Etigwe Uwa SAN, Streamsowers & Köhn
Until recently, the commencement of winding-up proceedings was the first recourse taken by creditors to recover bad debts, without exploring other alternatives by which debtors could achieve business recovery as a route to repayment of debts. However, in Nigeria, there is an increasing trend for companies to restructure with the objective of averting insolvency, as well as expanding operations and increasing their market share. We believe that these changes are driven by an evolving financial environment, the rising numbers of involved parties and more confidence in the prospects of the Nigerian economy strengthened by its strategic position in Africa.
Within the past year, there have been several cases of close shaves with insolvency, but shareholders, creditors or regulators have stepped in and demanded the restructuring of these ailing companies. The most recent case of restructuring to avert insolvency is that of telecommunications company 9Mobile (formerly known as Etisalat Nigeria), following its inability to sustainably service a syndicated facility obtained from a consortium of Nigerian banks. We also saw companies such as Oando in the energy sector and SevenUp in the food/beverage sub-sector go through varied forms of restructuring. Oando sold the majority stake in its downstream business to a consortium group, comprising international trading house Vitol and private equity firm Helios Investment Partners, for $276 million. This marked a move by the company to restructure its business to deal with the market rut caused by low oil prices. The aim of this restructuring was for the management to transform the business from a downstream company marketing refined petroleum to a fee-earning oil and gas exploration- and production-focused business. SevenUp went private, selling 27 per cent equity from the minority shareholders to its majority shareholder, which owned 73 per cent of the company’s shares. This was done after the company posted a loss of 11 billion naira.
Restructuring under Nigerian law may be broadly categorised into internal and external restructuring.
Internal restructuring refers to the various informal workouts in which a company may engage to adjust its capital structure, take on debt or defray debt. The Companies and Allied Matters Act (CAMA), the principal legislative framework within which informal workouts are conducted, allows a company to:
External restructuring, however, essentially refers to mergers, acquisitions and other forms of buyouts. In addition to the CAMA, these activities are regulated under the Investments and Securities Act (ISA); the Securities and Exchange Commission; and the Corporate Affairs Commission (CAC), the body empowered to administer the CAMA. A company looking to restructure may – depending on, among other factors, its industry, the parties involved and the nature of the capital being injected – require approval from one or more of the following bodies:
If the company operates in a regulated industry, it is likely that some form of approval will be required from the regulatory agency in charge of that industry.
Notwithstanding the foregoing developments, the laws have not changed. On the face of it, they give creditors easy recourse to recover debt by winding up the indebted company. However, recent appellate court decisions show that the courts have maintained a conservative and stern position, frowning on the practice whereby the procedure for winding up a company is used for debt recovery, or channelled as a direct means of debt collection.
In Nigeria, an incorporated entity becomes insolvent only after a court has declared it so. As such, there are several pending cases bordering on issues of insolvency, and more cases are constantly being instituted regarding liquidation across various industries. The large volume of cases may be attributed to provisions of the law stating that a company must be compulsorily wound up if it is unable to meet its financial obligations. It should be noted that if the company disputes the nature or quantum of the liability alleged, the court may not make an order for compulsory winding-up of the company. The reasoning behind this is only a creditor has the locus standi to petition the court to wind up a company and as per the wording of section 409(a) of CAMA, where a petition is based on a disputed debt, the petitioner is not a ‘creditor’.
Another instance in which a company may be wound up is where its members voluntarily apply for a winding-up order, especially where it is a special purpose vehicle (SPV) and the purpose has been achieved. However, this is unusual in Nigeria as most SPVs are maintained as going concerns, even after they have achieved their intended purpose.
As the global financial sector evolves, the focus of modern insolvency regulation has shifted from the punishment of insolvent entities through compulsory liquidation to the more constructive alternative of reorganisation and restructuring of such business entities and their operations, with a view to rehabilitate to ensure economic stability and financial propriety. However, Nigerian insolvency law is still traditional in its approach, such that winding up and liquidating the company remain the sole mechanisms for dealing with instances of insolvency.
There are various laws applicable directly and indirectly to insolvency generally in Nigeria. These include the following.
The CAMA makes provisions for the appropriate procedures to be taken in the event of insolvency. Under this statute, winding-up proceedings can be instituted voluntarily by:
Nonetheless, provisions in the Banks and Other Financial Institutions Act, as well as the Nigerian Deposit Insurance Corporation Act, also deal with insolvency as it relates to banks and other financial institutions. The Insurance Act contains certain provisions on the winding up of insurance companies. The Bankruptcy Act governs bankruptcy of natural persons and partnerships together with the Bankruptcy Rules. In 2017, the government of Nigeria passed the Collateral Registry Act, with the objective to facilitate financial inclusion. The Act establishes the Collateral Registry and further legitimised the use of movable assets as collateral to secure loans. The Collateral Registry Act applies to individual and companies.
Notwithstanding the foregoing observations, Nigeria has benefited from a forward-looking policy shift in the regulation of the sector as the CBN has taken to deal with the financial crisis which occurred in 2009. Some of the changes imposed by the CBN that necessitated restructuring include an increase in the minimum share capital requirement for banks and the subsequent recapitalisation by banks, which resulted in several mergers and acquisitions; and the re-categorisation of banks based on equity and the reversal of the universal banking system introduced in 2010.
In a similar vein, the National Insurance Commission has over time also increased the capitalisation requirements of insurance companies, and earlier this year introduced a re-categorisation of insurance companies into tiers, in line with the type of licence they hold (non-life, life and composite). This is expected to trigger some restructurings within the industry in the near future.
It is likely that there will be further developments in the area of insolvency and restructuring in Nigeria. Some of these anticipated developments are as follows.
Current government policies encourage foreign investment in Nigeria in order to ensure a transfer of management expertise and skills lacking in the country. In line with the rich potential of the country, it is expected that the Nigerian economy will see the entry of more foreign direct investment. For instance, in the power sector, several stakeholders are in talks with foreign entities to increase the capacity of power generation through embedded and nuclear power plants with values as high as US$80 billion within the next decade.
Nigeria has seen an increase in sophisticated investment and a tendency for investors, acting through private equity funds, to invest in existing businesses as opposed to starting businesses from scratch. Within the past five years, Nigeria has become Africa’s most attractive private equity investment destination. According to the African Private Equity and Venture Capital Association, between 2012 and 2017 Nigeria attracted about $7.8 billion in funding – about 32 per cent of all the deals that took place in Africa. In recent years, we have seen investments in information and technology; e-commerce; oil and gas; education; and media and entertainment, to name a few. It is expected that this rate of investment will increase in the coming years, and that similar investments will spread across all sectors.
A review of current legislation on insolvency and restructuring reveals some unresolved issues that have become a cause for concern among legal practitioners and stakeholders in the field, as they present a clog in the wheel of progress. For example, despite several amendments to existing legislations and the enactment of new laws on insolvency, the Bankruptcy Act has not been amended since 1992. Meanwhile, the AMCON Amendment Act allows for the legal exercise of various arbitrary powers held by AMCON that not only conflict with the interests of shareholders but can also be used punitively against companies with little scrutiny. There is also a call from insolvency law practitioners and stakeholders for a specialised revenue court to be set up, with sole jurisdiction as a court of first instance, to settle disputes, curb the arbitrariness of the current regime and enable speedy adjudication of insolvency matters.
Presently, Nigeria does not have a composite approach to the issue of insolvency. Rather, there are piecemeal legislations to address disparate matters without providing for a consistent scheme to ensure standardised practice thereunder. The Bankruptcy Act covers bankruptcy proceedings against individual debtors and partnerships alone, while the CAMA deals with the winding-up of companies as well as arrangements and compromises. The latter option is seldom used in reality, because practitioners prefer to push for the courts to liquidate and terminate the life of companies without the debtor company being given a right to restructure its business in order to pay its debt over time. Although liquidation is the last resort in some other jurisdictions, in Nigeria it is often used as a first option. Nigeria stands to benefit enormously, particularly in attracting more direct foreign investment and revenue for the government, wherein liquidation and insolvency becomes the very last option. The modern trend is presently geared towards the restructuring of business entities to allow for the continuation of business that would yield prolonged employments, payment of taxes and dividends, and other similar socioeconomic benefits.
In 2016, the Senate passed the Bankruptcy and Insolvency Act (Repeal and Re-enactment) Bill, which has provisions correcting the various issues previously raised. Unlike the Bankruptcy Act, the Bill contains provisions on bankruptcy proceedings of corporate and unincorporated bodies by altering the definition of “person” to include:
a partnership, an unincorporated association, a corporation, a cooperative society or an organisation, the successors of a partnership, association, corporation, society or organisation, and the heirs, executors, liquidators of the succession, administrators or other legal representative of a person.
Despite the improvements in the Bill, it is yet to receive presidential assent.
The Collateral Registry Act covers the repossession of movable assets in the event of insolvency. However, the Act does not have any elaborate provisions for insolvency as it simply subjects rights of the parties thereunder to the extant insolvency laws, which are said to be inadequate.
There is still a need for comprehensive reform of existing insolvency legislation in line with modern and global trends, which can help nip insolvency in the bud by encouraging business restructuring mechanisms. Non-governmental groups in the sector actively pursue this idea; one is the Business Recovery and Insolvency Practitioners Association of Nigeria, which has consistently expressed its view that Nigeria’s insolvency regulations need to be updated to align with the new global paradigm.
The positives in the Bankruptcy and Insolvency Act (Repeal and Re-enactment) Bill 2016 show a bright future for insolvency in Nigeria. If implemented, they will bring positive changes to the Nigerian scene.