; otherwise, they are proportionately abated.

CONVERSION OF ADMINISTRATION TO VOLUNTARY WINDING UP

A company may be wound up if an administrator issues a notice to the CAC under Section 620 of the Act, causing the administrator's appointment to cease upon registration. If the administrator believes the company has no distributable property, they must notify the CAC and the creditors, leading to the company's dissolution within three months unless the Court orders otherwise.

MORATORIUM ON CREDITORS DURING A SCHEME OF ARRANGEMENT

The Act provides a six-month moratorium on winding-up petitions or enforcement actions by creditors once a company initiates an arrangement or compromise process.¹⁵ Secured creditors can apply to the Court to lift the moratorium if they prove certain conditions, such as the asset not being part of the company's pool for arrangement or being perishable. The company must then update the Court on the asset's status.

NETTING ¹⁶

Netting, previously unrecognised statutorily, is now acknowledged under CAMA 2020. It consolidates obligations between parties into a single payment, reducing credit, settlement, liquidity, and systemic risks. Netting agreements are enforceable against insolvent parties and their guarantors, with limited exceptions. This strengthens the financial market by providing a clear picture of a company's financial status and risk exposure.

STRIKING A BALANCE BETWEEN BUSINESS RESCUE AND ECONOMIC STABILITY

A delicate balance must be maintained between business rescue and economic stability. While the legal regime aims to facilitate debt recovery for creditors, it also recognises the importance of maintaining economic viability. The insolvency procedures under CAMA, such as restructuring and business rescue mechanisms, reflect this balance. They provide insolvent companies with opportunities to reorganise and continue their operations, preserving jobs and eventually continue to contribute to economic growth.

CONCLUSION

By modelling the corporate insolvency framework in CAMA 2020 after the UK Insolvency Act 1986, Nigeria's lawmakers have signalled a shift toward business rescue and restructuring. This approach prioritises the rehabilitation of financially distressed companies, encouraging them to pursue healthy restructuring options. The innovations introduced by CAMA 2020 reflect a modern and progressive insolvency regime that aims to balance the interests of all stakeholders while fostering a culture of business rescue and economic sustainability.

Footnotes

1 Black's Law Dictionary, 10th Edition.

2 S. 572 Companies and Allied Matters Act 2020.

3 LFN 2004, Cap B2 Vol. 1

4 Bankruptcy Proceeding Rules 1990

5 LFN Cap C20 2020

6 O. Akanle. Bankruptcy Law and Practice (Mono Publishers Ltd, 1996)

7 S. 1 Bankruptcy Act

8 S. 1(1)-(4) Bankruptcy Act, Cap B2 LFN 2004

9 An appraisal of the legal regime for Bankruptcy and Insolvency in Nigeria by O.M. Atoyebi SAN, https://omaplex.com.ng/an-appraisal-of-the-legal-regime-for-bankruptcy-and-insolvency-in-nigeria accessed on 1^st August 2024.

10 S. 705 (c) Companies and Allied Matters Act 2020.

11 The UK Insolvency Act.

12 S. 434 Companies and Allied Matters Act 2020.

13 S. 443 Companies and Allied Matters Act 2020.

14 S. 490 Companies and Allied Matters Act 2020.

15 S. 717 Companies and Allied Matters Act 2020.

16 S. 718-721 Companies and Allied Matters Act 2020.

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.