Introduction
Insolvency has been defined as a situation in which a person or company does not have enough money to pay debts and buy goods.1 While the Companies and Allied Matters Act, 2020 ("CAMA") does not define "insolvency," it stipulates when a company will be deemed unable to pay its debt in as, when (a) a creditor who the company owes a sum exceeding N200,000 (Two Hundred Thousand Naira) delivers to the company's head or registered office a written demand and the company has neglected or refused to pay the sum for a period of 3 (three) weeks; (b) the company fails to satisfy the execution of a Court's judgment against it in favour of a creditor either in part or in whole; and (c) the Court is satisfied that the Company is unable to pay its debts.2
A common misconception is that an insolvent company automatically enters liquidation and will have to be shut down. However, a company can be insolvent without being put into liquidation. Nigerian corporate insolvency is primarily regulated by the CAMA.3 This article seeks to explore the different options available to struggling companies in Nigeria to help them get back to good financial health or, in the case of creditors, to realise the debt owed to them by the corporation.
Overview Of Insolvency Laws In Nigeria
The laws that regulate insolvency practice in Nigeria are:
i. CAMA;
ii. BOFIA;
iii. AMCON Act;
iv. the National Insurance Commission Act, 1997 (the "NAICOM Act");
v. the Business Facilitation (Miscellaneous Provisions) Act, 2023 (the "BFA");
vi. the Insurance Act, 2003 (the "Insurance Act");
vii. the Pension Reform Act, 2014 (the "PRA"); and viii. NDIC Act.
The insolvency provisions in the CAMA and the BFA are of general application and apply to entities regardless of the sector in which they operate. Sector-specific law like the BOFIA, the NAICOM Act, the Insurance Act, the PRA, the AMCON Act and the NDIC Act will prevail over laws of general application in matters which they regulate.4
Key Institutions Involved
A. Federal High Court
The Federal High Court (the "Court") has exclusive jurisdiction over insolvency proceedings, per the Constitution, s. 251(e) and 251(1)(f). All petitions and applications for any insolvency proceedings, therefore, must be made to the Court.
B. Corporate Affairs Commission (CAC)
The CAC has primary oversight over all companies. All insolvency proceedings are required to be notified to the CAC after the necessary approvals have been obtained from the Court.
Corporate Insolvency Procedures
There are a number of corporate insolvency procedures that are available to companies under CAMA. They include receivership, administration, company voluntary arrangement or compromise, and winding up. The above-stated procedures are examined in proper detail in the paragraphs below. A. Receivership A company enters into receivership where a Receiver/Manager is appointed on behalf of a secured creditor to recover the debt owed to the creditor.
A Receiver
can be appointed either by the Court5 or out of court6. Only the company's secured7 creditors can appoint a Receiver only pursuant to the powers granted to them in a debt instrument8 . The implication of this position is that if a creditor is desirous of appointing a receiver without recourse to the court, such creditor should expressly include the power to appoint a receiver in the security agreements evidencing the transaction. In the absence of the express power to appoint a Receiver, a secured creditor may apply to the Court to appoint a Receiver. The purpose of such an appointment is for the Receiver to preserve the assets in which the secured creditor has an interest and realise the security for his appointors' benefit.
Debenture holders, their trustees, or the court upon their application have an unimpeded right to appoint a Receiver in respect of charged or mortgaged assets9 where10:
a. the company fails to pay any instalment of interest, principal or premium under the debenture within one month after the debt becomes due;
b. the company fails to fulfil any of the obligations imposed on it by the debenture agreement or trust deed;
c. the company is wound up; or
d. other event of default as stated under the debenture agreement occur entitling the debenture holder to realise the security.
The Court may appoint a Receiver in favour of a secured creditor or upon the application of interested persons where11:
a. a fixed or floating charge has become enforceable; and
b. where the fixed or floating charge has not become enforceable, but the Court is satisfied that the security of the debenture holder is in jeopardy.
c. the principal money borrowed by the company or the interest is in arrears; or d. security or property of the company is in jeopardy.
All persons except the following can be appointed as a receiver:12 an infant, (b) any person found by a competent Court to be of unsound mind, (c) a body corporate, (d) an undischarged bankrupt, unless special approval is granted by the Court, (e) a director or auditor of the company, and (f) any person convicted of any offence involving fraud, dishonesty, official corruption, or moral turpitude.
Powers/Duties of a Receiver and a Receiver/Manager13
Receivers have a wide range of powers detailed in the Eleventh Schedule of CAMA, all geared towards the primary goal of realizing security in favour of his appointor. However, the parties to a security agreement are permitted to agree on the powers of any proposed receiver. Where the provisions of the Eleventh Schedule are inconsistent with the terms of such an agreement, the terms of the security agreement will prevail.14 The duties and powers of any appointed receiver/manager broadly include the following:
(a) the receiver can take possession of and protect the properties of the insolvent company;
(b) the receiver can receive rents and profits and discharge all outgoings in respect thereof;
(c) the receiver can realise the security for the benefit of those on whose behalf he is appointed; and
(d) if the receiver is also appointed as manager as well, the receiver/manager will manage the undertaking of the company with a view of realizing the security.
B. Arrangement and Compromise15
An Arrangement is a change in the rights or liabilities of the members, debenture holders and creditors of the company or any class of them by the unanimous agreement of all parties affected. An Arrangement alters the obligation of the company to either its members or creditors by the members or creditors relinquishing some of their rights to the company.
A company going through financial difficulties may enter into negotiations with its creditors and investors, which can involve the creditors/members relinquishing some of their rights as fairly as possible, to keep the company as a going concern.
No winding-up petition or enforcement action by a creditor (secured or unsecured) can be entertained against any company or its assets that has commenced an "arrangement and compromise" with its creditors for a period of 6 months from the time that the company submits to the Court relevant documents indicating its intention that it has commenced an arrangement and compromise.16 Where the company puts forward a scheme of compromise to its creditors, the Court may order a meeting of creditors to discuss the proposal. If a majority representing at least 75% of the value of the shares (in the case of members) or of the interests (in the case of creditors) present at the meeting agree to the compromise, the proposal is then referred back to the Court. The Court will sanction the arrangement if it determines that the terms are fair, and the terms of the arrangement will be binding on the company and the creditors or members.17
Where the debtor-company is a publicly-quoted company, the Court will refer the scheme of arrangement to the Securities and Exchange Commission ("SEC").18 The SEC will appoint one or more inspectors to investigate the fairness of the scheme and make a written report to the court in respect thereof, which shall then sanction it. Once the Court sanctions the arrangement, both the company (or its liquidator if the company is in liquidation) and its creditors will become bound by the scheme's terms.
C. Administration19
Although CAMA does not define administration, it defines an "administrator" as "a person appointed under any of the means under this Chapter20 to manage the company's affairs, business and property..." 21 The purpose of administration is three-fold: (a) to rescue the company, (b) to achieve a better result for creditors than immediate liquidation, or, if neither of these options is viable, (c) to realize the company's assets to pay secured and preferential creditors.22
Procedure for Administration
(a) Administration commences by filing at the Court an administration application supported with an affidavit stating the company's insolvent condition, and a written address. The administration application may be made by: (a) the company, (b) its directors, (c) one or more creditors of the company, (d) the holder of a floating charge in special circumstances, or (e) a combination of (a) – (d).
(b) Where the court grants the administration order and appoints an Administrator, the board of directors of the company is deemed suspended. An administration order suspends any winding-up petition against the company, except under specific financial legislation.
(c) Within 14 days after his/her appointment, the Administrator is required to send notice of his or her appointment to the company, the creditors he is aware of and the SEC. The Administrator must prepare a proposal on how to achieve the purpose of administration and send it to the CAC every creditor of the company of whose claim he or she is aware of and every member of the company of whose address he or she is aware.
(d) A creditors' meeting is to be convened to consider the proposal, and the Administrator will report any decision taken to the court and the CAC
The difference between winding up and administration
While winding up seeks the death of a company and the divestments of its assets in favour of creditors, the primary objective of administration, an innovation in CAMA, is the rescue of a troubled or insolvent company. However, the Administrator is required to consider the interests of the company's creditors in carrying out the goal of rescue.
The difference between Receivership and Administration
The goal of administration is to assist the business survive and continue its operations, while the goal of receivership is to recover the debt owed by the company to the creditor(s) who appointed the Receiver. Also, an Administrator represents the interests of all creditors collectively and seeks to settle creditors proportionately, based on their claims. A Receiver or Manager, however, focuses on just the creditor(s) who appointed him/her.
The first company said to enter into administration in Nigeria is Moorhouse Company Ltd23.
D. Company Voluntary Arrangement (CVA)24
The CVA is a new business rescue procedure introduced under CAMA. The CVA allows the directors of a financially-troubled company to have an agreement with the company's creditors to structure the debt repayment of the company. A CVA is a proposal by the directors of a company, the administrator of a company in administration, or the liquidator of a company being wound up to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs.
The CVA is overseen by an Insolvency Practitioner, who acts as a Nominee and facilitates negotiations between the company and its creditors. One significant difference between the CVA and an Administration or Receivership is that the directors of the company are able to maintain control of the company's business and assets while the procedure is ongoing.
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