04 Jul The Highlights of Corporate Insolvency in Nigeria
Insolvency is the inability of a natural or legal entity to pay debt owed to third parties. This usually occurs when the entity’s liabilities outweigh its assets and it may result in threats from creditors and the subsequent consideration of corporate restructuring.
Insolvency generally is regulated by the Companies and Allied Matters Act 2004 (CAMA) which is supplemented by regulations such The Banks and Other Financial Institutions Act, Investment and Securities Act 2007, Securities and Exchange Commission Rules2013, amongst others.
A company is deemed unable to pay its debts if;
- A creditor by assignment or otherwise to whom the company is indebted in a sum exceeding N2,000 (Two Thousand Naira) then due has served on the company a written demand, and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; or
- Execution or other process issued upon a Judgment or Order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
- The Court, after considering any contingent or prospective liability of the company is satisfied that the company is unable to pay its debts. (Section 409 CAMA)
This article seeks to highlight some of the options available to an insolvent company in Nigeria and they include the following;
- Winding Up
This is the process of disposing off all the assets of a company, paying off creditors and thereafter distributing the remaining assets to shareholders or partners in accordance with their respective liquidity rights. This procedure inevitably leads to the determination of the business and existence of a company.
By virtue of section 410 of CAMA, winding up may be initiated by the following categories of persons;
- The Company;
- A creditor including a contingent or prospective creditor of the company;
- The official Receiver;
- A contributory;
- A trustee in bankruptcy to, or a personal representative of a creditor or contributory;
- The Commission under section 323 of the Act;
- A receiver if authorized by the instrument under which he was appointed; or
- By all or any of the above parties together or separately.
Where a company is unable to pay its debt, the members of that company can resolve by special resolution to wind up the company and initiate the process. This is referred to as “Members’ Voluntary Winding Up”. However, if while considering the voluntary winding up process, the directors are unable to provide a Declaration of Solvency, the company must proceed with a “Creditor’s Winding Up”.
The latter method gives the company’s creditors the right to appoint the liquidators of the company, even after the nomination of same by the members of the company. Liquidator(s) strip the company directors of their powers as soon they are appointed and they must thus upon appointment, be provided with summary statements of the affairs, business, properties and financial position of the company in order for them to carry out their duties efficiently.
This is a debt recovery process which includes the appointment of a person by the Court or creditors (if permitted by the debt instrument, for example, a debenture) of a company to manage, collect and receive the profits of a company for the purpose of settling the company’s debt. It typically involves loaning the assets of a company to a receiver pending the satisfaction of debt.
A charge instrument or mortgage document may provide that upon the default of the company, the debenture holder or his trustee may appoint a receiver. The receiver may be entitled to all the profits arising from the business of the company in lieu of the debt owed by the company.
Upon the appointment of a receiver, a company does not lose its legal entity and neither are its assets automatically vested in the receiver. However, he will be entitled to the possession of the assets subject to the specific charges created. It is possible for a receiver to borrow money on the security of a company if permitted by the Court and the creditor of that loan will have a prior claim to the property over the debenture holders who requested for the court to appoint the receiver.
- Arrangement or Compromise
This is interchangeably referred to as “Arrangement” or “Compromise”. This takes place when a company makes an arrangement with its creditors and/or shareholders or a class of them to accept less than what they are ordinarily entitled to, in full satisfaction of the company’s obligation towards them. The company may persuade its creditors to accept shares or part shares and part cash as payment of the debt owed, or even convince them to relinquish their security or allow the creation of a parri pasu charge in favour of other creditors.
Shareholders may simultaneously or alternatively be requested to vary their rights such as preference shareholders entering agreements to cancel accrued dividends or to reduce the fixed rate of dividends. If possible, preference shareholders may even be convinced to convert their shares into ordinary shares.
- Arrangement on Sale
Here, the members of a company resolve to wind up the company and appoint a liquidator to sell whole or part of the company’s assets or undertakings to another company. The consideration may be in form of cash, shares or debentures, which will be distributed proportionately amongst the shareholders in accordance with their rights in liquidation.
- Merger or Acquisition
A Merger is the consolidation of all or part of the undertakings or interests of two or more companies for the purpose of forming a new entity. This new entity includes a new ownership and management structure. Typically, it takes place between companies of equal status, however in practice this not usually the case. A merger maybe either be vertical (companies at different stages of production), horizontal (companies in the same space/industry), or conglomerate (companies in unrelated fields).
Acquisition on the other hand, is the takeover of one entity by another. Most times, the smaller company is consumed and ceases to exist with all its assets and liabilities becoming part of the larger company. The larger company takes over the operational decisions of the other company and it is important to note that the process involves a large amount of cash but the buyer’s power is absolute.
In conclusion, importance of solicitors to insolvent companies cannot be overemphasized. It is the solicitor’s job to advise the company on the most suitable option upon insolvency. Berkeley Legal is capable of rendering legal services to both solvent and insolvent companies.
The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact firstname.lastname@example.org