This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Nigeria.
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
There are various forms of security that are created over immovable and moveable property. When any of these is utilised, an instrument known as a Debenture is executed as evidence of the security.
Charges: are equitable proprietary interests conferred by way of security without the transfer of title or assets, to discharge liabilities. A fixed charge allows for the acquisition of immediate real rights over property and prevents the charger from dealing with the property after the charge is created without the consent of the chargee. All assets subject to a fixed charge cannot be disposed of, without the chargee’s consent. A floating charge is an equitable charge over the whole or specified part of the company’s undertaking and assets. Upon creation, the company is permitted continue dealing with such assets unless the security becomes enforceable.
Mortgage: is the transfer of legal title in the property to the creditors as security for the loan which is subject to the borrower’s equity of redemption. The mode of creation of a legal mortgage depends on whether the property is situated in a Conveyancing Act of a state or a Property and Conveyancing Law of a state within Nigeria. E.g. the CA 1881 and 1959 Western Region PCL state how it is created.
A Pledge: is created when movable and immovable property are delivered by a debtor to its creditor as security for a monetary obligation. The pledgor transfers the possession and use of the asset to the pledgee as guarantee for the payment of a loan with the common intention of redeeming the asset on payment of the debt. Under Nigerian law, a property can only be pledged if it transferable by delivery of possession.
A Lien – is a legal right by which the creditor has a right to another party’s property until a debt or duty has been satisfied. It is usually applied to movable properties.
The formalities requires that any security must be validly created under the applicable law and perfected, accordingly. How it is registered is determined by the type of asset over which the security interest is created and the type of security interest to be created. Section 197 (1) of the Companies and Allied Matters Act (Companies Act) Cap C20 LFN 2004 (CAMA) requires that every charge created by a company that is intended to provide security will be void against the liquidator and any creditor of the company unless it is registered with the Corporate Affairs Commission (CAC) within 90 days of its creation.
Failure to comply with these formalities, renders the charge void and the money secured becomes immediately payable. However, the failure to register a registrable charge with the CAC does not prejudice the existing contract or obligation for repayment of the money secured, it renders the security void against the liquidator or any creditor thus, the creditor loses priority to other competing creditors that validly registered their security. Where the borrower is in breach, the creditors may enforce their security by foreclosure, sale, appointment of a receiver or through a court action to recover the debt.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Creditors are not permitted to deal with any property while the insolvency proceedings are on going in Court. -Section 12 of the Bankruptcy & Insolvency (Repeal and Re-enactment) Act 2016 (the Bankruptcy Act) and Bankruptcy Rules. Secondly, the creditors are not to deal with the security without an order of Court. Section 36 of the Bankruptcy Act provides that the creditor has to adhere to the rules of priorities in distribution of the debtor’s property which means that the matters mentioned in the law before the creditor’s interest must be settled before the creditor is paid back.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
The test for insolvency is as provided in Section 409 of the CAMA, to wit, the inability of a company to pay its debts to a creditor/contributory where demand for it has been made or where the court has ordered the payment of same but the debtor is unable to pay, provided, always, that the sum of money is not in dispute.
The directors/officers are not under an obligation to open insolvency proceedings upon the debtor becoming insolvent. The law says that they “may”, so failure to do so does not attract any penalty under Section 410 of the CAMA.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
The insolvency procedures available in Nigeria, per Section 401 of CAMA, are:
Court-ordered winding up;
Voluntary winding up, which may either be:
members’ voluntary winding up; or
creditors’ voluntary winding up; or
Court-supervised winding up.
Section 473 of the CAMA requires that upon the commencement of insolvency proceedings, management ceases to operate the business. A liquidator/manager/receiver-manager is appointed to manage the business by the members, creditors or the court. The court is usually involved in the insolvency proceedings as it grants the order, upon application by a member or creditor, for commencement to the proceedings and, thus, can wind up a company. The court also has the power to appoint liquidators or receivers/managers for the debtor as well as supervise the debtor’s business. Under section 401 of CAMA, the members and creditors can also initiate an insolvency proceeding against the debtor. The length of the procedures normally ranges between 12 and 24 months but it depends, largely, on the speed of actions taken by the liquidator and the court, within the legal timeframe for the actions to by the members and the creditors under Sections 401 – 454 of the CAMA.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
In insolvency proceedings, creditors are ranked accordingly to the type of securities they possess, over the insolvent company assets. Section 494 of CAMA 2004 provides ranking of claims and preferential payments. While this section does not expressly give priority to secured creditors, in practice, secured creditors with fixed charges are ranked higher than secured creditors with floating charges and unsecured debentures.
On an insolvency of a debtor, the creditors and other stakeholders rank as follows:
All costs including the remuneration of the liquidator are paid out: S. 484, 494 (5) of CAMA
Outstanding local rates and charges due from the company and payable within 12 months next before the date of the winding-up order or its commencement are paid
All PAYEE (Pay As You Earn) tax deductions, assessed taxes, land taxes, properties or income taxes from the company not exceeding 1 year before the winding-up Order or its commencement deductions under the National Provident Fund Act, 1961;
Pay wages/salaries of junior staff or servants of the company for services rendered to the company
wages of any workman or labourer;
accrued holiday remuneration; and
compensation if any payable under the Employee’s Compensation Act, 2010.
Statutorily, preferred debts include local rates, charges, taxes and pay-as-you-earn deductions; deductions under the Nigerian Social Insurance Trust Fund; wages and salaries; accrued holiday remuneration; and compensation due to workers. Amounts due to preferential creditors must be paid in priority to all other debts. Where the assets of the company are not sufficient to pay all the creditors, preferential creditors may be paid out of property, subject to a charge. In Nigeria, priority claims rank equally among themselves unless the company’s assets are insufficient to meet them. In such cases, the amounts are remitted in equal distributions. These labour claims rank over debenture holders and other secured creditors.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
A debtor’s pre-insolvency transactions can be challenged where according to Section 506 of CAMA, it appears that any business of the company has been carried on in a reckless manner or with the intent to defraud creditors of the company or creditors of any other person for any fraudulent purpose. Thus, any conveyance, mortgage or other transaction relating to property, which if done by an individual would be deemed in his bankruptcy a fraudulent preference, will if done by a company be deemed, in the event of the company being wound up, a fraudulent preference of its creditors and, therefore, be invalid and void ab initio. Section 47 of the Bankruptcy Act, allows for creditors to challenge any conveyance, mortgage or other transaction that are deemed fraudulent, within three months of commencement of insolvency proceedings. A successful challenge of the pre-insolvency transactions generally renders the transactions void and third parties rights are made subject to the rights of the prior creditors.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
Upon the commencement of the insolvency proceedings, all legal proceedings or enforcement of creditors’ claim are suspended pending the determination of the insolvency proceedings. This moratorium does not have an extraterritorial effect as countries have their respective laws that govern insolvency and territorial matters. Section 485 of CAMA provides that the period within which the insolvency proceeding are ongoing shall not bar creditors or contributories from pursuing their rights against the debtor in deserving cases.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
There are 2 restructuring options available in Nigeria; Internal and External Restructuring
Internal Restructuring Options:
Arrangement and Compromise – allows for a change or alteration of the rights or liabilities of the members, debenture holders or company creditors with the approval of the court as provided by Section 539 of CAMA. An arrangement may be proposed between a company and its creditors, or between the company and its members. If a majority (representing not less than 75% in value of the shares of members or the interest of creditors) is present and voting and agree to such arrangement or compromise, that arrangement or compromise may be referred by the court to the Securities and Exchange Commission (SEC). The arrangement is formally approved where the court is satisfied with its fairness based on the SEC report and authorises it to become binding on all creditors or members.
Sale Arrangements – provided for under Section 538 of CAMA, commences with a voluntary resolution to wind up the company and a liquidator is appointed to sell or transfer the company’s assets to another viable company. The members are required to pass a special resolution to wind up the company voluntarily and appoint a liquidator to sell the company’s assets. Upon approval, the directors will make a declaration of solvency as the basis of winding up. A sale agreement is valid if there is no objection raised within a year.
Management buy-out – is the purchase of the controlling shares of the company or its subsidiaries from the owners by the existing management team of the company. The management team must file an application, accompanied by a shareholder resolution approving the buyout.
Downsizing – involves the reduction of employees in a company’s payroll.
Reduction of share capital – i.e., decreasing the company’s shareholder equity through share cancellations and repurchases thereby, increasing shareholder value to produce a better capital structure.
External Restructuring Options:
Mergers and Acquisitions – is the fusion of interests of two or more companies and where one company purchases substantial assets or shares of another company. The Federal Competition and Consumer Protection Commission (repealed Sections 118 to 128 of the Investment and Securities Act) is responsible for the approval of Merger Schemes. The FCCPC issued a notice of threshold for mergers.
Takeovers –involves where a person or group of persons acquires or intends to acquire a minimum of 30% shares in a public-quoted company, with the intention of taking control of that company. The acquiring company must formally approve the takeover by passing a resolution to bid with the SEC and notify the target company for approval.
Cherry picking – is where an insolvent company can inspect the books, assets, operations and business activities of a failed company in order to cherry pick the aspects that it could save by integrating them into its own operations.
Purchase and Assumption – is where a solvent company buys the assets of an insolvent company and assumes its liabilities. The Management may continue to conduct business during the insolvency procedure as long as it is necessary for the beneficial winding up of the debtor company and all expenses or the cost incurred, will have priority over the debts. The Directors may advise the liquidator, on the proper running of the company and stakeholders may apply to the court if the liquidator takes steps in the management of the company that are detrimental to their interests. The Federal High Court is crucially involved in restructuring procedures. It is vested with the power to approve the scheme of arrangement or merger after giving stakeholders the opportunity to be heard and reviewing their presentations.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Yes, a debtor Company can obtain new financing through any of the arrangements and compromise procedures under the CAMA. Special priorities exist for such financing under the Secured Transactions in Movable Assets Act 2017. The Act introduced the concept of Purchase Money Security Interest (PMSI) as a form of security interest. This means that a lender to a distressed borrower can provide financing and enjoy repayment priority over the movable asset the purchase of which it facilitated. The priority of the new finance is not affected by the co-mingling of the finance property.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Claims against non-debtor parties may be released by restructuring proceedings. For example, guarantees may be released through restructuring proceedings if the guarantee agreement provides for that effect. Also, where a debtor provides some other sort of security acceptable to the creditor, claims against non-debtor parties may be released.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?
There is no express provision for a committee to be called Creditors Committee under Nigerian Law. However Section 474 of the CAMA provides that when a company is being wound up voluntarily by the creditors, the creditors may appoint a Committee of Inspection consisting not more than five persons to supervise and work with the liquidators. The Committee of Inspection are also responsible for fixing the remuneration of the liquidators.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
Generally, a restructuring procedure does not affect the existing contracts of the company. Thus, the parties to existing contracts will be expected to perform their obligations except the contracts provides restructuring as grounds for termination. Section 4 of Asset Management Corporation Of Nigeria (AMCON) amended No. 2 Act, 2019 however, provides that, upon 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 required eligible asset. Consequently, parties under such contracts may apply for variation or discharge.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
Under, Section 538 CAMA, the Company by special resolution, can authorise the liquidator to sell the whole or part of its assets to another company in consideration or part consideration of fully paid shares. If any member is opposed to such a sale, he is to state his grounds of objection in writing and the liquidator may offer to purchase his shares at a determined price or may refrain from carrying on the sale. The liquidator appointed by the court sells the assets by public auction or private contract as may be suitable in the circumstance provided that the exercise of the liquidator’s power if sale is subject to the control of the court.
There is no legislation that provides that the purchaser will take the assets free and clear of claims and liabilities. The purchasers will be expected to settle the claims and liabilities attached to the purchased assets. Before the debtor disposes of any property with a third party or title interest, it must obtain the consent of that third party, unless the proceeds of such disposal will be sufficient to fully discharge the amount of the third party’s title interest. The concept of credit bidding is not provided for under the Nigerian Insolvency framework. As such, the Liquidator/Manager has the latitude to decide to adopt credit bidding provided that it is accepted in a finalised business plan.
Pre-pack sale of assets may be effected in Nigeria as there is no legislation barring its practice.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
By Section 422 of CAMA, the directors have a duty to cooperate with the appointed liquidator and deliver up company properties and documents as required. They are expected to declare the insolvency of the company at a general meeting and to be available to account before the receiver all monies they controlled. They are also to prepare the statement of affairs of the company and to exercise due care, skill and diligence in the discharge of obligations. Any failure to exercise responsible care is a ground for an action in negligence.
As regards the directors incurring liability, generally the directors cannot automatically incur liability of debt of an insolvent debtor. However, where the director guarantees the transaction or enters it in his name on behalf of the company, he will be liable.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Directors and other stakeholders are not generally liable for actions carried out on behalf of the company as they are seen as separate entities however, the doctrine of corporate personality will not apply where the directors and stakeholders act recklessly or fraudulently, as such directors and stakeholders may be liable for previous actions and decisions. Section 290 of CAMA, states that where the directors of a Company fail to apply borrowed money for purposes for which it was borrowed, they shall be personally liable. Also, section 506 of the Act provides that directors will be held liable where it appears that a company activities were carried out in a reckless manner.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
No, a local court will not recognise such proceedings. It may only be recognised in accordance with the provisions of Section 10 of the Foreign Judgment (Reciprocal Enforcements Act) (Cap F35, LFN, 2004) which requires that the judgement sought to be enforced should be final and conclusive, with the existence of a wholly or partly unsatisfied foreign monetary judgment debt. This Act is based on the reciprocity of treatment of similar judgments in the original country.
Nigeria has not adopted the United Nations Commission on International Trade Law (UNCITRAL) on cross border insolvency and there remains no specific local legislation dealing with the issue.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Section 54 of CAMA provides that a foreign company intending to carry on business in Nigeria, must take the necessary steps to be incorporated for that purpose unless they have been exempted from doing so by the President of the Federation. It, therefore, follows that foreign debtors who are not domesticated according to Nigerian laws are not allowed to carry on their business including entering into any insolvency proceedings.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
Nigerian Law does not expressly deal with restructuring or liquidation of a group of companies. A parent company and its subsidiaries are deemed separate legal entities thus, their liabilities are separate. The only exception to this principle is where there is an existing contract between the parent and subsidiaries giving effect to joint liabilities or where there is evidence of fraud.
In effect, insolvency proceedings instituted against members of a group are treated as separate and distinct entities. Members of a group involved in insolvency proceedings, may elect to appoint the same insolvency officers to save costs by avoiding multiplicity of processes.
Is it a debtor or creditor friendly jurisdiction?
Nigeria is considerably a creditor-friendly jurisdiction, especially for debts acquired by Nigeria’s public assets management body, the Asset Management Corporation of Nigeria (AMCON). Section 471 of CAMA provides for the voluntary winding-up of a company by creditors where a company is indebted to a creditor in an amount above NGN 2,000 and despite a statutory demand settle the debt, the company refuses to pay same within three weeks. The creditor may file a petition for the company to be wound up. Section 493 of the same Act ranks both secured and unsecured creditors above members of the company during a winding-up.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
In Nigeria, employees may not bring claims as regards unlawful termination, however, they can bring claims in respect of payment of their entitlements in preference to all other claims. In a situation where employee pension schemes are available, such claims have priority in insolvency proceedings. As pensions are a statutory requirement, the employee may bring claim against ether employer.
The Finance Act 2020, introduced a “minimum holding requirement” test for related party group restructuring and modifies the tax exemption on business reorganisations allowing related party business reorganisations to be conducted in a tax-neutral manner.” AMCON was established to assist eligible financial institutions in resolving their non-performing loans.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
CAMA makes no provision for a scheme of arrangement for general corporate rescue because of the conflicting requirements on approval majority under the Act and Investment Securities Act (ISA) for a buyout of dissenting members. In recognition of the need to promote business rescue, the CAMA (Repeal and Re- enactment) Bill (the CAMA Bill) prioritises business rescue above liquidation and receivership thus providing a lifeline to sustain businesses and insolvent companies to remain a going concern.
The Bankruptcy and Insolvency Bill (the Bill), seeking to repeal the Bankruptcy and Insolvency Act 2004, makes provisions for corporate and individual insolvency, cross-border/international insolvencies by incorporating provisions of the UNCITRAL Law including recognition of foreign insolvency orders and assistance to foreign representatives. It also introduces the “letter of request” concept to assist with cross-border insolvencies.
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