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Restructuring & Insolvency in Nigeria, 2015

Restructuring & Insolvency in Nigeria, 2016

 

Question 1

Insolvencies and reorganization are governed by the Companies and Allied Matters Act, 1990. The Securities and Exchange Commission Rules, 2013 made pursuant to the Investment and Securities Act, 2007 regulates mergers, take-over and acquisitions of shares in public quoted companies. The Bankruptcy (Amendment) Decree No. 109, 1992 and Bankruptcy Rules regulate bankruptcy proceedings.

A company is insolvent if it is indebted to its creditors;

  • in a sum exceeding N 2,000 and is unable to pay same upon service of 3 weeks statutory notice on it;
  • upon execution of judgment against and it is returned unsatisfied in whole or in part;
  • or where the Court considers the liability of the Company and is satisfied that it is unable to pay its debts.

A person is insolvent if it is indebted to its creditors in a sum exceeding N 2,000 and is unable to pay same 3 months prior to presentation of the petition for bankruptcy.

Question 2

The Federal High Court with judicial divisions in each of 36 States of Federation is conferred with jurisdiction to hear insolvency proceedings. A creditor’s action to recover claims against the Company is commenced at the State High Courts.

Question 3

Insurance companies are excluded from customary insolvency proceedings. The Insurance Act, 2003 provides for liquidation of Insurance Company upon the petition of either 50 policy holders or the National Insurance Commission.

The Insurance Act prohibits the voluntary winding up of insurance business except for the purpose of effecting an amalgamation, transfer or acquisition.

The Banks and Other Financial Institution Act, 1991 prohibit the restructure, re-organization, mergers and disposal of interest in banks without the prior consent of the Governor of the Central Bank of Nigeria.

Question 4

Where there is a need to make a government enterprise more productive or where it is poorly managed, such enterprise may be liquidated by privatizing it under the Public Enterprise (Privatization and Commercialization) Decree 1999. This is achieved by offering the shares of the public enterprise by public issue at the capital market or share private placement. The National Council of Privatization may approve that the shares be offered for sale to a willing buyer or the shares may be disposed to interested investors through a local or international capital market.

A privatized enterprise which requires participation by strategic investors may be managed by the strategic investors as from the date of the privatization on terms that will be agreed upon.

Public enterprises are usually wholly owned by government or its agencies but in the event that there are pending claims of creditors, it will be settled before the effective date of the privatization. The creditors reserve the right to seek a restraining order against the parties to the privatization until their claims are settled.

Question 5

The commercial banks are huge investments which are considered “too big to fail”. The Asset Management Corporation of Nigeria Act, 2010 empowers the Corporation to take over bad loans of banks in Nigeria in order to keep the banks afloat. The Act also empowers the Corporation to apply to Court for forfeiture of the debtor’s property upon its inability to liquidate its debts.

Question 6

The security on immovable real property is legal mortgage, charge by way of debenture in urban areas and pledges and equitable mortgage in rural areas.

Question 7

The security on moveable personal property is charge on the property itself.

Question 8

An order for liquidation operates in favour if all the creditors whether secured or unsecured as if made on a joint petition. Nevertheless, secured creditors’ claims take priority over unsecured creditors’ claim. This is because an unsecured creditor only benefit from an insolvency proceedings in the unlikely circumstance that there is a reminder from the sale of the Company’s assets after settling the claims of the secured creditors.

Nonetheless, the unsecured creditors have a right to commence an action against the liquidator of the Company and attach its property to satisfy the unsecured claim. The unsecured creditor may also apply to the Court hearing the liquidation proceedings to adjourn the hearing of the liquidation petition.

There is no special procedure applicable to foreign creditors.

Question 9

Voluntary liquidation is an administrative process which is effected by filing the following documents at the Corporate Affairs Commission (“the Company registry”);

  • Publication of notice of creditors meeting in the Gazette and 2 daily newspaper;
  • Resolution for voluntary winding up;
  • Appointment of liquidator;
  • Publication of notice of appointment of liquidator in the Gazette and at least 2 daily newspaper;
  • Liquidator’s notice of appointment
  • Publication of notice of final meeting in the Gazette and at least 2 newspapers circulating in the locality of where the meeting is being called;
  • Return of final meeting and account of liquidation as laid before and approved by meeting;
  • Original certificate of registration;
  • Updated annual return; and
  • Payment of the statutory fees.

Voluntary liquidations are commenced when the duration for the Company as stated in its article expires, the occurrence for which the articles provide for the Company to be dissolved has happened or the Company in a general meeting pass a resolution for the Company to be liquidated. Nonetheless, a creditor or contributory may apply to Court to discontinue the voluntary liquidation of the Company if it is against their interests.

Question 10

A creditor may apply for the involuntary liquidation of a debtor Company if the Company fails to liquidate its exceeding N 2,000 after service of the 3 weeks statutory notice on it. This is done by filing a liquidation petition against the Company at the Federal High Court within the jurisdiction where the Company carries on business.

A liquidation order obtained by a creditor’s petition shall operate in favour of all the creditors and all the contributories of the Company as if made on their joint petition.

Question 11

A Company may commence a formal financial reorganization by passing a special resolution to that effect. The consequence of a financial reorganization will be a change in the rights or liabilities of members, debenture holders and creditors of the Company or any class of them including the regulation of the Company.

Question 12

There is no procedure for creditors to file for involuntary reorganization of Company.

Question 13

Where a Company defaults in holding a statutory meeting; its members reduce below 2 or it is just and equitable to do so, the Company or the Company registry may commence mandatory liquidation proceedings against the Company. Transactions by an insolvent Company are invalid.

 

 

Question 14

During reorganization, the Company can carry on business through the liquidator or receiver manager. To effect the reorganization, a company may by special resolution resolve that the Company may by special resolution resolve that the Company be put into member’s voluntary liquidation and the liquidator authorized to sell the whole or part of its undertaking or assets to another Company. The rights of the creditors of the Company are not affected by the reorganization but there is no special treatment given to creditors who supply goods or services after the filing.

The creditors or shareholders may apply to Court to order a meeting of shareholders or a class of shareholders or creditors or class of creditors and the meeting would be summoned in a manner as the Court may direct. If three fourth of the shareholders or creditors present by voting either in person or proxy agree to any reorganization plan, the plan will be referred to the Securities and Exchange Commission who will confirm the fairness of the plan by making a written report within the time specified by the Court. If the Court is satisfied with the fairness of the plan, it shall sanction same and it shall be binding on all the shareholders and creditors.

Once a special resolution is passed and a liquidator or receiver manager appointed, the directors and officers do not have powers to bind the Company.

Question 15

Once a liquidator is appointed, no action shall be commenced against the Company except with the leave of Court. Nevertheless, where an action is commenced after the presentation of petition, the Company or creditor may apply for stay of proceedings and the Court would either stay proceedings or refer the action to the Court hearing the liquidation petition.

Question 16

A Company in liquidation may obtain secured or unsecured loans or credit by the liquidator or receiver manager appointed by the Court but such loan must be for the purpose of carrying on the Company’s business for the period provided by the Court in the liquidation order for the purpose of settling the creditors’ claim.

Question 17

In the case of unlimited Company, the Court may allow to a contributory by way of set-off any money due to him which he represents from the Company of any independent dealing or contract with the Company but not money due to him as a member of the Company. In the case of a limited Company, it is a director whose liability is unlimited that is given the same treatment as a contributory of an unlimited Company.

Whether limited or unlimited when all creditors are paid in full, the money due on any account to a contributory may be allowed to him by way of set-off against any subsequent call.

 

Question 18

A liquidator appointed by the Court sells the Company’s assets “free and clear” of claims by public auction or private contract as may be suitable in the circumstance provided that the exercise of the liquidator’s power of sale is subject to the control of the Court.

Question 19

Though the IP laws are silent on this aspect, upon commencement of a liquidation proceeding, the IP licences shall continue to be used by the Company until the liquidation order is made. IP licence is an asset of the Company and may be sold alongside other Company’s assets, in which case the new owner would continue to use the IP licence with the consent of the licensor.

A liquidator cannot terminate the Company’s agreement with a licensor and continue to use the IP licence for the benefit of the Company in liquidation.

Question 20

In the absence of fraud, a debtor undergoing reorganization cannot reject or disclaim an unfavourable contract. The liquidator is liable to defend action against the Company if the Company breaches the contract and it is sued after the insolvency case has commenced.

Question 21

Insolvency matters are not subject to arbitration proceedings. Arbitration is commonly used for resolution of commercial disputes.

Arbitration proceeding commenced by the Company before the commencement of liquidation proceeding will not be stayed as proceeds from an arbitral award is an asset due to the Company. If the arbitral proceeding was commenced by a creditor before the commencement of liquidation proceeding, he may file an application at the Court hearing the liquidation proceeding for stay pending the publication of the arbitral award.

In any case, arbitrable disputes which arise in insolvency case after the case has opened can be arbitrated as long as there is an arbitration or submission agreement between the parties involved in the disputes.

Question 22

The reorganization plan must be fair and equitable. See Question 14.

Claims for non debtor parties’ liability may be waived except there is fraud or willful misconduct.

Question 23

Yes. By virtue of Section 534 of the Companies and Allied Act, the Company may by special resolution resolve that the Company be put into voluntary winding up and the liquidator authorized to sell its assets to another Company and distribute the proceeds to members of the Company in accordance with their rights in the Company.

Question 24

A proposed reorganization is defeated where;

  • there is an order on the grounds of unfairly prejudicial and oppressive conduct to minority shareholders or for liquidation of the Company under creditor’s voluntary liquidation, the reorganization is invalid unless sanctioned by the Court;
  • The creditor or any class of creditors or members of class of members agree on a reorganization plan but SEC’s written report shows that the plan is not fair or equitable;
  • Where the Court for whatever reason refuses to sanction SEC’s written report or the reorganization plan.

Reorganization upon a disapproved plan is invalid. Where the Court sanctions the plan and the liquidator fails to perform the plan, a shareholder or creditor may apply to Court for the plan to be performed.

Question 25

Upon service of the petition for liquidation on the Company, the Petitioner would seek and obtain an order of Court to advertise the petition in a national daily newspaper or official Gazette within 15 days to the hearing of the petition. The purpose of advertisement is to inform the Company’s creditor and persons interested in the Company of the pending liquidation petition against the Company.

Upon advertisement of the petition, every creditor person who intends to appear on the hearing of the petition shall file an affidavit within 15 days after the advertisement of the petition. The petitioner has 5 days within which to file his affidavit in response to affidavits against the petition.

In the administration and distribution of the assets of the Company among its creditors, the liquidator shall have regard to directions given by resolution of the creditors or contributories at any general meeting, or by the committee of inspection. But where there is conflict, the directions of the creditors will override the directions of the committee of inspection.

The liquidator shall send to the Company’s registry, an account of his receipts and payments as prescribed by the Court or at least twice each year of his tenure and the account will be audited.

The management and the Company’s remedies during liquidation can only be pursued by the liquidator appointed by the Court.

Question 26

No, the creditors do not have powers to pursue the Company’s remedies even if the liquidator has no assets to pursue a claim.

Question 27

Where a liquidation order is made by the Court and a liquidator is appointed, the Court will appoint a committee of inspection from the creditors and contributories or persons holding general powers of attorney from creditors or contributories to inspect the activities of the liquidator. The committee of inspection directs the liquidator on the administration of the Company.

The committee of inspection is funded by Company funds managed by the liquidator.

Question 28

A parent company and its subsidiaries are separate legal entities. In insolvency proceedings involving a corporate group, the parent Company and its subsidiaries cannot be combined for administrative purposes except there is a special contract between the parent Company and its subsidiaries to that effect or where there is fraud.

Except in a special circumstance where the Court directs, the assets and liabilities of the parent Company and subsidiaries cannot be pooled for distribution purposes.

Assets may not be transferred abroad except the claims of all the creditors have been fully liquidated and the foreign creditor file an application before the Court hearing the liquidation petition before the liquidation order is made.

Question 29

Upon advertisement of the petition for liquidation of the Company, the creditors would submit their claim by failing an affidavit stating same within 15 days after advertisement of the petition and serve same on the petitioner. Nevertheless, any delay in the creditor filing his claim which does not amount to a miscarriage of justice is not fatal to the creditor’s claim.

Where a creditor cannot prove his claim it will be disallowed and would not be considered in the liquidation order. The creditor may appeal against the liquidation order to the Court of Appeal.

The liquidator may make arrangement, compromise or transfer of claims of the creditor as he deems appropriate but same must be disclosed. Claims for contingent or unliquidated amounts cannot be recognised in a liquidation proceeding. The creditor would have to commence an action for the exact amount of the claims to be determined.

Question 30

No

Question 31

Labour related claims rank equally among themselves unless the Company’s assets are insufficient to meet them, in which case they shall abate in equal proportions. After labour claims are claims of holders of debentures and other secured creditors.

Question 32

They include all tax deductions, deduction under the pension fund, wages of employees of the Company, accrued holiday remuneration and rights under the Workmen Compensation Act.

Question 33

Pension related claims ranked pari pasu with labour related claims.

Question 34

Before the liquidation order is made or a liquidator appointed, the Directors of the Company are liable for environmental problems and remedy. But once a liquidator has been appointed, he will be liable to liabilities and remedy of environmental problems.

Question 35

No

Question 36

In reorganization, the distributions are made by the liquidator in line with the reorganization plan which SEC had certified to be fair and equitable and the Court sanctioned same.

In liquidation, the liquidator shall manage the business of the Company and sell the assets of the Company for the purpose of settling the creditor’s claims within the time stated in the liquidation order. In distributing the assets, the liquidator must have regard to directions of the resolution of the creditors, committee of inspection and the Court.

Question 37

In reorganization, the purchase of a Company of its own shares or distributions to its shareholders contrary to the relevant portion of the Companies and Allied Matters Act is null and void and liable to be annulled.

 

In liquidation, any transaction relating to property which would, if made or done by or against individual, be deemed in his bankruptcy a fraudulent preference, shall, if made or done by or against a company, be deemed, in the event of its being wound up, a fraudulent preference of its creditors, and be invalid accordingly. In the same vein, any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void.

 

Question 38

 

No.

 

Question 39

 

A person who was not duly appointed as Director but holds himself out and act as such on behalf of the Company shall be personally liable to obligations that may arise from such representation. In the same vein, under the general grounds for Directors’ liability, a Director shall be personally liable to the Company’s obligation for breach of his fiduciary duties and fraud.

 

Where a director before winding up of a Company fails to deliver to the liquidator all the Company’s property and books in his custody, conceals debt due to the Company, fraudulently removes any of the Company’s property, makes any material omission in any statement relating to the affairs of the Company, makes a fictitious losses or expenses at a meeting with creditors, makes a false representation, pledges Company property which has been obtained on credit in a transaction which is not in the ordinary course of its business, is guilty of an offence and is liable upon conviction to 12 months imprisonment.

 

Question 40

 

A parent Company can only be liable to liabilities of its subsidiaries or affiliates and vice versa if there is a contract between them to that effect or evidence of fraud.

 

Question 41

 

Once an insider claim is liquidated and can be proved, it may be ranked pari pasu with unsecured creditors.

 

Question 42

 

Upon making a liquidation order, if there is reasonable proof that a contributory is about to abscond from Nigeria or remove property for the purpose of evading payment of calls, or avoiding examination in respect of Company affairs, the Court may order for the contributory to arrested and moveable personal property to be seized to be kept until a time in which the Court may order.

 

Question 43

In liquidation, a liquidator or receiver is appointed to realize the assets of the Company to settle its debts while in a bankruptcy proceeding the entity is declared bankrupt and its liabilities cancelled.

Question 44

Liquidation of a Company is concluded upon reaching a compromise between the liquidator and the creditors and contributory and settling the claims of employees, secured and unsecured creditors.

Reorganization of a Company is concluded upon distributions of the assets in accordance with the reorganization plan sanctioned by the Court.

Question 45

Foreign creditors have the same rights with local creditors. Monetary Judgments and orders from countries with reciprocal treatment with Nigeria are enforceable under the Foreign Judgment Reciprocal Enforcement Act and leave for enforcement is filed in a High Court in Nigeria within 6 years from the date of delivery of the Judgment or when the order was made.

Though Nigeria is yet to adopt the UNICITRAL Model Law on Cross-Border Insolvency, steps have been taken to enact an Act based on the Model law.

Question 46

No

Question 47

There is no specific law for recognition of foreign insolvency proceedings but this can be accommodated within the existing legal procedure in insolvency proceedings and the provisions of the Foreign Judgment Reciprocal Enforcement Act.

Question 48

No

 

 

Quick Reference Table

Applicable insolvency law, reorganisations: liquidations Companies and Allied Matters Act, Company Winding Up Rules, Securities and Exchange Commission Rules, Investment and Securities Act, Bankruptcy (Amendment) Decree, Banks and Other Financial Institution Act, Asset Management Corporation of Nigeria Act.
Customary kinds of security devices on immoveables Legal mortgage and charges by way of debenture in urban areas and pledges and equitable mortgages in rural areas.
Customary kinds of security devices on moveables Charge on the property itself.
Stays of proceedings in reorganizations/liquidations A shareholder, the company or creditor may apply for stay of proceedings and the Court if satisfied with the reasons for such application would adjourn the proceedings to a later date.
Duties of the insolvency administrator Defend legal proceedings on behalf of company, carry on business of the company for the benefit of the winding up, appoint professionals to assist him in performance of his duties, pay any class of creditors and make any compromise or arrangement with the creditors.
Set-off and post-filing credit

 

Whether limited or unlimited company, when all creditors are paid in full, the money due on any account to a contributory may be allowed to him by way of set-off against any subsequent call.
Creditor claims and appeals

 

Where a creditor cannot prove his claim, it will not be considered in the liquidation order. A creditor may appeal against the liquidation order to the Court of Appeal.

 

Priority claims

 

Labour related claims rank equally among themselves. After labour claims are claims of secured creditors.

 

Major kinds of voidable transactions Reorganization contrary to the provisions of the Companies and Allied Matters Act is null and void.

 

In liquidation, any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void.

 

Operating and financing during reorganisations If the liquidator elects to purchase the shares of any member who dissents to the transfer of shares to a transferee company, the price payable on the member’s shares shall be determined by agreement in the case of a private company with no foreign participation.

In the case of a public company or private company with foreign participation, the price shall be determined by the Securities and Exchange Commission

International cooperation and communication Monetary Judgments and orders from countries with reciprocal treatment with Nigeria are enforceable under the Foreign Judgment Reciprocal Enforcement Act and leave for enforcement is filed in a High Court in Nigeria within 6 years from the date of the Judgment or order.

 

Liabilities of directors and officers

 

Where a director before winding up of a Company fails to deliver to the liquidator all the Company’s property and the accurate books in his custody, such a director is guilty of an offence and is liable upon conviction to 12 months imprisonment.

 

Pending legislation

 

Bankruptcy and Insolvency Act (Repeal and Re-Enactment) Bill, 2015 has just passed 1st reading.

 

 

UPDATE & TRENDS

The Foreign Judgment Reciprocal Enforcement Act, 2004 provides for recognition and enforcement of foreign judgment and orders. The Bankruptcy and Insolvency Act (Repeal and Re-Enactment) Bill, 2015 pending before the National Assembly which has scaled first reading will improve domestic bankruptcy procedures.

 

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