THE LEGAL REGIME OF CORPORATE INSOLVENCY IN NIGERIA: AN IMPEDIMENT ON BUSINESS RESCUE
THE LEGAL REGIME OF CORPORATE INSOLVENCY IN NIGERIA:
AN IMPEDIMENT ON BUSINESS RESCUE
ABSTRACT
In every
society the basic need for restructuring through business rescue must be
unencumbered because its
financial system is the heartbeat of the economy. The modernised concept of insolvency in other
jurisdictions does not envisage liquidation but business rescue.[1]
In other words, the essence of insolvency is to revive the business even if the
company is liquidated in order to foster commercial activities in the financial
system. Nigeria’s legal framework for insolvency discourages business rescue
and as such, judicial activism is relied upon to promote economic growth and
development in the country.[2]
However, the legal framework for business rescue for insurance companies and
banks in Nigeria emphasise business rescue.
This article explores the legal framework for
insolvency in Nigeria while basically exploring the necessity for business
rescue rather than liquidation in Nigeria. It examines loopholes in the
insolvency laws and proffers recommendations that are business-rescue
oriented.
1.0.
INTRODUCTION
The only definition that best describes
insolvency is contained in CAMA although the definition is inadequate in that
it is restricted to private individuals.
Corporate Insolvency is defined in CAMA as;
An
"insolvent person" where
used in this Decree means any person in Nigeria who, in respect of any
judgment, decree or court order against him, is unable to satisfy execution or
other process issued thereon in favour of a creditor, and the execution or
other process remains unsatisfied for not less than six weeks.[3]
The
Nigerian corporate insolvency framework is captured by Part XIV, XV and XVI of
the Companies and Allied Matters Act on receivership, winding-up and
arrangement & compromise respectively and envisages different levels of
commercial difficulty.[4]
Recently, the banking sector witnessed a major modernization of its insolvency
framework with the advent of the Asset Management Corporation of Nigeria Act of
June 2016.
The term “Insolvency” is usually used to
refer to business or company insolvency. There seems to be a distinction made
between the narrower concept of “cash
flow insolvency” (inability to meet up with commercial
commitments/obligations arising from trade with third parties or secured
lending even though the company may be asset rich) and the wider concept of “balance sheet insolvency” which
arises where the liabilities of the company exceeds the assets of the company.
It seems clear that an improper case of winding up or a proper case for
business rescue and turnaround is more likely to occur for a company that is
cash flow insolvent. The current insolvency
framework envisages two broad categories of corporate insolvency proceedings;
non-collective proceedings (receivership) and collective proceedings (winding
up, arrangements and compromises, mergers and acquisitions).
2.0.
RESTRUCTURING AND
INSOLVENCY IN NIGERIA
Generally, Nigerian law
on insolvency seems deficient with regard to business rescue and restructuring.
For instance, Section 471 of the Companies and Allied Matters
Act provides for the voluntary winding up of a company by creditors. Where a
company is indebted to a creditor in an amount above N2, 000, the creditor may
issue a statutory demand letter to the company to settle the debt. If the
company refuses or fails to pay the debt within three weeks, the creditor may
petition for the company to be wound up. In addition, under Section 493 of the
Companies and Allied Matters Act, both secured and unsecured creditors are
ranked above the members of the company during a winding up. Section 10 of the
Foreign Judgment (Reciprocal Enforcement) Act[5] also allows judgment
creditors to enforce foreign judgments in Nigeria within 12 months of the date
on which the judgment was delivered. The
need for the court to employ judicial activism cannot be overemphasised in this regard because of
the lacuna in the insolvency laws. Courts have a significant role to play in those procedures.
Business
or corporate rescue is more concerned with the revival and the
restructuring of the financial and the organisational structure of the business
than the company for the purpose of ensuring the recovery and the
continued existence of the business. The restructuring and
business rescue processes in Nigeria have been very slow on the economic growth
of the society. This has led members of The Business Recovery Insolvency
Practitioners Association of Nigeria to call out for the need for the
legislative reform that will focus more on restructuring, receivership and turn around management.[6] There
are two formal rescue procedures in Nigeria available
for a company in financial difficulties under the CAMA which include
receivership, and arrangement and compromise. The Investment and Securities Act
of 2007 provides for mergers, acquisition and takeovers which are not rescuing procedures but have assisted
with the rescue of banks in Nigeria. The mischief
aimed at in the insolvency law should be to prevent the liquidation of
companies which could lead to financial crisis in the economy and cause a fall
in the government revenue.[7]
Unfortunately, the provisions of insolvency law are not aimed at restructuring
and preventing the liquidation of companies. Even the so-called business rescue
procedures act as an impediment to business rescue in Nigeria.
The
Bankruptcy and Insolvency Act, 2016 was enacted to repeal the Bankruptcy Act of
1979 in order for the laws on bankruptcy to be in tandem with current
realities. The recent law aims at remodelling the financial and administrative
structure of debtors in financial distress in order to allow the rehabilitation
and continuation in business. Despite the good intentions portrayed by this
law, it fails immeasurably in countering certain issues as would be reviewed in
this article. It has been argued that the title of the act is misleading as it
deals more with bankruptcy (personal insolvency) rather than corporate
insolvency
3.0.
BUSINESS RESCUE PROCEDURES IN INSOLVENCY LAW
AND ITS DEFECTS
Insolvency has been defined as the inability
to pay debt as they fall due or in the usual course of business, or as the
inability to pay debt as they mature[8].
Business rescue means proceeding to facilitate the rehabilitation of a company
that is financially distressed by providing for the temporary supervision of
the company and of the management of its affairs, business and property. A
business rescue entails a temporary moratorium on the rights of claimants
against the company or in respect of its
possession; and the development and implementation, if approved, of a plan to
rescue the company by restructuring its affairs, business, property debt and
other liabilities, and equity in a manner that maximises the likelihood of the
company continuing in existence on a solvent basis; or if it is not possible
for the company to so continue in existence, results in a better return for the
company’s creditor or shareholders than would result from the immediate
liquidation of the company.[9]
The laws
governing insurance companies and banks in Nigeria are more business rescue
oriented than the legislations on insolvency law. The Insurance Act 2003
provides for the liquidation of insurers on the petition of either 50
policyholders or the National Insurance Commission. Section 33 of the Act
prohibits the voluntary winding up of insurance businesses, except for the
purpose of effecting an amalgamation, transfer or acquisition. Similarly, The
Banks and Other Financial Institutions Act[10]
prohibit the restructure, reorganisation, merger or disposal of interests in
banks without the prior consent of the Governor of the Central Bank of Nigeria.
3.1.
Defects in the Legal Regime of Corporate
Rescue
The various forms of business
rescue procedures are highlighted with critical analysis of its defects. They
include;
3.1.1.
Arrangement
and compromise
The
Companies and Allied Matters Act makes provision for arrangement and
compromise. Compromise and arrangement are used interchangeably. A compromise
is essentially an arrangement by a company with the creditors and/or the
shareholders or a class of them, to accept less than what they are ordinarily
entitled to as full satisfaction of their obligation.[11]
As much as the provisions of the Companies and Allied Matters Act have good
intentions to ensure the preservation of the business of the insolvent company,
the provisions of the statute deters creditors from entering into a scheme of
arrangement or compromise.
The
procedure for arrangement and compromise is that an application must first be
made to the court to call a meeting of the creditors and members. Notice of the
meeting will be served on the members, accompanied with a statement showing the
effect of the arrangement on the directors, creditors and shareholders.[12]
Following investigations by the court and the Securities and Exchange Commission
(SEC), the court will make an order approving the arrangement. The implication of all these procedures is
that the scheme is not cost effective and immediate.
The scheme of arrangement and compromise is
regarded as being unsuitable as a corporate rescue device because of the
absence of moratorium on creditor’s right for the duration of the business
rescue process since debt recovery can be commenced, unrestrained in the State
High Court. The absence of a ‘stay on the enforcement of creditor’s rights’
hinders a company that is facing financial distress from adopting this scheme
for business rescue. Consequently the
absence of a stay of proceeding of the creditor’s rights allows the creditor to
enforce his right with respect to the assets of the company while attempts are
being made for business rescue. For example, a legal mortgagee of the business
debtor may exercise his power of sale under The Mortgage and Property Law of
Lagos State without recourse to business rescue.
3.1.2.
Receivership in Nigeria.
Receivership
is another form of corporate rescue in Nigeria, adopted for preserving the
assets and management of the ailing company for all affected persons involved
with the company and is regulated by the Companies and Allied Matters Act.[13]
A company is usually placed under receivership where the principal sum borrowed
by the company or the security or property is in arrears. The Companies and
Allied Matters Act allows a company to borrow money for the purpose of its
business.[14]
The duty of a receiver/ a manager is to act as a business rescue practitioner
and bring about a turnaround for financially distressed companies in Nigeria.[15] The challenges associated with receivership
include the lack of relevant legislative provisions on the application of
moratorium to receivership and arrangement or compromise.
Receivership
has a high tendency of benefitting the appointing creditor at the expense of
other interested parties except for a court appointed receiver. For instance,
where the receiver/ manager is appointed under a debenture deed, he becomes an
agent of the debenture holder on whose behalf he was appointed. This could lead to disorder and the eventual
winding up of the company especially where there are lots of debenture holders. However, Chapter 11 of the US Bankruptcy
Law, with a view to rectifying this, adopts the ‘debtor in possession approach’
which permits the management of the company to run the company with the aim of
business rescue.
Another
pending issue is that of the need for credit by a financially distressed company
under receivership or an insolvent company interested in employing a formal
rescue procedure. The insolvency law in Nigeria makes no provision for how an
insolvent company will access credit in the bid to execute the formal business
rescue procedures, and the protection and incentive that will be afforded any creditor that advances money for business
rescue in relation to the prior creditors. However, the US Bankruptcy Law
prescribes the priority rule, thereby affording such a creditor priority over
the prior secured creditors along certain incentives.
3.1.3.
Mergers and Amalgamation
Mergers
and amalgamation are rescue procedures for financially distressed companies and
are provided for in the Investment and Securities Act 2007.[16]
Mergers and amalgamation has assisted the Nigerian economy especially in the
banking sector. A merger is the amalgamation of the undertaking or any part of
the undertakings, or interest of two or more companies, or the undertaking of
part of one or more companies and one or more body corporate. Merger and
amalgamation are not procedures to rescue business but to merge the corporate
assets for value enhancement.[17]
Oladele and Adeleke contend that there are various reasons why a merger is
entered into, such as to reduce production costs and to eliminate duplicate
productivity, to enhance competitiveness by expanding the service range and
productivity capabilities of the company thereby creating a strong company with
increased competitive abilities.[18]
In spite of the fact that the entry into a merger or acquisition by a company
comes with a lot of positive impacts, it poses challenges such as loss of jobs
in the bid to prevent duplicating positions, possible resistance by employees
and shareholders, and most likely the winding up of the business. Most times,
the acquisition of a distressed company could necessitate the liquidation of
the acquiring company.[19]
4.0.
LAW REFORM IN NIGERIA COPORATE INSOLVENCY
LAW
There is
no doubt as to the effectiveness of a good law in ensuring business rescue in Nigeria.
The reforms being undertaken by The Business Recovery And Insolvency
Association Of Nigeria [BRIPAN], an initiative engaged in the capacity building
for individuals with the aim of equipping them with the necessary skills and
knowledge to deal with corporate insolvency and business rescue, include the
establishment of a mechanism for the recognition and appointment of insolvency
practitioners in Nigeria, a simple and accessible procedure for the adoption of
a scheme of arrangement, the creation of a simple and accessible procedures for
dealing with insolvency in the Federal High Court as regards ordinary debtors and the
encouraging of corporate rescue of companies instead of winding up. BRIPAN has
called upon the government to reform the insolvency laws in Nigeria and one of
the reason for the organisation’s suggestion is that because many companies are
presently growing and have assets outside the country, steps need to be taken
by the government to reform those laws so as to give a form of security to
Nigerians investing outside Nigeria and any prospective investors in the
country.[20]
Akinwunmi, an insolvency consultant suggested some reforms that should be
undertaken by the Nigerian government which have been highlighted above and
these reforms include: ensuring that the procedures for entering a scheme of
arrangement under the CAMA, which included the court, members, creditors and
the securities and exchange commission, be streamlined and improved by the
appointment of an individual to conduct the scheme of arrangement which should
be incorporated into our law and also the fact that the court should play no
part in the formulation of the scheme of arrangement or compromise which should
only be dealt with by the appointed person to monitor the scheme, that is, the
liquidator, thereby limiting the court’s involvement to the sanctioning of the
scheme.
5.0.
A CUE FROM CHAPTER 11 OF THE U. S. BANKRUPTCY
ACT
The US law
on insolvency unlike its counterpart in Nigeria is more business rescue
oriented.[21]
It is evident that the shortcomings in the Nigerian insolvency law can be
rectified by taking a cue from Chapter 11 of the US Bankruptcy Act. The
philosophy underpinning the US Bankruptcy Act is the rehabilitation of
distressed business and the need to encourage entrepreneurism. The Bankruptcy
Code can be used as a veritable tool in filling up the lacuna in Nigeria’s laws
by adopting the following approaches;
5.1.1.
A legal
framework for the rescue of small and medium enterprises and unincorporated
business
The US
Bankruptcy Act embodies the procedures for the rescue of unincorporated
businesses and individual debtors without any form of segregation. In Nigeria,
the provisions on bankruptcy differ from that of insolvency with respect to
business rescue. The provisions on insolvency should focus on business rescue
rather than the business vehicle which could operate outside the corporate form
to include partnership or entrepreneurship. The provisions of the Bankruptcy
and Insolvency Act, 2016 focus more on bankruptcy rather than the intricacies
of insolvency.
5.1.2.
Moratorium;
Automatic stay of proceedings on the exercise of creditors’ right
The
automatic stay of chapter 11 has been described as one of the basic debtor’s
protections provided by the Bankruptcy Law. It begins upon the commencement of
the winding up proceeding or administration. The Nigerian law on insolvency
makes no provision on this thereby discouraging the rehabilitation of the
business. The automatic stay as provided under the English law serves as a
temporary restraining order pending the duration of the business rescue process
in order to prevent creditors from exercising their rights over the debtor’s
assets in a variety of uncoordinated proceedings. The scheme of arrangement is
gravely hindered by the absence of moratorium. It is submitted that Nigeria
needs to adopt the US automatic stay of proceedings which cuts across all
business enterprises; corporate or non-corporate, small or large enterprises.
5.1.3.
The US debtor in possession (DIP) approach
DIP
permits the debtor to be in possession of the estate and administer the process
of the rehabilitation of the business as a trustee. This arrangement is based
on the ideology that the management is in the best position to continue the
running of the business because they are fully aware of the structure and the
nitty-gritty of the business. This underlies the presumption that the
management would take measures to ensure the continuation of the business in
order to keep their jobs. DIP would bode
well in Nigeria because the concept of receivership displaces the immediate
management.[22] Most times, the insolvency practitioners in
Nigeria appointed as trustee don’t have adequate experience, training and
knowledge as to the workings of the debtor’s business as much as the
management. Another challenge
experienced by receivers in Nigeria is that their efforts at rescuing the
business are usually frustrated by a scheming management and creditors in the
ploy to adopt other options.
5.1.4.
US Cramdown
The
bankruptcy code is debtor friendly and grants the court the power to approve
plans of reorganisation that impose significant concession on dissenting
creditors, shareholders and others. The power granted to the court is known as
the cramdown power. However it is
subject to some certain conditions that are - the plan must not discriminate
unfairly, and the plan must be fair and equitable. The remedy to a secured
creditor that has been crammed down is that he gets the value of what he is
entitled to.
6.0.
RECOMMENDATIONS
1. The need
to reform and restructure the Nigerian Insolvency laws and the possible
unification of the laws [Companies and Allied Matters Act 2004, Bankruptcy Act
and the Winding Up Rules2000] in a single insolvency act.
2. The
introduction of a moratorium in the current formal rescue procedure in Nigeria
with regards to receivership as a formal rescue procedure.
3.
The need to organise more local and international
training programmes, and symposiums for insolvency practitioners as is being
conducted by BRIPAN with a view to ensuring corporate rescue. There should be a
tribunal for insolvency matters apart from the court in order to ensure that
insolvency matters are promptly addressed.
4.
A review of the approval requirement of Securities
and Exchange Commission with regard to the entering into a merger or
acquisition should also be addressed.
5.
The adoption of the United Nations UNICITRAL Model
law into the Nigerian legislation to handle cross border insolvencies. There
should be a review of the Foreign Judgement (Reciprocal Enforcement) Ordinance
1958 and The Foreign Judgement ( Reciprocal Enforcement) Act Cap 35 LFN 2004 to
meet up with the current global practise of cross-border insolvency
6.
There should be reduced involvement of the court in
the rescue procedure because its involvement is slow and expensive.
7.
A review of the provision of the Investment and
Securities Act 2007 on merger, acquisition and business combination, which
subjects merger and acquisition of business to prior review and approval of the
security and exchange commission thereby limiting the application of the formal
rescue procedure.
7.0.
CONCLUSION
Nigeria is yet to incorporate the trend of
business rescue into the legal regime for corporate insolvency laws. Nigeria
should take account of chapter 11 of the US Bankruptcy
law and the legal framework of South Africa as a model for its insolvency laws
on business rescue. It appears that the Bankruptcy and Insolvency Act has
failed tremendously in the practicability of business rescue.
By a creative application of its constitutional and adjudicatory powers, the
courts can subtly achieve a paradigm shift in our insolvency framework towards
business rescue and effective regulation and professionalization of insolvency
practice in Nigeria. In order to be successful, both key players, that is - the
judiciary and insolvency practitioners, must be properly empowered with
knowledge.
[1] S. Akinwunmi, ‘Receivership and Business
rescue
[2]
FMBN v
NDIC(1999) 2 NWLR (Part 591) p.333
[3]
Companies and Allied Matters Act (CAMA), 1990 Cap. C20 Laws of the Federation
of Nigeria 2004, s. 650
[4]S, Akinwunmi and T. Busari
‘Insolvency Practice in Nigeria’: The Nigerian Experience
http// www.akinwunmibusari.com/images/documents/insolvency%20practice%20in%20the%Nigerian%experience.pdf.(accessed
14 April 2018)
[6] The Business Recovery Insolvency
Practitioners Association of Nigeria is an association for insolvency practitioners Accessed at: http//www.bripan.org/aboutus.php> 21 November 2017, 16:24:27
[7]
Corporate rescue and the Nigerian insolvency system by Bolanle Adenike Adebola;
November 2012. Accessed at: http/www.discovery.ucl.uk>1385156_thesis 21 November 2017,
16:24:27
[9]
Section 128(1)(b) Companies Act 71 of 2008(South Africa)
[11] CAMA s. 537
[12] CAMA s. 539-540
[13] CAMA s. 420 & 421
[14] CAMA s. 178(2)
[15] Adebola B ‘’the duty of the Nigerian receiver to
manage the company’’ http://www.chasecambria.com/site/journal/article.php accessed 21 November 2017,
16:24:27
[16]
A. Adefule ‘Nigeria’: Mergers and
Acquisition under The Investment and Securities Act 2007 http://www.mondaq.com/Nigeria/x/85466/M+A+Private%20equity/Merger+And+Acquisition+Under+The+Investment+Securities+Act+2007
accessed 15 April 2018
[17]Afoke
Igwe and Bayo Onamade ‘Nigeria: Regulation of Mergers in Nigeria(last update 3
April 2014) http://www.mondaq.com/Nigeria/x/304250/Securities/Regulations+of+Merger+in+Nigeria
accessed 15 April 2018
[18] O.O. Oladele &
M.O Adeleke ‘’The Legal Intricacies Of Corporate Restructuring And Rescue In
Nigeria’’ discovery.ucl.ac.uk/…../138156_thesis (accessed 14 April 2018)
[19] The Central
Bank of Nigeria discloses in an advertorial on Friday 10 June 2011 that some of
the banks rescued by mergers and
acquisition are still technically insolvent
[20] I.F. Fletcher The Law of Insolvency 2nd Ed.
Sweet and Maxwell (London 1998)
[21] M.S. Uchechukwu
“Rethinking business rescue in Nigeria: borrowing virtues from chapter 11 of
the US Bankruptcy” Codemarch2015 .www.etd.ceu.hu/2015/mba_sandford.pdf
(accessed 18 November 2017)
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