1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Nigeria is substantially a creditor-friendly jurisdiction, especially for debts acquired by Nigeria’s public assets management body i.e. Assets Management Corporation of Nigeria (AMCON). With creditors other than AMCON, the extant laws still tilt highly in favour of the creditors who have an array of options, including winding up, by which they may realise or recover debts.
1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?
Legislative frameworks in Nigeria have made express provisions for formal restructuring and insolvency proceedings in the form of mergers or amalgamations, takeovers, acquisitions, bankruptcy or winding up proceedings. (See Sections 117 – 152, Investment and Securities Act, 2007 (ISA) which laid down the procedures for such). Insolvency proceedings are more formal as provided for under the Asset Management Corporation of Nigeria Act (AMCON Act), 2010 (as amended), for AMCON-acquired debts, and under the Companies and Allied Matters Act (CAMA), Cap. C20, LFN 2004 and the Bankruptcy and Insolvency Act (BIA), 2017 for other debts.
On the other hand, informal work-outs are accommodated by extant laws, albeit without detailed regulations. For instance, under the Banks and Other Financial Institutions Act (BOFI Act) Cap. B3, LFN 2004, a bank can enter into an agreement or arrangement that will result in the change in control of the bank; sale, disposal or transfer of the whole or any part of the business of the bank; amalgamation or merger of the bank with any other person; reconstruction of the bank; or employment or transfer of the business of the bank to a management agent. Whatever the restructuring might be, Section 7 BOFI Act requires prior consent of the Governor of the Central Bank of Nigeria (CBN). Similarly, the AMCON Act empowers AMCON to accept work-outs or indulge a restructuring. With respect to other private creditors, work-outs and restructuring are feasible only to the extent spelt out in loan agreements, offer letter or as may otherwise be mutually agreed by the parties.
2 Key Issues to Consider When the Company is in Financial Difficulties
2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?
The Directors of a company in financial difficulty are liable to be proceeded against if found wanting under Section 290, CAMA. This Section provides that where money and/or property was received by a company by way of loan for specific purpose or by way of advance payment from a party for the execution of a contract or project, and not so channeled, the directors and/or officers would be personally liable to the party for such misappropriation.
In terms of duties, the directors owe a duty to make a declaration of solvency or otherwise at a General Meeting of the company. Where the company is found to be in financial difficulties, it may elect to voluntarily wind up. Otherwise, creditors of the company may file a petition in court to wind up the said company. Where this is the case, the Board of Directors has a duty to approve the special resolution and call an Extraordinary meeting. Additionally, where a receiver/manager or a liquidator might have been appointed to assume management of a company, the Directors shall become functus officio (without further authority or legal competence). However, while at the helm of affairs over a company in financial difficulties, the Directors must take care to ensure that the monies received by way of loan or advance payment are channeled to the right source, or risk personal liability. Likewise, BIA entitles a trustee to bring an application to court, and the Court may inquire into any transactions (e.g. dividend redemption or purchase on cancelled shares) approved by the Directors of a company, to ascertain whether it occurred at a time when the corporation was insolvent or whether it rendered the corporation insolvent. If the court finds that the act of the Directors in this regard has rendered the company insolvent, the court will enter judgment against the directors in the amount of the dividend or redemption or purchase price, with interest thereon.
With regards to the time frame for a company to restructure, there is no specific point at which a company must restructure as restructuring is a continuous process and could occur in moments of solvency (e.g. arrangement on sale) or insolvency (compromise). For insolvency proceedings, however, it may be initiated once a company, after being served with demand notice, fails or is unable to pay any debt in excess of N2000. This is as provided for in Section 408, CAMAand upheld in the recent Supreme Court decision of Unifam Ind. Ltd. v. Ecobank (Nig.) Ltd.  1 NWLR (Pt. 1653) SC 187.
2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?
Statutory bodies including AMCON, Nigerian Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), Corporate Affairs Commission (CAC), National Social Insurance Trust Fund (NSITF), Federal Inland Revenue Service (FIRS) have influence over a company’s situation. These, however, are substantially regulatory, except for AMCON, NSITF and FIRS that are purely debt, social insurance and tax recovery agencies respectively. Other stakeholders that might influence the situation of a company, especially in times of financial difficulties are debenture holders, employees and landlords.
The law defines their priority, how and when they can bring an action against a company and to what extent they can recover. Under the relevant laws, preferential payments shall be made of debts in the nature of charges, rates and other taxes due from the company within 12 months preceding its insolvency. Deductions accruable to NSITF and wages or salary of clerk, servant, workman, labourer or employee of the company also enjoy priority. Likewise, a landlord of a property demised to a company is equally entitled to claim payment from the company or its liquidator for arrears of rent. With respect to restructuring like mergers, same will not be sanctioned (made enforceable) by the court until adequate provisions are made for the employees to be affected.
The moratoria allowed for commencement of bankruptcy and winding up proceedings under AMCON Act are 30 and 60 days from the date of judgment and bankruptcy respectively. With respect to other creditors, moratoria are as spelt out in the loan agreements or offer letters duly executed by the company and its creditor.
Stay on enforcement can only operate against unsecured creditors. Secured creditors cannot be restrained from the realisation of a loan before winding up proceedings. Additionally, under Section 412, CAMA, where a petition for the winding up of a company is before a court, a company, its creditor or its contributory may obtain a stay or restraining order against all other suits in any other court, pending the outcome of the winding up proceedings, or apply to have such other matter transferred to the court hearing the petition.
2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?
The Directors of a company can lawfully act for and on behalf of a company until a receiver/manager or liquidator is appointed either by the company, creditors or by the court. At such point, every action taken for the company must be by the receiver/manager or liquidator, otherwise, it is voidable. A member of a company, past or subsisting director or officer, a creditor, the CAC or any other appropriate person may apply to the court for remedies where it is perceived that the business of a company is been conducted in an unfairly prejudicial and oppressive manner. Such remedies include rescission of a transaction, damages and criminal indictment and/or conviction. Likewise, a company and its affairs may be investigated by the CAC and where the investigation may result in civil action or criminal proceedings (piercing the veil) of the company, to make the culpable alter egos (agents) accountable.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
An informal work-out is possible in Nigeria. It will, however, require the concession of the parties, especially the creditor, to take place. For AMCON acquired loans, AMCON has a statutory power to initiate or participate in any restructuring, rearrangement or other compromises. Further, with respect to banks and other financial institutions, as noted in paragraph 1.2 above, they can enter into an agreement or arrangement with the consent of the CBN Governor. Indeed, there had been quite a number of such restructuring since the continual recapitalization exercise by the CBN which started in 2009.
3.2 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre-packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?
The formal restructuring procedures available in Nigeria are numerous. Prominent among these are mergers, takeovers and acquisitions. It is apt to say that swaps are permissible in Nigeria. Section 160 (2), CAMA allows a company to acquire its own shares for several purposes, one of which is to settle or compromise a debt or claim asserted by or against it, or satisfy the claims of a dissenting shareholder. Also, Section 166, CAMA allows a company to borrow money for the purposes of business or objects and may mortgage or charge its undertakings, property and uncalled capital, or any part thereof, and issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the company or a third party. Lastly, Section 383 (3), CAMA, gives a clear indication of the power of Nigerian companies to allot unissued shares to debenture holders or creditors as shares fully paid up.
The restructuring procedures are never embarked upon without carrying the stakeholders along. Merging companies must hold separate meetings and obtain a yes vote of persons who own at least 3/4 of the total value of shares in the companies. With respect to intermediate and large mergers, notices of the proposed merger must be served, personally or through trade unions, on the employees to be affected by the merger. Sections 129 and 130, ISA makes ample provision by which a transferee company may acquire shares of dissenting shareholders, and the right of dissenting shareholders to compel acquisition of their shares respectively. Whereas for mergers, the transferee company must command at least 51% controlling shares of the transferor company, for takeover, control of up to 30% would be sufficient to kickstart the bid. It might be a regular or hostile takeover. The Takeover Bid must be served on SEC, the board of directors of the companies, the shareholders and the creditors of the target company. 9/10 of the members of the target companies must endorse it for it to scale through. The interest of the dissenting 1/10 can be acquired, at a price to be fixed by a court-appointed independent share valuer. To this extent, it is right to say that dissenting classes of shareholders can be crammed-down.
- 3What are the criteria for entry into each restructuring procedure?
The foremost criteria for entry into a merger as noted in paragraph 3.2 above is for the acquiring or transferee company to wield a controlling share interest of at least 51% in the targeted company. Other detailed criteria for merger is determined by the size of the merger, which could be small (not more that N500 Million worth), intermediate (more than N500 Million but less than N5 Billion worth) or large (exact or more than N5 Billion worth) merger. For the most part however, the common criteria are that SEC must be notified, SEC must consider its suitability vis-à-vis competition and public policy. Upon SEC approval, it must be sanctioned by order of the Federal High Court which must be gazetted and published in at least one national newspaper.
The criteria for takeover are a controlling share interest of at least 30% in the target company, a resolution by the acquiring/controlling company, a takeover bid document, an inspector to be appointed by SEC to consider the fairness of the bid and prepare a report on same and sanctioning order by the FHC of the report.
- 4Who manages each process? Is there any court involvement?
Informal restructuring that are done internally are piloted by the directors and shareholders of the company, sometimes with influences from creditors. The company only ensures statutory regulations are adhered to.
For formal restructuring that are often external, on the other hand, SEC manages most of the processes. CAC comes in mostly in the area of returns by the company to update the records of CAC.
As to court involvement, the Federal High Court is involved in both merger and takeover. AMCON too may be involved in a restructuring, utilizing as appropriate, judicial involvement.
3.5 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?
A contract duly entered in compliance with CAMA shall survive every restructuring procedure and be enforceable against the entity that emerges from such restructuring unless the contract itself takes into account an event of restructuring the company. According to Section 71(2), CAMA, an existing contract shall bind the company and its successors and all other parties thereto, their heirs, executors, or administrators, as the case may be.
It is important to note the peculiarity with AMCON-acquired assets. The recent amendment (Section 4, Asset Management Corporation of Nigeria (Amendment) Act, 2015) entitles AMCON to ‘rights’ alone, without any prior existing ‘obligations’. Thus, giving a rigid interpretation may suggest that AMCON may refuse to be bound by a contract between a third party and the bank from which AMCON acquired an eligible asset. Parties obliged under such contracts may apply for it to be varied or discharged mutually. Often times, because of the insertion of arbitration clauses in such contracts, the party may decide to terminate the relationship and where the facts create a possibility for set-off, it may be adopted to fully discharge the rights and obligation between the parties.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Internal restructuring is funded internally. It takes compromises of the stakeholders of the companies including shareholders, debenture holders, creditors and directors depending on the module of restructuring involved. For external or more formal restructuring like merger and takeover, the funding is handled by both companies, but substantially by the acquiring or transferee company. With regards to rescue financing, Section 383 (1), CAMA requires the directors of the company to earmark reasonable sum as reserve and capitalization before making any declaration for the dividend at the end of any financial period.
4 Insolvency Procedures
4.1 What is/are the key insolvency procedure(s) available to wind up a company?
There are two broad types of winding up proceedings in Nigeria: Compulsory winding up (i.e. winding up by the Court, or subject to the supervision of the Court) and Voluntary winding up (i.e. members’ voluntary winding up and creditors’ voluntary winding up).
4.2 On what grounds can a company be placed into each winding up procedure?
The grounds for winding up by the court are: inability of a company to pay its debt, shortfall in membership of the company below two adults, default in filing of statutory report by the company, where a court considers winding up just and equitable or where the members by a special resolution call for a court winding up. Sometimes, a company may pass a resolution for voluntary winding up but the court is petitioned for the processes to be completed by the court. Then it is said to be winding up subject to the supervision of the court.
The grounds for members’ voluntary winding up are effluxion of the lifespan of the company or happening of a predefined occurrence after which the company was to be wound up as provided in its article of association, and where the company decides by a special resolution that it be wound up voluntarily.
The ground for creditor’s voluntary winding up is an inability on the part of the directors of the company to issue a declaration of solvency pursuant to Section 462, CAMA.
4.3 Who manages each winding up process? Is there any court involvement?
Quite a number of interfaces takes place in all the winding up procedures involving different persons at different stages. For a winding up by the court or subject to the supervision of the court, the Board of Directors, the Extraordinary General Meeting, CAC, a provisional liquidator, the FHC and a liquidator are all involved at different stages. Upon the appointment of the provisional liquidator, the directors take backstage and the liquidator becomes the key person who follows the procedure through.
In the case of a members’ voluntary winding up, the Directors, the General Meeting, a liquidator, an auditor and CAC are involved at different stages. Again, the directors handover to the liquidator immediately he is appointed.
A creditors’ voluntary winding up engages the Directors, the General Meeting, the creditors of the company, the Liquidator, the Extraordinary General Meeting, the auditor and CAC, the liquidator being the pilot after being appointed by the creditors.
Ultimately, the Federal High Court is vested with the exclusive power to wind up a company.
4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?
In a creditors’ voluntary winding up proceedings, the creditors play key roles capable of greatly influencing the process. Section 473, CAMA gives the creditors a wide power in the appointment of the liquidator for a creditors’ voluntary winding up. Upon such appointment, the directors of the company must refrain from the running and management of the company. The creditors however retain the power to fill vacancies of the position of a liquidator occasioned by either death, resignation or otherwise. Moreover, the creditors may decide to appoint a committee of inspectors which oversees the activities and determine the remuneration of the liquidator(s).
The influence shareholders have over any winding up proceedings lies in their power to vote at every general meeting, inclusive of one for a resolution to commence winding up proceedings. As such they have the potential to halt the process. Even minority rights are protected through the existence of a company, in the event that a few shareholders are dissenting.
4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?
As with paragraph 3.5 above, a valid contract entered by a company being wound up subsists even after winding up, unless the contract provides otherwise. The receiver/manager or liquidator has a duty to take care of all liabilities and assets of the company, which must be distributed in the order of priority and on the basis of laid down guidelines. Under Section 441, CAMA, the court may, at any time after making a winding‐up order, make an order on any contributory for the time being on the list of contributories to pay, in the manner directed by the order; any money due from him or from the estate of the person whom he represents to the company, exclusive of any money payable by him or the estate by virtue of any call. Moreover, when all the creditors are paid in full, the money due on any account whatever to a contributory from the company may be allowed to him by way of set‐off against any subsequent call. It is important to note that any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property, where done by or against a company, in fraudulent preference of its creditors, in the event of its being wound up, shall be invalid.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
- Costs and expenses of winding up;
- Secured creditors;
- Social and contractual liabilities like –
- Local rates and charges; all pay‐as‐you‐earn tax deductions, assessed taxes, land tax, property or income tax assessed on or due from the company;
- Deductions under the Nigeria Social Insurance Trust Fund Act;
- Wages or salary of any clerk or servant in respect of services rendered to the company;
- Wages of any workman or labourer, in respect of services rendered to the company;
- Accrued holiday remuneration payable to any clerk, servant, workman or labourer or their heirs on the termination of their employment before or by the effect of the winding up;
- Debenture holders under a floating charge and other unsecured creditors.
4.7 Is it possible for the company to be revived in the future?
A company wound up can still be revived in the future. Section 524, CAMA gives room for a company under liquidation to be revived. The law also provides for the voiding of a dissolution order within two years upon the application of an interested party or the liquidator.
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Restructuring or insolvency does not usually attract the risk of direct taxation. Indirect taxes or incidental taxes might, however, come in the areas of stamp duties, value-added taxes on professional services retained, withholding tax on dividends offset or tax on gains of capital asset disposal.
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
Employment contracts are usually reviewed or terminated during restructuring or insolvency respectively. An employee may be reabsorbed or laid off after a restructuring, hence the provision under ISA for them to be put in the picture during such restructuring. With respect to insolvency, their job cannot be safeguarded. However, they are settled as discussed in paragraph 4.6 above. Finally, Section 566, CAMA empowers a company to make provisions for its employees on cessation or transfer of its business, where said provisions can be made from the undertakings of the company itself, or its subsidiaries, if any.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
SEC reserves the power to authorize and regulate cross-border securities transactions. However, foreign direct investment requires domestication of a company in Nigeria by its parent branch outside of Nigeria. For instance, Celtel was severally restructured as Vmobile, Zain and currently Airtel but is not a wholly Nigerian company.
7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?
This depends on the rule of reciprocity where similar decisions from Nigerian courts will be enforced. This is possible via bilateral arrangements as per Section 10, Foreign (Reciprocal Enforcement) Act. This section requires the existence of a satisfied foreign monetary judgment.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
Save for the provision of CAMA that requires foreigners holding shares undergoing compromises, restructuring or other forms of arrangements to obtain SEC approval, there is no other law that recognises the enforcement of cross-border insolvency procedures, unless if in conformity with what is obtainable as discussed in paragraph 7.2 above. Noteworthy, SEC has power to authorise and regulate cross-border securities transactions, and may to this extent, has control over cross-border insolvency proceedings involving securities companies.
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
There are no specific provisions of the CAMA that deals with the restructuring or liquidation of a group of companies. However, if individual companies are in such a situation, they may appoint the same insolvency officers so as to save cost and avoid multiplicity of actions. There are also provisions for audits and investigation to extend to subsidiaries of group of companies or holding company. CAMA also requires the directors of a group of companies to also prepare group financial statements annually.
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
The CAMA (Amendment) Bill has been passed by both Houses of the National Assembly though awaiting presidential assent. Some notable changes in the new bill include; the provision for e-registration, pre-action notice and restriction on levy of execution, increase in the minimum share capital for companies, electronic signature, exemption from audit requirement for small companies, registration of one-man company etc. There is also the Bankruptcy & Insolvency Act, (Repeal & Re-enactment) Bill, 2016. Experts have been brainstorming on the need for insolvency proceedings to be settled out of court, thereby exploring the Alternative Dispute Resolution (ADR) schemes. This is geared towards ensuring that companies may be able to settle their debts (at agreed periodic intervals) thereby minimizing the risk of being liquidated.