For nearly all advanced industrialized nation-states, companies/businesses by way of taxation inter alia are the central source of public revenue and the lifeblood of the nation. Invariably, a nation would depend on a company’s or companies’ fiscal well-being inter alia to keep its economy progressively stimulated. However, there is a chance that a company will be unable to liquidate its debts at some point in its existence, despite having seemingly exhausted all available means. Evidently, Nigerian corporate businesses are collapsing due to exorbitant rates of daily operations and a slowing descent into debt. A company’s liabilities, in this ecosystem, may even exceed its assets. In most cases, this situation is widely recognized as insolvency.
Arguably, the ability to overcome insolvency, re-strategize, and return to profit demonstrates a company’s viability. In a state of insolvency, different jurisdictions adopt various restructuring procedures to allow distressed businesses to reopen. The limited rescue options outlined in the previous regime of the Companies and Allied Matters Act (CAMA) 2004 had drawbacks, which prompted amendments. However, in recent times, some other options are now being considered with a view to rescuing the corporate entity or some part of it without prejudice to the interest of the creditors and other pre-distressed stakeholders.
Previous Insolvency Regime
In the insolvency regime of the CAMA 2004, winding up and receivership had been the primary insolvency mechanisms provided by that piece of legislation. These mechanisms were barely adequate in rescuing the insolvent company or a part of it as a going concern, rather, they focused on liquidation/debt collection which ultimately established the death of such a company. Foreign investors became wary of doing business in Nigeria after learning that no law protects the value of a going concern when it becomes insolvent.
The world’s major economies, including the United States of America, and the United Kingdom, have recognised that there are numerous benefits to rescuing beleaguered companies or business activities, particularly when such going concerns have the potential to survive the malady. The efforts have resulted in the formal introduction of business rescue legislation across those respective jurisdictions.
Ideally, the best insolvency regime is one that allows for not only the survival but also the continued viability of failing businesses. It would also guarantee that a failing business with a very low chance of recovery has a smooth and responsive liquidation that allows the equity derived from the proceeds of the assets to be re-invested in another sustainable enterprise.
New Procedures for Business Rescue
Conforming with global best practices, CAMA 2020 impressively amended a great number of provisions and introduced new provisions to usher in (inter alia) a new regime for insolvency law and practice. These new provisions offer insolvent companies an opportunity to be salvaged and remain a going concern.
Accordingly, two (2) major Corporate/Business rescue procedures are under CAMA 2020. These include;
- Company Voluntary Arrangement
- Company Administration
Company Voluntary Arrangement
A Company Voluntary Arrangement (CVA) is provided for under Chapter 17, s. 434 – 442 of CAMA 2020. By the operations of CAMA 2020, a CVA is an arrangement between an insolvent corporation and its unsecured creditors to structure a debt repayment plan that is fair in terms of the amount to be paid and the timeframe for those repayments. Notably and in pursuance to the provisions of S. 710 of CAMA 2020, the word “arrangement” means ‘any change in the rights or liabilities of members, debenture holders or creditors of a company or any class of them or in the regulation of a company, other than a change effected under any other provision of the Act or by the unanimous agreement of all parties affected.’
However, the repayment plan herein is usually proposed by the insolvent company and subsists for the agreed-upon period. Wherein a company is distressed, this process becomes essential in ensuring the survival of the business as it encourages the business to thrive, allowing it to repay its debt and, ultimately, keep the business afloat.
The objective of a CVA is to maintain the business viability and be in control of its affairs while being overseen by an insolvency practitioner. This procedure can be used independently or in conjunction with company administration or when the liquidator is winding up.
A company voluntary arrangement proposal will be made to creditors by the insolvent company’s nominee, who is appointed by the company’s director; however, if the company is in administration or liquidation, the administrator or liquidator may propose an arrangement.
Directors of the company must prepare a proposal to creditors that includes the debt repayment plan. By virtue of s. 435 of CAMA 2020, the nominee must be qualified to act as an insolvency practitioner and must act within 28 days of receiving notice of the proposal for a Company Voluntary Arrangement. The nominee must submit to the Court a report stating whether the proposal is viable and whether meetings of creditors and members should be convened to discuss it. Unless otherwise directed by the Court, the nominee must hold the meetings separately. If the proposal is approved by both the creditors’ and members’ meetings, it becomes binding on all unsecured creditors. It binds every creditor who can vote at the meeting as if he were a party to the agreement. This is necessarily the case whether the creditor (i) voted at the meeting, (ii) attended the meeting, or (iii) received the meeting notice.
The terms of a Company Voluntary Arrangement may be implemented like any other commercial agreement. When a company defaults, creditors may be released from the Company Voluntary Arrangement and take unilateral action against the company.
Another type of business rescue is company administration, which is similar to the UK Insolvency Act 1986 Schedule B1 and Chapter 11 of the US Bankruptcy Code.
Company administration is provided for under Chapter 18, S. 443-445 of CAMA 2020. By virtue of the Act, company administration is a restructuring procedure in which an administrator is appointed to manage the assets of an insolvent company with the goal of saving all or part of the company’s business and preserving the company’s values as a going concern.
When a company enters administration, it enters a legal process with the goal of achieving one of the statutory objectives of an administration, which includes;
- Rescuing the whole or part of the company as a going concern;
- Achieving a better result for the company’s creditors wholly, than would be likely if the company were wound up without first being in administration; and/or
- Realizing property to make a distribution to one or more secured preferential creditors.
However, the rescue of a company is the primary objective of the administrator in the performance of his functions except where this administrator is of the opinion that it is not reasonably practicable, or a better result can be achieved by the company’s creditors.
A significant benefit of the administration is that when a company is under such a regime or process, a resolution to wind up the company cannot be passed. In the same vein, an order for the company to wind up cannot be issued unless it is in the public interest, or the application is for regulated entities in the financial industry.
Furthermore, the moratorium during administration indicates that while a company is in administration, enforcement actions, legal proceedings, execution, distress, and indeed the exercise of the right of peaceable re-entry, among other things, may not be commenced or instituted against the company without the administration’s consent or the court’s authorization.
The administration option is only available to companies that are no longer solvent. Because these companies are already in deep financial trouble, turning their fortunes around may be more difficult. Administration entails a licenced insolvency practitioner acting as an administrator, who can be appointed by the court or the company. The administrator will then take control of the company with the goal of meeting one of the three statutory objectives set out in the Insolvency Act. If the company cannot be saved, the administrator will seek a higher return for creditors than if the company were wound up.
Other notable provisions of CAMA 2020 in no particular order include the following;
- As opposed to the previous regime under CAMA 2004, CAMA 2020 under 704-709 provides for insolvency practitioners. The Act creates a quasi-regulation for the practice in Nigeria wherein it outlines the requirements to practice as an insolvency practitioner in Nigeria.
- The rationale for determining a financially distressed company has been raised under CAMA 2020. The previous amount of N2,000 (two thousand naira) has now been increased to a sum exceeding N200,000 to classify a company as such that is unable to pay its debt (two hundred thousand naira).
- 665 CAMA provides, among other things, for the continued supply and employment of essential contracts to insolvent companies. Despite their financial difficulties, such essential services as water, electricity, and fuel are provided. The innovative insolvency regime seeks to ensure that companies in financial distress can continue operations for the benefit of corporate/business rescue by explicitly allowing the provision of these essential services in any of the insolvency options.
- Companies not registered under CAMA are deemed unable to pay their debts if the debt exceeds #100,000 (one hundred thousand naira), as opposed to the #100 (one hundred thousand naira) fixed in the repealed CAMA.
Many businesses died prematurely under the previous insolvency regime due to the lack of business rescue mechanisms in line with global best practices. As a result, introducing the company’s voluntary arrangement and administration under the amended CAMA is a significant step forward in changing Nigeria’s tough approach to corporate insolvency. In its combined effect as a rescue option, company voluntary arrangement and company administration provide an avenue for business rescue options to first be prioritised and explored before involuntary liquidation and receivership. Without a doubt, rescuing an insolvent company or its operations would contribute to the progressive stimulation of Nigeria’s economy.
However, we cannot deny that the provisions of this amended CAMA and ISA (Investment and Securities Act) are insufficient to address the comprehensive need for insolvency law in Nigeria; a separate Act of the National Assembly addressing the matters and procedures encompassing insolvency in Nigeria, with prioritised provisions for Corporate/Business Rescue, must be enacted.
Finally, proper implementation and additional robust enactments to address Corporate/Business rescue will benefit the Nigerian economy and encourage Foreign Direct Investment.