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 where companies restructure with the objective of averting insolvency, as well as expanding operations and increasing their market share.
These changes were largely driven by an evolving financial environment, the rising numbers of involved parties and greater 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 varied forms of 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. Companies such as Oando in the energy sector and SevenUp in the food/beverage sub-sector went 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 the 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 business. SevenUp went private, selling 27% equity from the minority shareholders to its majority shareholder, which owned 73% 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 CAMA, administered by the Corporate Affairs Commission (CAC), these activities are regulated under the Investments and Securities Act (ISA); by the Securities and Exchange Commission; and the Federal Competition and Consumer Protection Act 2018 by the Federal Competition and Consumer Protection Commission 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 regulator. 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 prevalent practice of utilising the mechanism of winding up for the purposes of debt recovery or 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 standing 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 rehabilitating and ensuring 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 Collateral Registry Act was passed, with the objective of facilitating 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 become proactive to avert a recurrence of 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 recategorisation 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 recategorisation 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 discussed below.
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 benefit from 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 $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. In 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 2013 and 2018 Nigeria attracted about $7.884 billion in funding – about 54 per cent of all the deals that took place in West 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 could hinder progress. For example, despite several amendments to existing legislation 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 is piecemeal legislation to address disparate matters without providing for a consistent scheme to ensure standardised practice. 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 of arrangement and compromise 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 a period of 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, if liquidation and insolvency become 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 employment, 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 and has in fact been rejected twice by the president on account of drafting issues that could hinder clarity and understanding of the bill. 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 to the extant insolvency laws, which are inadequate.
In a related development, in May 2018, the Senate passed a Bill for an Act to Repeal the Companies and Allied Matters Act 1990 (CAP C20 LFN 2004) and enact the Companies and Allied Matters Act 2018 (CAMA Bill). Given Nigeria’s bicameral system of legislature, input is required from the House of Representatives before whom the Bill is at first reading stage, prior to its transmission to the president for assent.
The CAMA Bill introduces an insolvency framework, which is not focused on the liquidation of a company but on providing a lifeline to viable businesses. Regarding insolvency, the CAMA Bill notably provides for Administration, Netting Provisions and Company Voluntary Arrangements.
Administration serves as a mechanism for insolvent entities to remain a going concern. One of the main advantages of this model is that the administrator is appointed by an order of the court, an holder of a floating charge, the company or its directors to act in the interest of the company and not, as in the case of receivership, in the interest of the person that appointed him or her. The administrator is regarded as an officer of the court, whether or not appointed by the court. The administrator is empowered to do all and anything necessary for the management of the assets and business of the company.
Once a company is under administration, any petition for the winding-up of the company will be dismissed except the petition if presented under grounds of public interest or with the leave of the court or if the petition was presented under special banking provisions of the Banks and Other Financial Institutions Act, the Nigerian Deposit Insurance Act or any law and rule by a financial services and markets regulator.
Netting provisions serve as a means of mitigating credit risks associated with over-the-counter derivatives and promote financial stability and investor confidence in the Nigerian financial sector. Netting entails offsetting the value of multiple positions or payments due to be exchanged between two or more parties. Netting helps to manage disagreements in connection with outstanding invoices or payments in intercompany transactions. It reduces the need to process a large number of transactions by streamlining the necessary transactions down to one payment and helps to consolidate the number of currencies with which companies transact.
Company voluntary arrangements allow a company to settle debts by paying only a portion of the amount that it owes to the creditors and come to some other arrangement with its creditors over the payment of its debts. It is a process whereby the directors of a company, an administrator or liquidator make a proposal to its creditors for a composition in satisfaction of its debts or a scheme of arrangement of its affairs.
There is still a need for comprehensive reform of existing insolvency legislation in line with modern and global trends, which can deviate from corporate insolvency by encouraging business restructuring mechanisms. Non-governmental groups such as the Business Recovery and Insolvency Practitioners Association of Nigeria have consistently expressed views on the need for a review of Nigeria’s insolvency regulations to align with the new global paradigm. The positives in the Bankruptcy and Insolvency Act (Repeal and Reenactment) Bill 2016 and the Bill for an Act to Repeal the Companies and Allied Matters Act 1990 (CAP C20 LFN 2004) and to enact the Companies and Allied Matters Act 2018, if implemented, hold the promise of a new dawn for insolvency legislation in Nigeria.