Aug 3, 2020 - Articles by Dr.Jennifer Douglas-Abubakar, Ikiemoye Ozoeze, Zada Amede Oputa
Nigeria: Restructuring & Insolvency 2020 – Miyetti Law
ICLG – Restructuring & Insolvency nay Laws & Regulations – Nigeria covers common issues in restructuring and insolvency, including issues that arise when a company is in financial difficulties, restructuring options, insolvency procedures, tax, employees, cross-border issues in 27 jurisdictions.
1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?
Nigeria is a creditor-friendly jurisdiction. The rights of a creditor once made known are protected under the provisions of the Companies & Allied Matters Act (CAMA) Cap C20, Laws of the Federation of Nigeria, 2004. Section 471 provides for the voluntary winding up of the defaulting company by its creditors. It is instructive to note that the provisions of Section 493 of the CAMA ranks secured and unsecured creditors above the members of the company during the winding up proceedings. The members are not entitled to any payments until the creditors have been fully refunded and the debts liquidated.
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?
The options available to financially distressed companies are: receivership; liquidation; and arrangement and compromise. In practice, liquidation and receivership are most common. These options are geared towards the dissolution of the company. Due to the limited nature of insolvency provisions, creditors and companies often resort to the court for interpretation of the legal provisions. The only extant provision that identifies priority for secured creditors is the Assets Management Corporation of Nigeria (AMCON), amended No. 2 Act, 2019. Any out-of-court restructuring is considered an “informal” arrangement. Informal workouts serve as a timely alternative to recovery of funds pursuant to coordinated negotiations to avoid unnecessary liquidation of viable companies.
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?
Under Section 422 of the CAMA, the directors have a duty to cooperate with the appointed liquidator and deliver up all company properties and provide any document so requested. They are bound to declare insolvency of the company at a general meeting. Section 508 of the CAMA imposes duties on directors to keep account of their books. Put differently, directors have duties to make a declaration of solvency or otherwise and to exercise due care, skill and diligence in the discharge of obligations. Failure to exercise responsible care is a ground for an action in negligence.
With respect to restructuring, where a company is distressed, it may elect to wind up, or the creditors of the company may file a petition in court to wind up, said company. Where this is the case, the board of directors has a duty to approve the special resolution and call an extraordinary meeting to notify the company officially. Also, where a receiver/manager orliquidator is appointed to assume management of a distressed company, the directors will have no legal rights to deal in the company but must assume that the monies received are channelled through the right source, or else risk personal liability.
Section 290 of the CAMA touches on potential liability, where money was received by a company by way of loan for a specific purpose or by way of advance payment from a party for the execution of a contract and not so concluded, the directors or officers would be personally liable to the party for such misappropriation.
Regarding the time frame for restructuring, there is no specific point at which a company must restructure, because it is presumed that a restructuring is a continuous process and could occur in solvency or at the brink of insolvency.
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? Forexample, 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?
The Nigerian Deposit Insurance Corporation (NDIC), the Securities and Exchange Commission (SEC) and the Corporate Affairs Commission (CAC) are the predominant statutory regulatory bodies that have influence over a company’s situation. Other non-regulatory stakeholders that might have influence over a company’s performance particularly in times of financial difficulties are debenture holders, employees and shareholders.
The respective laws i.e. the CAMA, the Investment and Securities Act (ISA) and the NDIC Act have defined instances when the stakeholder can bring an action against a company and to what extent they can recover. Under the relevant laws, preferential payments shall be made to pay off debts in the nature of charges, rates and other taxes that the company owes within 12 months preceding its insolvency.
With regard to restructuring, the same will not be sanctioned until the laid down procedure by the SEC has been abided with. Stays on enforcement can only operate against unsecured creditors. Secured creditors cannot be restrained from the realisation before winding up proceedings. Section 412 of the CAMA provides that, where a petition for winding up of company is before a court, a company, its creditor or 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 the matter transferred to the court for hearing of 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 on its behalf until a liquidator is appointed either by the company, creditors or by the court. At such point, every action taken for the company must be made by the liquidator; otherwise, it is voidable. A member of a company or 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 being conducted in an unfair manner. Such remedies include rescission of a transaction and damages. Likewise, a company may be investigated by the CAC and the investigation may result in civil action against the company.
3 Restructuring Options
3.1 Is it possible to implement an informal work-out in your jurisdiction?
Informal work-out is strongly encouraged and practiced in Nigeria. This occurs where the creditor is cooperative, and the company’s business is viable. The work-out may involve restructuring the terms of the company’s debt and a reduction of the workforce and operations, among others.
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?
Formal rescue procedures available to a financially distressed company in Nigeria are of two types: (a) internal restructuring which includes arrangement and compromise, sales arrangements and reduction of share capital; and (b) external restructuring including mergers and acquisitions, takeovers, purchase and assumption. Internal restructuring: Section 539 of the CAMA provides for arrangement and compromise. By this provision, where a compromise or arrangement is proposed between the company and its creditors or members, the company shall make an application to the Federal High Court for an order to summon a meeting of the creditors or members in such a manner as the Court directs. Notice of the meeting will be served to the creditors or members, accompanied by a statement showing the effect of the compromise or arrangement on the directors, creditors and shareholders. Under Section 538 of the CAMA, a sale arrangement commences when members pass a special resolution to wind up the company voluntarily and appoint a liquidator to sell the company’s assets. Once the scheme of arrangement is approved, the directors will make a declaration of solvency as the basis of winding up. A dissenting member or creditor may to write the liquidator within 30 days of the passing of the resolution, asking him either to abstain from carrying out the resolution or to purchase his own shares at a determined price. The arrangement will be valid if no objection has been raised within one year. Therefore, by virtue of this provision, minority shareholders of the company are not forced to accept the sale arrangement. On the other hand, a company may decide to reduce its share capital through share cancellations and repurchase. This is done to increase shareholders’ value and produce a more efficient capital structure. By virtue of Section 160(2) of the CAMA, a company can acquire its own shares for several reasons including to settle or compromise a debt or to satisfy the claims of dissenting shareholders. Section 383(3) of the CAMA vested power on companies to allot unissued shares to debenture holders or creditors as shares fully paid.
External restructuring: Mergers and acquisitions occur when a viable company acquires another company or decides to merge in order to form a new company or maintain the earlier names of the companies. In a takeover, a company which later becomes a holding company acquires the issued share capital of another company in order to have control over the management of the acquired company. Purchase and assumption takes place where a solvent company purchases assets of an insolvent company and assumes its liabilities.
3.3 What are the criteria for entry into each restructuring procedure?
In arrangements and compromises, under Section 539(2) of the CAMA, three-quarters of the shareholders present and voting, either in person or by proxy at the meeting, shall agree to any compromise or arrangement which may be referred by the court to the SEC who shall appoint inspectors to investigate the fairness of the compromise or arrangement and make awritten report to the court within a time specified by the court. If the court is satisfied as to the fairness of the compromise or arrangement, it shall be binding on all shareholders and creditors. Sections 129 and 130 of the ISA made provisions for a transferee company to acquire shares of dissenting shareholders and the right of dissenting shareholders to compel acquisition of their shares, respectively. For mergers, the transferee company must command at least 51% of the controlling shares of the transferor company, and a pre-merger notification shall be made to the SEC before it is approved. For takeover, a minimum of 30% control of the shares of the target company is sufficient to kickstart the bid. The takeover bid must be served on SEC, the board of directors of the companies, the shareholders and the creditors of the target company. 90% of the members of the target companies must endorse it for it to scale through. The interest of the dissenting 10% can be acquired at a price to be fixed by a court-appointed independent share valuer.
3.4 Who manages each process? Is there any court involvement?
Both informal work-out and internal restructuring are managed by the directors and shareholders of the company, sometimes with the influence of the creditors. The company ensures that it complies with the statutory regulations governing the restructuring process. Regarding external restructuring, the SEC manages the process. Apart from informal work-out, the court is involved in all restructuring procedures, but the extent of its involvement depends on the type of restructuring.
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?
When a company is being restructured, the scheme of arrangement shall provide for the mode of compliance with existing contracts. Therefore, a restructuring procedure does not affect the company’s contracts except that such contracts made restructuring grounds for termination. However, it is important to note that Section 4 of AMCON amended No. 2 Act, 2019 provides that, upon the acquisition of rights by the Corporation in an eligible bank asset, the Corporation shall acquire all rights applicable to the assets notwithstanding that only equitable rights are created in the assets and the Corporation is entitled to exercise the powers of a legal estate holder in a charge or legal mortgage. The interpretation of this provision is that AMCON may refuse to be bound by a contract between a third party and the bank from which AMCON acquired an eligible asset. As such, parties obliged under such contracts may apply for variation or discharge.
3.6 How is each restructuring process funded? Is any protection given to rescue financing?
Informal work-out and internal restructuring are funded by the members and shareholders of the company. Also, depending on the module of restructuring involved, creditors may make some concession or compromise. For external restructuring, funding is handled by both companies, but substantially by the acquiring or transferee company.
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 a statutory report by the company; where a court considers winding up just and equitable; or where the members by 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. On the other hand, the grounds for members’ voluntary winding up are the effluxion of the lifespan of the company or the 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 grounds for a 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 of the CAMA.
4.3 Who manages each winding up process? Is there any court involvement?
Winding up processes are managed by liquidators, receivers and receiver managers. Where it is compulsory winding up or winding up subject to the court’s supervision, the court is significantly involved in the liquidation procedure. The CAC plays a role in winding up processes as it is the corporation tasked with registering companies as well as keeping the books of registered companies. For voluntary winding up, the creditor, shareholders or directors may be involved at various stages.
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)?
Section 473 of the 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 for the position of liquidator occasioned by either death, resignation or otherwise.
The creditors may decide to appoint a committee of inspectors which oversees the activities and determines the remuneration of the liquidators. Also, shareholders can influence winding up proceedings by voting and passing a resolution in general meetings on whether or not winding up proceedings should be commenced.
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?
Winding up procedures in general have no effect on existing contracts, except if such contracts are deemed fraudulent and as such they are rendered invalid. However, the terms of any existing contract may determine that a contract ceases to exist if winding up procedures commence.
Section 441 of the CAMA provides that 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 to the company, in the manner directed by the order, any money due from him or from the estate of the person whom he represents, exclusive of any money payable by him or the estate by virtue of any call. Also, a liquidator can disclaim contracts which are burdensome to the company in liquidation. Upon completion of the liquidation procedure, the company’s contracts are deemed terminated.
4.6 What is the ranking of claims in each procedure, including the costs of the procedure?
Claims are ranked in this order:
A. costs and expenses of winding up;
B. secured creditors;
C. social and contractual liabilities, such as: 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; and 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; and
D. debenture holders under a floating charge and other unsecured creditors.
By the provisions of Section 34 of AMCON amended No.2 Act, 2019, AMCON gives priority over any other claims even if they are unsecured.
4.7 Is it possible for the company to be revived in the future?
Section 524 of the CAMA provides that the company can be revived in the future if an application is made to void the dissolution by an interested party or the liquidator.
5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?
Any form of restructuring must be brought to the notice of the Federal Board of Inland Revenue Service (FIRS). Section 29(12) of the Companies and Income Tax Act (the Act) requires the Board’s direction to be sought, and clearance received before any restructuring procedure can take place. Tax considerations are dependent on whether the entities involved in the restructuring are related or unrelated entities. Where they are unrelated, they are treated as distinct entities and are liable to commencement and cessation tax. Where they are related entities, the FIRS may provide tax waivers. In the case of an acquisition, or a merger of unrelated parties, Section 29 of the Act provides that the company formed, or the acquiring company must file commencement tax returns, while the acquired company pays cessation tax returns. In such a case, any non-utilised capital allowances or tax losses of the former entities may not be taken over by the new company. However, the acquired company may, at the discretion of the FIRS, be exempted from tax returns if the companies involved are related parties, and the surviving entity will only be eligible for annual allowance based on the tax written-down values of assets taken over. The rationale behind this is that business of the acquired entity is deemed continued by the acquirer. Under merger and acquisition, the Act is clear on the responsibility
of the acquiring company to bear tax responsibilities of the acquired company. Section 29(9) of the Act demands that a security be deposited to guarantee that taxes of the acquired entity will be borne by the acquiring entity. Capital gains may also arise where gains are made from the acquisition of the shares of an entity either merged with or absorbed by another company. Where these gains were received in the form of cash, capital gains tax will be paid in that regard. Stamp duties will apply where additional shares are registered with the CAC.
6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?
In an insolvency, an employee will certainly be affected and may claim compensation. This compensation may be assessed by reference to the contract rights (remuneration and benefits) which would have accrued over the remaining term of the contract, and such compensation shall not be taxed. Under restructuring, the employees’ contracts may either be terminated, renewed, or reviewed. Section 566 of the CAMA empowers the company to make provisions for the benefits of employees/past employees in a cessation or transfer of its business.
7 Cross-Border Issues
7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?
Any foreign company intending to carry out business in Nigeria must take the necessary steps to be incorporated for that purpose. Although, in certain circumstances, an exemption may be granted by the President of the Federation. Therefore, until a foreign company undergoes the process of domestication in Nigeria, any efforts to carry out any business functions including entering into insolvency proceedings is void.
7.2 Is there scope for a restructuring or insolvency
process commenced elsewhere to be recognised in your jurisdiction?
In corporate insolvency, there is no provision on judicial cooperation with foreign courts, as Nigeria has not adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency. Further, there are nolegislations, frameworks or institutions set up to deal with the recognition and enforcement of cross-border insolvency procedures. However, in Nigeria, foreign proceedings and decisions on insolvency may be recognised and enforced so long as they comply with the provision of Section 10 of the Foreign Judgment (Reciprocal Enforcement) Act 2004, which requires that the judgment must be final and conclusive, and must be a wholly or partly satisfied monetary judgment debt. The operation of the provision of this law is predicated on the reciprocity of treatment of similar judgments in the original jurisdiction.
7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?
The practice is virtually non-existent in Nigeria as there are no frameworks or institutions dealing with cross-border insolvencies. However, nothing precludes a Nigerian company from initiating proceedings in a foreign jurisdiction if the laws of that jurisdiction permit. In such an event, the principles of the Foreign Judgment (Reciprocal Enforcement) Act 2004 shall apply in respect of recognition and enforcement of any decision reached.
8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?
Nigerian law is silent on dealing with restructuring or liquidation of a group of companies. However, generally speaking, a parent company and its subsidiaries are separate legal entities. A parent company can only be liable for liabilities of its subsidiaries (and vice versa) if there is a contract between them to the effect or where there is evidence of fraud. Therefore, insolvency proceedings instituted against members of a group are treated as separate and distinct entities. In cases where members of a group are involved in insolvency proceedings, they may elect to appoint the same insolvency officers to save costs and avoid a multiplicity of processes.
9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?
In an attempt to keep up with the dynamic regulatory landscape of insolvency laws in the international community, particularly the UNCITRAL Model Law, the Nigerian legislature took steps to enact a new insolvency law. The Bankruptcy and Insolvency Bill (the Bill), which seeks to repeal the Bankruptcy and Insolvency Act 2004, makes provisions for corporate and individual insolvency, and cross-border/international insolvencies by incorporating provisions of the Model Law. The Bill, still awaiting Presidential assent, incorporates provisions recognising foreign insolvency orders and provides assistance to foreign representatives e.g. liquidators, trustees, etc. The Bill also introduces the “letter of request” concept to assist with cross-border insolvencies i.e. requesting the assistance of the relevant courts within the jurisdiction where the trustee or liquidator is to realise assets. In recognition of the need to promote business rescue, the Companies and Allied Matters Act (Repeal and Re-enactment) Bill (the CAMA Bill) has been passed by both Houses of the National Assembly and is awaiting Presidential assent. The CAMA Bill prioritises business rescue above liquidation and receivership. Further, the Finance Act 2020, which was passed into law on 13 January 2020, introduced a “minimum holding requirement” test for related party group restructuring. The new provision curbed the formation of short-term group relationships created for the purpose of enjoying tax concessions as a business reorganisation strategy. The new Act also modifies the tax exemption on business reorganisations allowing related party business reorganisations to be conducted in a tax-neutral manner, subject to meeting the “minimum holding requirement” test.