There has been an increase in restructuring across different sectors over the last couple of years, for example, in the banking sector, the restructuring of banks has been successful in Nigeria through mergers and acquisitions. In 2005, the Central Bank of Nigeria issued directives requiring banks to increase their minimum capital base to NGN25 billion. As a result of this, majority of banks either merged with other banks or acquired smaller ones in order to meet the capital base requirement. This led to the reduction in the number of banks from 89 to 25. Since 2005, banks have continued to go through different business restructuring models.
In the food and beverages sector, Chi Limited was acquired by Coca-Cola Company early in 2019.
The outbreak of the COVID-19 pandemic in the world has affected various business entities and their operations in Nigeria. This necessitated the Central Bank of Nigeria (CBN) to issue directives to deposit money banks, granting approval to consider temporary and time-limited restructuring of tenor and terms of facilities for households and businesses most affected by COVID-19, particularly those operating in the oil and gas, agriculture and manufacturing sectors. In addition, the CBN rolled out intervention facilities to assist businesses affected by the pandemic. It is anticipated that these interventions will lead to an increase in financial restructurings.
The Companies and Allied Matters Act
On 7 August 2020, the Companies and Allied Matters Act 2020 was passed into law. The Act was subsequently gazetted on 10 August 2020 and has a commencement date of 1 January 2021. This Act has introduced business rescue mechanisms such as Administration and Companies Voluntary Arrangement (CVA), for distressed companies.
This creates an avenue for business rescue options to first be prioritised and explored before receivership and involuntary liquidation. With this new Act, we anticipate that there may be a decrease in insolvencies of distressed businesses and instead an increase in business rescue.
The relevant laws applicable to financial restructurings, reorganisations, liquidations and insolvencies of business entities and partnerships in Nigeria include:
The Companies and Allied Matters Act 2020 (CAMA) and The Companies Proceeding Rules 1992
The primary legislation governing financial restructurings, reorganisations, liquidations and insolvencies of business entities and partnerships in Nigeria is the Companies and Allied Matters Act 2020 (“the Act”). See 1.1 The State of the Restructuring Market.
The Act empowers the Corporate Affairs Commission (CAC) to administer the regulation and supervision of the formation, incorporation, registration, management, and liquidation of companies. The Act also regulates insolvencies and internal and external business restructuring mechanisms in Nigeria, such as Company Voluntary Arrangement, Administration, Arrangement and Compromise, Mergers and Acquisition, Arrangement on Sale, Management Buy-out and Take Over. In addition to the Act, the Companies Proceedings Rules, 1992 and the Companies Winding-Up Rules, 2001, also govern corporate insolvency and restructuring in Nigeria.
The Investment and Securities Act
The Investments and Securities Act is the primary legislation regulating and governing capital market operations in Nigeria. The Act established the Securities and Exchange Commission (SEC) as the apex regulatory body for the Nigerian capital market and also vests the SEC with the authority to regulate investments and securities business in Nigeria. The Securities and Exchange Commission is also responsible for regulating, approving and reviewing takeovers in accordance with the Investments and Securities Act.
With the enactment of the Federal Competition and Consumer Protection Act, the provisions of the Investments and Securities Act relating to the control of mergers, acquisitions and business combinations have been repealed. However, the consequential amendments brought about by the Federal Competition and Consumer Protection Act do not prejudice the powers of the Securities and Exchange Commission to determine the fairness of transactions involving public companies.
In order to effectively carry out its objectives of securities regulation in Nigeria (as provided under the Investments and Securities Act), the Securities and Exchange Commission enacted the Securities and Exchange Commission Rules and Regulations in 2013.
The Federal Competition and Consumer Protection Act
The Federal Competition and Consumer Protection Act regulates competition and consumer protection in the Nigerian market. It also regulates mergers, acquisitions and business combinations between or among companies, and established the Federal Competition and Consumer Protection Commission and the Competition and Consumer Protection Tribunal to administer its provisions.
The Banks and other Financial Institutions Act
The Banks and other Financial Institutions Act (BOFIA) regulates the restructuring, re-organisation, mergers, disposal and acquisition of banks in Nigeria. It specifically provides that, without the prior consent of the Governor of the Central Bank of Nigeria (CBN), no bank shall enter into an agreement or arrangement:
BOFIA also vest the Governor of the CBN with the powers to create limitations and impose prohibitions on the business of a bank where the bank informs the CBN that:
The Asset Management Corporation of Nigeria (AMCON) Act
The AMCON Act was enacted to effectively manage non-performing assets of banks in Nigeria. The AMCON Act created the Asset Management Company of Nigeria, as the body responsible for acquiring eligible non-performing bank assets from eligible financial institutions. It is also responsible for managing, realising and disposing of eligible bank assets, including the collection of all outstanding sums and the takeover or disposal of collateral used in securing such assets.
Pursuant to the 2019 amendment, the Asset Management Corporation is entitled to exercise all the rights of creditors after acquisition of eligible bank assets.
Bankruptcy Act of 1979
The Bankruptcy Act regulates personal bankruptcy and provides for the making of a receiving order against an insolvent person
The Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act
This Act regulates the recovery of debts owed to failed banks and provides for trial of offences relating to financial malpractices in banks and other financial institutions.
Nigerian Deposit Insurance Corporation Act
The NDIC is a government body established (by the Nigeria Deposit Insurance Corporation Act, Chapter N102, LFN 2004) to insure all deposit liabilities of licensed banks and other deposit-taking financial institutions (insured institutions). The NDIC may give assistance to insured institutions in the case of imminent or actual financial difficulties
Voluntary restructuring proceedings available in Nigeria include purchase and assumption, management buy-out, arrangement on sale, share reconstruction and consolidation, increase of share capital, reduction of share capital, arrangement and compromise, companies voluntary winding-up, takeovers, mergers and acquisitions or business combination, company voluntary arrangement and administration.
Acquisition of deposit money banks by bridge banks pursuant to an intervention by the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation is a primary example of involuntary restructuring available in Nigeria
Insolvency proceedings available in Nigeria include receivership, compulsory winding-up by the court, winding-up subject to the supervision of the court, and creditors voluntary winding-up.
There are no statutory provisions compelling a company to commence formal insolvency proceedings within specific timelines. However, a company may be obligated to commence formal insolvency proceedings where the company passes a resolution for members’ voluntary winding-up, where the articles of association provide for dissolution upon an event which has occurred, or where the duration fixed for the existence of the company in its articles of association has expired.
Creditors or other parties (including contingent and prospective creditors), a contributory, an official receiver or a receiver or the Corporate Affairs Commission may commence involuntary insolvency proceedings by presenting petitions before the Federal High Court for the winding up of companies, for reasons including:
Also, holders of a floating charge may commence administration against a distressed company.
Insolvency is not required to commence voluntary proceedings as members of the company may decide to wind up the company where the objects of the company have been achieved, or the company has entered into a merger, acquisition or other form of business combination. A solvent company may also decide to pay off its creditors and wind up for commercial reasons.
However, insolvency is required to commence involuntary proceedings. Insolvency is the inability of a company to pay its debts. Under Section 572 of the Companies and Allied Matters Act, a company is deemed unable to pay its debts where:
Banks and other financial institutions are not permitted to enter into any arrangement which results in change in the control of the bank, for the sale, disposal or transfer of the whole or any part of the business of the bank, or for the reconstruction of the bank to employ a management agent or to transfer its business to any such agent, without the prior consent of the Central Bank of Nigeria (CBN).
Where the CBN revokes the license of a failed bank, the Nigeria Deposit Insurance Corporation (NDIC) as the statutory liquidator of banks, applies to the Federal High Court for an order to wind up the affairs of the bank. The NDIC realises the assets of the bank, settles the deposit liabilities in priority to all other liabilities of the bank and applies the statutory waterfall payments under the Companies and Allied Matters Act to make payments to the general creditors of the bank.
Voluntary winding-up proceedings cannot be initiated by insurance companies transacting life insurance business, except for the purpose of effecting an amalgamation, transfer or an acquisition. However, involuntary winding-up proceedings may be commenced with the approval of the National Insurance Commission by not less than 50 policyholders presenting a petition to wind up the company on various grounds including a default in delivering the statutory report to the Commission or in holding the statutory meeting and that the company is unable to pay its debts. If the application to wind up the company is granted, the National Insurance Commission carries out the statutory role of monitoring the winding up process.
In practice, consensual restructuring is common as market participants consent to the restructuring of a company in financial difficulty in order to preserve value and enable the company to continue as a going concern. Existing legislations do not prohibit informal and consensual restructuring procedures in Nigeria and courts generally uphold the sanctity of contracts between parties. There are no statutory provisions imposing mandatory consensual restructuring negotiations before the commencement of a formal statutory process, however, CAMA 2020 recognises that distressed companies may be restructured through a CVA or administration, even where winding up has commenced. This prioritises restructuring ahead of winding up.
There are currently no statutory provisions or guidelines on consensual restructuring and workout processes applicable in Nigeria. Parties to consensual restructuring and workout processes are at liberty to adopt contractual terms and provisions on standstills, priority, etc, that will promote their interests vis-à-vis the interest of the other parties. In practice, parties enter into these arrangements and agreements on a contractual basis and Nigeria law recognises that such agreements freely entered into, are binding and will result in obligations and liabilities on the contracting parties.
New money is typically injected into a company through cash, equity or debt. There are no statutory provisions for the injection of new money in Nigeria. However, in the absence of laws or other formal processes, investors which seek to advance new money usually enter into contractual agreements with existing creditors. In practice, creditors may enter into an inter-creditor agreement providing that priority is accorded to new money investors.
There are no laws or legal doctrines in Nigeria that impose duties on creditors to each other.
There are no statutory provisions on out of court financial restructuring or workout. However, companies in regulated industries, like the banking and financial sector, have to consider and ensure that proposed informal workouts comply with the industry specific framework.
Changes in the terms of credit agreements are regulated by the relevant inter-creditor agreement between creditors. The approval threshold for schemes of arrangement or compromise is a supermajority and, by the use of a cram down device, the supermajority of lenders may be able to bind dissenting lenders subject to the examination of the fairness of the transaction by the court.
Creditors can either create a legal or equitable mortgage over real estate as security for the payment of debt or discharge of other obligations. A legal mortgage has the effect of transferring the debtor’s interest in the real estate to the creditor, subject to the equity of redemption of the debtor. The equitable mortgage simply charges the property, but does not convey legal title to the creditor.
Creditors with a legal mortgage, who have taken the necessary perfection steps, may enforce their security by selling the asset or appointing a receiver to realise their security. However, in an equitable mortgage, a court order must be obtained before the right to sell the secured property can be exercised by the creditor.
A charge is an equitable proprietary interest created over the whole or specified part of the debtor’s undertaking and assets as security. A charge may be fixed or floating. Every charge must be registered within 90 days of its creation (unless the court extends time) before it can be enforced. If it is not registered, the charge becomes void against the liquidator and any creditor of the company and the debt secured becomes immediately repayable.
A lien may arise by the agreement of parties or by operation of law (common law or statute). A creditor may rely on common law lien, statutory lien or contractual lien to retain possession of the debtor’s property until a debt due is discharged.
Where a company is being wound up by the court, secured creditors holding a fixed charge, or any other validly created and perfected security interest other than a floating charge, may enforce their security independent of the winding up process. Once winding-up has commenced, other categories of secured creditors are not allowed to dispose of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, is void, unless the court otherwise orders. In addition, any attachment, sequestration, distress or execution put in force against the estate or effects of the company after the commencement of the winding up, by these categories of creditors is void. Winding-up is deemed to commence from the date the petition for winding-up is presented at the Federal High Court.
Secured Creditors' Rights
Unless a creditor completes the execution of a judgment debt before the commencement of the winding-up, such creditor cannot retain the proceeds of the execution, but must deliver it to the liquidator.
In an administration, a moratorium takes effect and prevents secured creditors from enforcing security over the company’s property, except with the consent of the administrator or permission of the court.
Where a company has commenced a process of arrangement and compromise, a six months moratorium takes effect, preventing secured and unsecured creditors from taking enforcements steps or filing an application for the winding-up of the company.
Outside of arrangement and compromise, administration and compulsory liquidation, secured creditors are not prohibited from enforcing their liens and security, subject to existing contractual inter-creditor covenants (if any).
Secured creditors are entitled to special procedural protection in statutory insolvency and restructuring proceedings as follows:
In liquidation, the claims of secured creditors rank in priority to any other claims including any preferential payment made under the Act and any other debt inclusive of expenses of winding-up, under Section 657 (6) of the CAMA.
Under Section 665 of CAMA, a trade creditor who supplies necessaries such as gas, electricity, water or communication services, from the effective date a company enters into administration, company voluntary arrangement, or liquidation, may make it a condition of the supply that the office –holder (an administrator, the nominee, the supervisor, the liquidator or the provisional liquidator) personally guarantees the payment of any charges in respect of the supply. However, such trade creditor cannot make it a condition of the supply that outstanding charges prior to the commencement of administration, company voluntary arrangement, or liquidation are to be paid.
Unsecured creditors may rely on common law lien, statutory lien or contractual lien to retain possession of the debtor's property until a debt due is discharged as a result of the repayment pressure created.
Unsecured creditors may institute an action for debt recovery before the High Courts and may proceed to obtain summary judgement in the absence of a defence, or judgment on the merit. With the judgment obtained, the unsecured creditor may take judgment enforcement steps and if the judgment is not satisfied in whole or in part, an action for the winding-up of the debtor may be commenced. Alternatively, a statutory demand for unpaid debt in excess of NGN200,000 may be made to the debtor and upon the debtor’s failure to liquidate the sum due, an unsecured creditor may commence winding-up proceedings against the debtor.
An unsecured creditor (contingent or prospective) may apply to the court for an administration order in respect of a company. Creditors with debts of at least 10% of the total debts of the company may request the administrator to summon an initial meeting to consider an administrator’s proposal, or summon a further creditors meeting, during administration. A creditor may apply to the court claiming that the administrator’s actions are unfairly harmful to their interest or that the administrator is not performing their functions as quickly or efficiently, on the basis of which the court may amongst others, make any order it considers appropriate, including terminating the appointment of the administrator.
In a CVA, creditors may make applications to the court for redress, where a voluntary arrangement prejudices the interest of a creditor or where material irregularity occurs in the conduct of meetings. On the basis of the application, the court may revoke or suspend any decision approving the voluntary arrangement, or request for the consideration of a revised proposal, or reconsideration of an original proposal.
There are no statutory rights and remedies of unsecured creditors in a winding-up context. However, a winding-up order, once made, operates in favour of all the creditors and all the contributories of the company as if a joint petition had been presented, no matter who applied for the liquidation. This means that a creditor who has not participated in the winding-up processes may still recover its debt in priority to the petitioning creditor, subject to the priority of payments.
Pre-judgment attachments are available as provisional remedies during a court action if an unsecured creditor can adduce sufficient evidence that a debtor is likely to dissipate its assets prior to the delivery of judgment. The unsecured creditor will be required to give an undertaking for damages.
Under Section 657(6) of CAMA a secured creditor ranks in priority to all other claims, including any preferential payment or any other debts which is inclusive of expenses of winding up. Other creditors (including equity holders) and contributories rank after the costs or expenses of winding up and preferential payments such as:
The statutory process for reaching formal restructuring and reorganisation are schemes of arrangement or compromise, company voluntary arrangement, mergers and acquisition or other form of business combination.
Schemes of Arrangement and Compromise
The company makes an application to the court for leave to call a meeting of the affected class of creditors and of the members of the company to consider and approve the proposed scheme. Where the court grants the order convening the meeting, the company will forward the notice of the meeting as well as the scheme document to the relevant stakeholder.
After the approval of the scheme by a majority representing not less than three quarters in value of the shares of members or class of members, or the interest of creditors or a particular class of creditors, the court may refer the scheme to the Securities and Exchange Commission (SEC) to investigate the fairness of the compromise or arrangement. Upon referral, the SEC will appoint one or more inspectors to investigate the fairness of the scheme and forward a written report to the court within the timeframe specified by the court. The purpose of the referral to the SEC is to ensure that the interests of minority creditors are fairly considered and treated in the scheme approved by the majority. In practice, however, the courts tend to approve the schemes once they have received the required majority votes, as required by law.
If the court is satisfied as to the fairness of the scheme and it sanctions same, it becomes binding on all the affected creditors or members of the company, and on the company. Thereafter, a copy of the order should be filed at the Corporate Affairs Commission.
Merger, Acquisition or Business Combination
Every merger, acquisition and business combination between or among companies is subject to the prior review and approval of the Federal Competition and Consumer Protection Commission (“the Commission”).
A merger may be a small or a large merger and the Commission sets the threshold of annual turnover for determining the categories of small and large merger. Considering that the Commission was recently given the responsibility to regulate Merger, acquisition or business combination, the Commission is yet to issue a guideline on the thresholds for merger categorisation. Therefore, the joint advisory issued by the Commission and Securities and Exchange Commission, provides that the existing SEC regulations, guidelines and fees, including the thresholds, continue to apply until a further advisory or guideline is issued by the Commission.
A party to a small merger is not required to notify the commission of the merger, and may implement the merger without approval, unless the commission requires it to do so. Upon implementation of the small merger, the Commission may request the parties to notify it of the merger within six months. After notification, the Commission is required to consider the small merger within 20 business days or an extended period not exceeding 40 business days. If, after the expiry of 20 business days or the extension period, the Commission does not issue a report, the small merger shall be deemed approved.
A party to a large merger must notify the Commission of the merger in the prescribed manner and form and seek prior approval. A large merger cannot be implemented until it is approved, with or without conditions. The Commission is required to consider a large merger within 60 business days or an extended period not exceeding 120 business days. If, after the expiry of 60 business days or the extension period, the Commission has not issued a report, a large merger shall be deemed approved, subject to the powers of the Commission to revoke its own decision to approve or conditionally approve a small or large merger.
Where a party is aggrieved by the Commission’s decision on a proposed merger, the party may file an application for review before the Competition and Consumer Protection Tribunal and, if aggrieved by the decision of the tribunal, may appeal to the Court of Appeal. The duration of the entire restructuring process will depend on the restructuring option chosen by the company. In practice, restructuring spans six months to one year.
Company Voluntary Arrangement (CVA)
In a CVA, the directors of a company may make a proposal to its creditors for a composition in satisfaction of the company’s debts or a scheme of arrangement of its affairs. A nominee (qualified insolvency practitioner) acts in relation to the voluntary arrangement either as a trustee or otherwise for the purpose of supervising its implementation. A CVA may be proposed where an administration order is in force or where the company is being wound up. The nominee upon receipt of the proposal for CVA will submit a report to court, containing his opinion on whether a meeting of the company and of its creditors should be summoned to consider the proposal, the date, place and time for the proposed meeting.
At the meeting, the proposal will be considered and approved with or without modification. If the decision taken at the creditors meeting differs from that taken at the company’s meeting, a member of the company may apply to the court and the court may order the decision of the company’s meeting to have effect instead of that of the creditors meeting or the court may make such order as it deems fit. An order made by the court, binds everyone entitled to vote at the meeting or would have been so entitled if he had notice of it.
A creditor may challenge the CVA on grounds of material irregularity with either of the meetings, or that the CVA unfairly prejudices its interests.
Where a company is undergoing administration or a scheme of arrangement and compromise, moratorium would be available to the company, however in all other types of formal restructuring procedures a moratorium or automatic stay of claims by the creditors would not be available to the company. The company is, therefore, exposed to enforcement action by both secured and unsecured creditors.
For formal processes such as CVA, the company can continue to operate its business under the supervision of a nominee. In an administration, the administrator steps in to manage the affairs of the company, business, and property. In a scheme of arrangement and compromise, the ability of the company to continue operating its business will be based on the contractual agreement between the company and the counter parties in the restructuring.
Where a bank is undergoing formal restructuring and its assets and liabilities have been acquired by a bridge bank, the bank will cease to operate, and its business will be taken over and operated by the bridge bank. Under mergers and acquisitions, takeovers or other business combination procedures, incumbent management may continue to manage the company. However, where a receiver is appointed (or another person appointed to control and manager the company by a debenture holder), the incumbent management would cede management of the company to the receiver.
Where a company is in liquidation, the liquidator takes over the management of the company for the purpose of conducting the winding up proceedings. This includes the realisation and distribution of the assets of the company working towards the effective winding up of the company.
There is no statutory provision on whether and how the company can borrow money during a formal restructuring procedure.
In a scheme of arrangement or compromise, creditors with different interests are separated into separate classes. Each class of creditors whose interests are affected by the scheme must approve its terms as they affect that class.
In a CVA, creditors are not separated into classes. They all participate and vote at creditors meetings. Similarly, in an administration, creditors are not separated into classes for the purpose of voting on an administrator’s proposal.
In a scheme of arrangement or compromise, dissenting creditors will be bound by the majority votes and the sanction of the court.
In a CVA, dissenting unsecured creditors are bound by the decision taken at the creditors meeting, however, a decision affecting the rights of a secured creditor cannot be made at the meeting without the concurrence of the secured creditor.
In an administration, the administrator’s proposal does not include any action which affect the right of a secured creditor to enforce his security, except with the creditor’s consent.
Claims may be traded in a scheme and may be transferred at any time, subject to notification to the company and any lock up terms between classes of creditors. There are no statutory provisions preventing the trading of claims against a company, in a CVA or administration.
Schemes may be proposed for a compromise, arrangement or reconstruction between two or more companies or the merger of any two or more companies, or transfer of the whole or any part of the undertaking or property of any company concerned in the scheme. Schemes may therefore be utilised to reorganise a corporate group on a combined basis for administrative efficiency.
In schemes of arrangement and compromise, the directors retain management control of the company and are in possession and control of the assets. Subject to contractual terms regulating the sale of assets and their proceeds, there are no additional permissions or restrictions on a company’s use or sale of its assets. Upon completion of the scheme, the company will be subject to the terms of the restructuring and agreements relating to the sale of assets.
Additionally, in a CVA or administration, the restrictions on a company’s use of its assets are imposed by the terms of the voluntary arrangement or proposals in place.
Asset disposition procedures applicable in either a scheme or CVA are the terms stipulated in either the scheme document or the proposal. A possible term of the CVA is that if an asset is to be sold, its proceeds should be made available to the creditors bound by the CVA and the proceeds should be paid to the supervisor.
In schemes of arrangements and compromise and in CVA, the directors execute the sale of the assets or the business and a purchaser ideally acquires a good title in a sale executed pursuant to the restructuring.
It will be impossible to effectuate during such a restructuring proceeding sales and similar transactions that have been pre-negotiated prior to the restructuring proceeding in the following situations:
In schemes of arrangement and compromise, secured creditors may reach an arrangement to release securities, including guarantees, as part of the scheme arrangement.
In a CVA, the rights of the secured creditors are not affected except with their concurrence.
There is no statutory provision for priority of new money. New money may be given priority by creditors as part of the terms of the proposed scheme and the agreement of parties will be sanctioned as part of the scheme.
In CVA, for new money to be secured on assets encumbered by pre-existing secured creditors’ security, consent of the secured creditors is required.
There are no specific provisions for the determination of the value of claims under the existing insolvency legislations in Nigeria. However, there are guidelines which may be relied on in arriving at the value of claims and identifying the creditors with economic interest in the company. For example, it is a requirement that the statement in a scheme of arrangement or compromise sets out the interest of the secured debenture holders and general creditors of the company as well as the price of purchase of shares of a dissenting member. Also, the liquidator has the duty to value the claims of creditors after assessing the proof of debts filed.
For secured creditors as well as preferential creditors, there consents are required to take any steps there affect their rights in the proposal for a CVA.
Restructuring or reorganisation arrived at through schemes of arrangement or compromise are subject to a review for fairness by the court. In practice, the court would refer the scheme to the Securities and Exchange Commission (SEC) to investigate the fairness of the compromise or arrangement.
There are no statutory provisions for disclaimers of onerous contracts in a restructuring or reorganisation.
The CVA must not be unfairly prejudicial to the interests of a creditor, as it can be challenged. Where the court finds the CVA to be unfairly prejudicial, it can set aside the CVA or require a further meeting to be called.
In schemes, non-debtor parties, such as guarantors, may be released from liabilities, subject to the test for overall fairness of the agreement by the court.
Similarly, under the CVA, non-debtor parties may be released from liabilities, where such term is expressed in the proposal and the requisite approvals are obtained.
There is no mandatory right of set-off in schemes. However, contractual set-off may be available in relation to individual debts and this may be reflected in the terms of the Scheme or CVA, subject to obtaining the necessary approvals.
Where a company fails to observe the procedural requirements for a scheme, it may fail at the creditors meeting, or at the sanction hearing in court, on grounds of procedural or substantive unfairness.
Where the company or creditor fails to observe the terms of an agreed restructuring plan in the course of implementation, the company or the creditor will be exposed to the consequences of any breach, subject to the terms of the relevant agreements and applicable law on breach of contract. The creditors may institute enforcement action against the company or seek for specific performance by the company of the terms of the agreement. In addition, the creditors may consider the breach as a ground for winding up the company and a defaulting creditor may be subject to injunctive relief.
With regards to a CVA, where a company fails to observe the terms of a CVA, it will usually come to an end.
Subject to the terms of the restructuring agreements, existing equity owners may receive or retain any ownership or other property on account of their ownership interests.
Voluntary Liquidation Proceedings
Voluntary liquidation proceedings are commenced where a specified period or event in the articles of association of the company occurs, or the company passes a special resolution that the company be voluntarily wound up. The two types of voluntary proceedings are the Members’ Voluntary Winding-Up (MVW) and the Creditor’s Voluntary Winding-Up (CVW).
Members’ voluntary winding-up (MVW)
MVW is a solvent liquidation commenced when a special resolution that the company be wound up voluntarily is passed by members. For a company to embark on a MVW, the directors are required to make a declaration of solvency (not more than five weeks prior to the passing of the special resolution) that the company will be able to pay its debts in full within 12 months of passing the special resolution.
After the passing of the special resolution, the directors will appoint one or more liquidators who will wind up the affairs of the company and distribute the assets among its members following the payment of all debts in accordance with the statutory preferential payments. The special resolution will be filed at the Corporate Affairs Commission within 14 days of it being passed and from that day the company ceases to carry on any business and the powers of the directors cease, except as permitted by the liquidator.
The liquidator, in the discharge of their responsibility, may disclaim onerous property with the leave of court at any time within 12 months after the commencement of the liquidation or such other period allowed by courts. Upon the conclusion of the MVW, the liquidator will issue a public notice for a general meeting where an account of the winding up will be presented Within seven days of holding the meeting, a copy of the account and minutes of the meeting will be sent to the Corporate Affairs Commission. Upon preparation of the audited account, a final meeting will be convened to discuss the audited account and within 28 days after the meeting, the liquidator will file copies of the accounts and a statement of holding of the meeting at the CAC. The company is deemed dissolved three months after the registration of the audited accounts and the returns.
Creditors’ voluntary winding-up (CVW)
A CVW is initiated by the company where the directors of the company are unable to depose to a statutory declaration of solvency or where during a MVW the liquidator believes that the company will not be able to pay its debts as stipulated in the declaration of solvency. Where an MVW is converted to a CVW, the liquidator would convene a meeting of the creditors of the company and present to them a statement of the company’s assets and liabilities. If the company initially opts for a CVW, separate meetings of the members and the creditors of the company will be held with the creditors’ meeting taking place immediately after the meeting of the company, either on the same day, or the next day. At the creditor’s meeting, a director will present a statement of the company’s affairs, with a list of all the company’s creditors, for a decision on the CVW and appointment of a liquidator. If the members meeting nominated a different person as liquidator of the company, the liquidator nominated by the creditors’ meeting shall be the liquidator. Any creditor, member or director of the company dissatisfied with the appointment may apply to the court within a period of seven days for redress.
The creditors have the right to constitute a committee of inspection, consisting of not more than five persons, at the first or any subsequent meeting, and the company may, at a general meeting, also nominate up to five persons to join the committee of inspection. Upon the appointment of a liquidator, all the powers of the directors cease, except to the extent permitted by the committee of inspection or the creditors.
Liquidators are able to disclaim onerous property in a CVW. In addition, the liquidator makes payments to the creditors in accordance with the statutory preferential payment waterfall. Similarly, liquidators in a CVL will prepare an account of their dealings, and summon a final meeting of creditors. Thereafter, they would make the necessary returns to the CAC, and the company will be dissolved three months after the registration of the accounts and the returns.
Involuntary Liquidations (Winding-Up Subject to the Supervision of the Courts/Compulsory Winding-Up by the Courts)
Winding-up subject to the supervision of the courts and compulsory winding-up by the courts are involuntary liquidations proceedings.
Winding-up subject to the supervision of the courts
A company that is being liquidated voluntarily may become subject to court supervision where a creditor, contributory or a person with sufficient interest files a petition in court for the winding-up to proceed with the supervision of the court and this is granted. The applicant is required to show that they have some special interest in the company or that the liquidation process will be jeopardised by the manner the liquidation is being presently conducted. Where voluntary winding-up is made subject to the supervision of the court, any dispositions of property by the company become void unless the court otherwise orders, and all writs of attachment and execution issued out against the property of the company also become void. As part of the order for supervision, the court may appoint an additional liquidator to act with the liquidator appointed under the voluntary winding-up or may remove the first liquidator entirely.
A liquidator appointed by a supervision order may make any compromise or arrangement with creditors or claimants against the company, compromise any calls or liabilities to make calls as against contributories with the sanction of the court, or of a committee of inspection.
Compulsory winding-up by the courts (CWC)
Generally, a CWC is commenced by the presentation of a petition to the court by a creditor on the ground that the company be wound up for an inability to pay its debts. A company will be deemed unable to pay its debt if:
If the order to wind up is granted by the court, a copy of the order must be forwarded to the Corporate Affairs Commission immediately after it is obtained. Although the responsibility to forward the order is that of the company being wound up, in practice it may be forwarded by the petitioner. In other cases, the liquidator appointed by the creditors will forward the order to the Commission. Within 14 days of the granting of the order, the company is required to submit a statement of its affairs to the Official Receiver. Once the statement is received, the Official Receiver uses it to prepare a preliminary report. Thereafter, a liquidator may be appointed by order of court, if required. As a matter of practice, the appointment of a liquidator is only applied for when the creditors believe that sufficient assets of the company are available to satisfy creditor demands.
With the role of realising the assets and distributing proceeds, the liquidator has wide-reaching powers to fulfil this objective. The liquidator is also empowered to disclaim onerous contracts and make payments in accordance with the statutory preferential payments waterfall.
Creditors are required to prove their debts by submitting an affidavit in the relevant format to the Official Receiver or liquidator, and secured creditors will indicate their security in the affidavit. Upon verification of the proof of debts, the liquidator will settle claims of creditors and undistributed and unclaimed monies will be paid into the Company Liquidation Account kept by the Accountant General of the Federation. The winding up is concluded when the order dissolving the company is reported by the liquidator to the Commission, or when the Attorney General of the Federation makes an order releasing the liquidator.
Administration is for financially distressed companies or companies on the verge of financial distress. The statutory objectives of Administration are as follows:
An insolvency practitioner is appointed when the company enters into administration to act as the company’s administrator. On appointment of the administrator, the directors’ powers cease except as permitted by the administrator. The administrator takes control of the company’s business and assets from the company’s directors, in order to achieve one of the three objectives of administration.
Administration can be commenced by the court on the presentation of a formal application. The applicant must prove to the court that the company is, or is likely to become, unable to pay its debts and that the administration order will meet one of the statutory purposes described above. The company, the directors, or one or more creditors, or the designated receiver of the Federal High Court may make such application before the courts.
An administration can be commenced of court by the floating charge holder having security over the whole or a substantial part of the company’s assets and undertaking, or by the directors of the company. The appointor would subsequently file notice of appointment and any relevant document at the CAC, and in court where the appointment is made by the company. The administrator is required to prepare a statement for setting out proposals for achieving the goal of administration. The statement would be delivered to the registrar of companies, all creditors and to members whose address they are aware of.
Where a company is in administration, enforcement steps, legal proceedings, execution, distress, exercise of the right of peaceable re-entry amongst others, may not be commenced or instituted against the company without the consent of the administrator, or permission of the court as the case may be.
Generally, the liquidator negotiates, executes and authorises the sale of assets. Where the liquidator acts with the Committee of Inspection, they may require a resolution of the Committee of Inspection authorising such a sale.
In winding up, subject to the supervision of the court, any sale of assets by the liquidator would be subject to the control of the court. Liquidators would usually not give any representations, indemnities or warranties for the sale of assets and will exempt themselves from any liability in that regard.
In this case, a purchaser will acquire good title save for claims attaching to assets in the ordinary course, such as retention of title claims and other competing ownership claims and liens, and the transfer will benefit from very few warranties (a position which is usually reflected in the price). There are no specific provisions regulating bidding by creditors for company assets during insolvency proceedings.
There are no statutory provisions with respect to effectuating pre-negotiated sales transaction’s following the commencement of a statutory procedure. However, the liquidator, upon appointment, has the power to carry on the business of the company so far as may be necessary for its beneficial winding-up and can also terminate contracts that are not geared towards beneficial winding-up. Furthermore, where any part of the property of the company being wound up consists of unprofitable contracts, the liquidator may, with the leave of court and subject to the provisions of CAMA, disclaim such onerous contracts/properties.
Creditors in a compulsory winding-up, may decide to appoint a Committee of Inspection, and make an application to the court for this purpose. The Committee of Inspection comprises of creditors and contributories of the company, or persons holding powers of the creditors and contributories. No member of a Committee of Inspection is allowed to derive any profit from any transaction arising out of the winding except under and with the sanction of the Court.
In a CVW, the creditors may appoint a Committee of Inspection of not more than five persons. The creditors will also decide the extent to which they will act with the liquidator(s) through a Committee of Inspection. Generally, the powers of the Committee vary and are usually dependent on the mandate given by other creditors. The Committee sanctions the exercise of the liquidator’s powers, and may also fix the remuneration to be paid to the liquidator. The liquidator is expected to give due regard to the resolutions of the Committee, although the decisions of the Committee may be superseded by decisions taken at a meeting of the creditors.
Nigeria is yet to adopt the UNICTRAL Model Law on Cross-Border Insolvency (the “Model Law”). There is no specific local legislation dealing with this issue. Therefore, cross border insolvency issues are handled on an ad hoc basis, with each matter dealt with regarding its own specific facts. However, the recently passed CAMA 2019 recognises the appointment of an administrator in cross border insolvency. for such Administrator to be recognised, an ex parte application must be made to the court.
Since Nigeria is yet to adopt the Model Law, it is unlikely that Nigerian courts would enter into protocols or other arrangement with foreign courts to co-ordinate proceedings.
Nigeria courts are most likely to take the view that Nigerian law is paramount
Foreign creditors are not dealt with in a different way.
Statutory officers in Nigeria are:
In a winding-up by the Court, the Official Receiver, before the appointment of a liquidator, exercises all the powers of a liquidator with respect to the examination, admission and rejection of proofs.
Provisional Liquidator and Liquidator
The liquidator has the general duty to maintain an impartial relationship with all those who have dealings with the company and to act for all creditors, even those who were not involved in his initial appointment.
The liquidator, by virtue of the appointment, becomes the alter ego of the company and can keep in office such staff as are continually utilised after the date of appointment. The liquidator has a range of powers including, amongst others, the ability to settle the list of creditors and contributories, make calls on shareholders to contribute to the assets, hold and conduct meetings of the creditors and the members of the company to find out their views regarding the winding up, and collect and apply the assets during the winding up. Certain actions, however, require the prior approval of either the court or a creditors’ committee of inspection.
A receiver can, subject to the rights of prior encumbrancers, take possession of and protect a secured property, receive the rents and profits from the property and realise the security for the benefit of their appointor. A receiver who acts as manager has the power to carry on the business, stands in a fiduciary relationship to the company and must observe the utmost good faith towards it in any transaction with it or on its behalf.
Some of the statutory power of a receiver manager include:
Special managers are appointed where the nature of the business requires specialised skills for the management of the affairs of the company in winding-up by court.
Appointed to supervise the implementation of the proposal in the CVA.
Administrators pursue the objective of rescuing the company as a going concern or, where not possible, to achieve a better result for the creditors than would be likely if the company were to be wound up. If neither of these objectives is possible, an administrator’s role is to realise the company’s property to make a distribution to one or more secured or preferential creditors. Administrators have powers to run and manage the affairs of the company in order to achieve these objectives. Therefore, they are required to act honestly, exercise their powers in a manner that ensures that personal interest does not conflict with duty.
Liquidators, official receiver, provisional liquidator, administrators, nominees, receivers and managers, and administrative receivers must be authorised insolvency practitioners in accordance with the Companies and Allied Matters Act.
The mode of appointment and removal of a liquidator depends on the liquidation procedure employed. In MVW, the company appoints a liquidator at the general meeting, and can be removed by the members. While in a CVW, the liquidator is chosen by the creditors, and can subsequently be removed by them. In a compulsory liquidation, the Official Receiver (who is the Deputy Chief Registrar of the Federal High Court (FHC) or an officer designated for the purpose by the Chief Judge of the FHC) usually exercises the powers of the liquidator with respect to the examination, admission and rejection of proof, before the court makes a winding-up order as well as appoint the liquidator. The court replaces the liquidator appointed in a compulsory liquidation.
Management and Directors
Powers of management and the directors cease upon the appointment of the statutory officers in liquidation proceedings. However, these officers may direct the directors to provide information relevant to the management of the affairs of the company. For example, directors are obliged to verify, by affidavit, the statement of affairs prepared and submitted by the liquidator to the official receiver.
Although, the directors have no power to manage the company, they retain residual powers on behalf of the shareholders to challenge the statutory officers by court action, if it appears that they are not performing their duties in good faith.
Where it appears, in the course of liquidation, that the business of the company was conducted in a reckless manner, the official receiver, provisional liquidator, or liquidator may apply to court for personal liability of the responsible member of the management team.
Receivers are usually appointed by the secured creditor, out of court, by virtue of powers conferred on the creditor by a deed of debenture or mortgage. A receiver/manager may be removed in line with the terms of the instrument appointing them.
Administrators are appointed by the court, the holder of a floating charge, by the company (out of court) or by the directors of a company. An administrator may be removed upon the expiration of their tenure. Once appointed, the administrator takes control of the company, and the directors cannot exercise powers that might affect the administration objectives without the administrator’s consent. The directors, however, keep certain duties after a company goes into administration and are subject to the usual fiduciary obligations to act in the best interests of the company.
The directors and all the past and present officers of the company are bound to deal with the liquidator in utmost good faith and make full disclosure of the circumstances of the company to the liquidator. In order to protect the creditors of a company in the event of its being wound up, and also ensure balance and fairness between its creditors and contributories, the Companies and Allied Matters Act by the provisions of Section 668, attaches criminal liability to certain acts of officers of the company, either past or present, which take place within a period of 12 months before the winding-up commences.
The law defines an officer of the company as including “any person in accordance with whose directions or instructions the directors of a company have been accustomed to act". The possibility then exists that a person not on the board of directors of the company being wound up may be criminally liable under this section.
Generally, directors’ fiduciary duties are towards the company, not the creditors. Therefore, the shareholders can assert direct fiduciary breach of claims against the director. Where there are such claims in insolvency, they must be asserted through the insolvency office holder, such as the Insolvency practitioner.
Historical transactions may be set aside where any part of the property of a company which is being wound up consists of land of any tenure burdened with onerous covenants, shares or stock in companies, unprofitable contracts, or of any other property that is unsaleable or not readily saleable (by reason of its binding the possessor to the performance of any onerous act, or to the payment of any sum of money within 12 months preceding the insolvency process).
Fraudulent preference transactions can be set aside under Nigeria law. In the case of a preference which is given to a person who is connected with the company (otherwise than by reason only of being its employee), the relevant time is the period of years ending with the onset of insolvency, and in any other case, the relevant time is the period of three months ending with the onset of insolvency.
Furthermore, Nigeria law provides for the invalidation of certain floating charges when the company is being wound up. Floating charges created within three months of the commencement of the winding-up are invalid unless it is proved that the company was solvent immediately after the creation of the charge.
In addition, the liquidator can disclaim onerous contracts, with the leave of the court, at any time within 12 months after the commencement of the winding-up or such extended period as may be allowed by the court.
Claims in respect of onerous property, fraudulent preference transactions and certain floating charges in insolvency proceedings can be brought by liquidators and administrators.