i Insolvency Law, Policy and Procedure
i Statutory framework and substantive law
Although Nigeria does not have a specific insolvency law, certain legislation deals with insolvency issues. This includes the Companies and Allied Matters Act (CAMA),2 which remains the principal legislation dealing with insolvency issues; the Companies Winding-Up Rules;3 the Banks and Other Financial Institutions Act;4 the Nigerian Deposit Insurance Corporation Act 2008; the Asset Management Corporation of Nigeria Act 2010 (the last three make specific provision for the insolvency of banks and other financial institutions); and the Investments and Securities Act.5
In 2004, the Central Bank of Nigeria (CBN) implemented a policy that compelled Nigerian banks to recapitalise from a capital base of 5 billion naira to 25 billon naira. The recapitalisation exercise led to a reduction in the number of operating banks from 89 to 24 well-capitalised banks.
After the 2007 global financial crisis, and as part of efforts to prevent a reoccurrence in the financial sector, the CBN implemented policies and directives targeted at restructuring the sector. One such policy initiative was the reversal of the universal banking policy (introduced in 2010), which permitted Nigerian banks to consolidate or integrate various distinct operations under one corporate structure. This compelled many banks to divest their interests in subsidiaries involved in non-commercial banking activities such as insurance, asset management, capital market and investment banking.
For banks that did not survive this process, the CBN and the Nigeria Deposit Insurance Commission opted for the Bridge Bank Mechanism. With this mechanism, three bridge banks were established to take over the assets of three failing banks. The bridge banks were subsequently acquired by the Asset Management Corporation of Nigeria, the ‘Bad Bank’ established by law to acquire the non-performing loans of the commercial banks.
iii Insolvency procedures
The three statutory insolvency procedures available for companies in financial difficulties in Nigeria are receivership, winding up, schemes of arrangement and compromise.
iv Starting proceedings
The CAMA recognises the voluntary and compulsory winding up of a company going through financial difficulties.
Voluntary winding up
The voluntary winding up may either be a members’ voluntary winding up or a creditors’ voluntary winding up. The distinction between the two is that, in the case of the members’ voluntary winding up, a declaration of solvency is made by the directors as opposed to a creditor’s voluntary winding up where no declaration of solvency is made. A company can commence a voluntary winding up of its business by:
- a passing a ‘special resolution’ of the company which shall be advertised in the gazette or two national daily newspapers and filed at the Corporate Affairs Commission within 14 days of the passing of the special resolution; or
- b issuing a statutory declaration of solvency made and filed at the Corporate Affairs Commission by the directors within five weeks immediately preceding the passing of the special resolution.
Compulsory winding up
A creditor can apply to the court for the compulsorily winding up of a company by petition.
v Control of insolvency proceedings
In Nigeria, corporate insolvency and bankruptcy are dealt with in the first instance by the Federal High Court.6 The Federal High Court is vested with exclusive jurisdiction to handle insolvency and bankruptcy matters, and appeals may be made to the Court of Appeal and then from there to the Supreme Court of Nigeria.
Similarly, Section 407 of the CAMA vests jurisdiction on the Federal High Court to wind up relevant companies (whether registered or not), which have registered office or head office within the jurisdiction of the court during the six months immediately preceding the presentation of the petition for winding up.
vi Special regimes
vii Cross-border issues
There is no statutory provision on cross-border insolvency in Nigeria, nor has Nigeria adopted the UNCITRAL Model Law on Cross-Border Insolvency. Therefore, any insolvency proceedings commenced outside of Nigeria may not be recognised in Nigeria and foreign creditors will be treated in the same manner as local creditors.
However, foreign judgments and orders may only be enforced in Nigeria if they comply with the provisions of the Foreign Judgment (Reciprocal Enforcement) Act, which recognises the existence of wholly or partially unsatisfied foreign judgment debt.
In order for a foreign judgment to be enforceable in Nigeria, it must be pronounced by a superior court of the country of the original court and must be a money judgment and final and conclusive as between the parties thereof.
II INSOLVENCY METRICS
In considering the state of the real economy and capital markets, it would be apt to set an appropriate background. With the advent of democracy in 1999, and the appearance of political stability and an enabling climate for businesses, there has been a steady inflow of foreign direct investment (FDI) into Nigeria. This influx of much-needed capital has led to year-on-year growth of the Nigerian economy, save for the recent slowdown occasioned by the plunge in global crude oil prices. The period of buoyancy in both the capital market and the real economy essentially lasted from the late 1990s, until the global recession of the 2007 set in and trickled down to our jurisdiction. Thereafter, a glut seemed to set in, occasioning a lull in economic forces. This lull persisted for a while, with the impact felt keenly in the value of blue chip shares and, in particular, shares in the banking sector.
While share values did not quite make a full recovery, even at the turn of the decade, over the last few years there has been a marked and steady progression of activity in the capital market. Presently the picture is of a slow but gradual boost in the stock market – mostly brought about by tight regulatory measures introduced by the federal government to protect investors’ funds without necessarily stifling the market. These measures have been primarily articulated by the Securities and Exchange Commission (SEC), the nation’s capital market regulator. The government has also introduced bridging measures, such as the Asset Management Corporation of Nigeria (AMCON); a creation of statute, established for the purpose of resolving the non-performing loan assets of banks in Nigeria.
Around this time, there was also a recapitalisation of banks in Nigeria where the Central Bank of Nigeria (CBN) infused approximately US$3.96 billion into the Nigerian banking sector. The combined activities and strategy of the CBN and SEC have ensured that macroeconomic stability is kept in check.
As regards incidences of companies defaulting on debt obligations or seeking extensions from creditors, the position is that prior to now there was ample room for, not to mention high incidence of, recalcitrant debtors avoiding their debt obligations by rushing to court with a frivolous action, which is then employed to frustrate the interests of the creditor. This was especially prevalent when the underlying security was flexible enough to avail the debtor of some possessory right when the contrived dispute was pending. However, with the creation of AMCON, measures are now in place that remove the rigour of certain proceedings such as insolvency and bankruptcy, and in turn some loopholes have been plugged.
Unfortunately, it is not possible to provide a statistical basis for the various indices around this area, as the use of information technology, though on the rise, is still in its infancy.
It may be quite difficult to accurately predict whether there will be an increase or decrease in insolvency activity during the coming year. However, it seems possible that the harsh economic climate will draw a fair balance between insolvency proceedings and restructuring activities. As such, both winding up actions and restructuring activities are following a similar upward trend based on available market indicators. The foregoing position is predicated on a certain premise as considered below.
The dramatic nosedive of global crude oil prices has led to significant revenue shortfalls in Nigeria, given the economy’s dominant reliance on the proceeds from crude oil sales. The economic downturn has led to decreased commercial lending to businesses and consequent illiquidity or low output, as several companies began to run their operations at minimal level. Even more significant is the negative impact the crash in crude oil prices has had on the financial health of the indigenous oil companies that acquired some of the oil assets of the international oil companies, and also on the loan assets of the local banks that financed these assets acquisition. A great deal of these assets were acquired when crude oil was selling above US$100 per barrel as against the present average price of US$40 per barrel.
However, one noticeable trend in terms of how companies are dealing with the financial difficulties has been the use of schemes of arrangement and compromise under Nigerian law (as opposed to resorting to winding-up procedures). For example, these indigenous oil companies have resorted to refinancing or restructuring their existing loan obligations with their creditors or lenders. Most notable in this regard is the Oando Group, which acquired the upstream assets of ConocoPhilips sometime in 2014. In June 2016, it received 94.6 billion naira from nine local banks to enable it to restructure its debt obligations. The refinancing was syndicated by Access Bank Plc, a tier 1 local bank, as a five-year Medium Term Note to assist the company in meeting its financial obligations in this low-oil-price regime. Another recent example is the case of Skye Bank Plc, a tier 2 commercial bank, that had recently failed the capital adequacy ratio (CAR) test conducted by the CBN. The failure of the Bank to meet the minimum CAR was primarily because of the huge non-performing loans it had incurred in relation to the credit lines it extended to some local companies operating within the oil and gas and power sectors. Although the CBN has intervened in order to rescue the bank from going into liquidation (by changing its board of directors and management team), it is yet to unfold its plan with regard to putting the bank back into a good financial shape. It is not too far-fetched to imagine that the CBN would definitely resort to a restructuring mechanism as opposed to liquidation.
Industry analysts have predicted a new wave of consolidation deals across sectors following the dwindling performance of crude oil prices as several companies have entered into strategic alliances, restructuring, compromise, rearrangements and reconstructions such as mergers. Through mergers, such companies are able to stay afloat, diversify into new markets, enlarge their managerial expertise, increase their market share, maximise financial potential and increase their capital base.
In recent years, the attention of most practitioners in Nigeria has shifted towards encouraging business restructuring mechanisms, and the use of liquidation as an option of last resort. This change of perception largely accounted for the considerable levels of corporate internal and external restructuring and arrangements recently witnessed in various sectors of the Nigerian economy such as banking; oil and gas; food and beverages; power; insurance; and manufacturing. Restructuring transactions in these sectors were in some instances triggered by regulatory directives, while in other instances transactions were driven by local investment and foreign direct investment.
In order to control the high inflationary rate in the economy, which officially entered into a recession at the end of the second quarter of 2016, the CBN has had to reduce the Cash Reserves Ratio (“CRR”) requirements of the commercial Banks in Nigeria from 31 per cent to 22.5 per cent at the end of July 2016, while increasing the Monetary Policy Rate (“MPR”) by 200 basis points from 12 per cent to 14 per cent.
However, in light of the recent foreign exchange crisis in Nigeria, and the attendant devaluation of the Naira currency, Nigeria has lost its place as the largest economy in Africa in terms of GDP. The real GDP growth rate further declined by -2.06 per cent in the second quarter of 2016, which was 1.70 percentage points or 170 basis points lower than the decline by -0.36 per cent recorded in the preceding quarter. There was also a significant slowdown in FDI in the relevant sectors of the economy primarily caused by the scarcity of the foreign exchange. Hence, the Monetary Policy Committee of the CBN increased the MPR to attract Foreign Portfolio Investment in the Nigeria’s debt securities and also curb the incidence of rising inflation which was at 17.2 per cent as of July, 2016.
Nevertheless, there seems to be a light at the end of the tunnel as it is anticipated that the new federal government administration is determined to embark on extensive diversification initiatives that would result in increased investments in sectors such as agriculture, manufacturing, mining and telecommunications. Many more companies will be restructuring into newer and stronger entities. Based on the above, it seems safe to predict that winding up actions on account of insolvency may decrease in the coming year, with an increasing preference for other forms of corporate restructure that do not necessarily cumulate in the end of the corporate entity.
As regards whether there are particular industries or companies to watch during the coming year, in view of higher capital requirements prescribed by the Securities and Exchange Commission for capital market operators, it is expected that there will be several cases of corporate restructuring arising from the need to comply with the new capital requirements.
i Debt trading markets
The Nigerian debt market has witnessed a significant level of trading activities in recent years. According to the 2015 annual report released by the Debt Management Office (DMO),9 the federal government, the state governments and the corporate organisations raised a total of 224.3 billion naira through the domestic bond markets in 2015.The DMO also put the value of the country’s domestic bond market at 6.53 trillion naira as of the end of December 2015. The bond market was dominated by the activities of the federal government.
The report stated that the equities market was largely bearish during the year of 2015, which was attributable to factors including falling oil prices at the international market, investors’ apathy and volatile socio-economic and political climate.
In contrast, the bond market capitalisation increased by 32.7 per cent to 7.14 trillion naira by the end of December 2015 from 5.38 trillion naira at end of December 2014, as the corporate organisations, federal and state governments accessed the debt markets in 2015, to raise a total of 112 billion naira, 56.5 billion naira and 35.8 billion naira, respectively.
The size of the Nigerian domestic bonds market, in terms of face value, was 6.52 trillion naira as of the end of December 2015 compared to 5.68 trillion naira as of the end of December 2014, which represented an increase of 832.16 billion naira or 14.64 per cent. The increase was broken down as follows: FGN bonds – 5.81 trillion naira; state government bonds – 457.24 billion naira and corporate bonds – 226.15 billion naira. There was no issuance by supranationals during 2015. The DMO also reported strong activities in the secondary bond market, putting total transactions in the market in 2015 at 9.49 trillion naira. The report stated that the secondary market activities for the FGN Bonds were generally stronger in 2015 compared with the previous year.
Data from the Financial Markets Dealers Quotation Market (FMDQ) and Central Securities Clearing System in 2015 showed that the total face value of transactions, consideration and number of deals was 9.49 trillion naira, 9.58 trillion naira and 46,992 naira higher than the corresponding figures of 7.39 trillion naira, 8.07 trillion naira and 46,090 naira in 2014, respectively.
Trading activities were boosted in 2015, as most of the challenges that had arisen from the introduction of the Scripless Securities Settlement System by the Central Bank of Nigeria in 2013 were addressed. Secondary market activities also got a boost, with the introduction of the FMDQ OTC E-Bond platform, which enabled the dealers to trade more professionally, with enhanced price discovery and transparency.
The report further indicated that as in the previous year, oversubscriptions were recorded in all the monthly auctions of the FGN Bonds in 2015, which presented a clear indication of diverse and strong investor interest, resulting from an active secondary market and sustained efforts by the stakeholders to develop and strengthen the domestic debt market.
The average yield of the FGN securities of about 10 per cent in 2015 was relatively lower than their corresponding yield of 15 per cent in 2014.
ii Litigation over director’s liability
The prevailing trend in Nigeria relates to the rising incidence of litigation over directors’ liability, particular in respect of fraud and other related issues. The Nigerian financial system experienced a banking crisis in 2008–2009, partly triggered by the global financial crisis and largely by domestic events arising from huge toxic loan assets. In order to avoid the system’s collapse and also to restore depositors’ and investors’ confidence in the banking sector, the CBN injected liquidity funds of 620 billion naira into the eight affected distressed banks and consequently replaced their management teams with interim management appointed by the CBN. The failure in corporate governance of Nigeria’s banks was indeed a principal factor, contributing to the financial crisis as some of the banks’ chief executives or directors were engaging in unethical and potentially fraudulent business practices, facilitating the grants of unsecured loans, insider abuse, etc.
Following from the foregoing, a wave of criminal litigation began and still continues in the aftermath of the sale of the affected banks, with intense attention on the former managing directors (MDs) or directors of the failed financial institutions. Not all of the directors have been caught in the net of litigations; in some cases, only the MDs and few directors were charged with fraud and other financial crimes associated with the insolvency of their former banks. In one instance, the Economic and Financial Crimes Commission10 brought a 22-count charge of conspiracy, fraud and stealing against the accused former MDs and directors. In each of the pending criminal suits, the indicted former MDs and directors have pleaded not guilty to the each of the charges upon their arraignment. In another instance, the former MD of a failed bank was sentenced to six months in prison for fraud and ordered to hand over US$1.2 billion in cash and assets after pleading guilty to three of 25 counts of fraud and mismanagement. More recently, a Nigerian court discharged a former MD of one of the defunct banks. The former MD was alleged to have committed general banking fraud and granted credit facilities without following due process at a time while he was in office. The said former MD still stands trial for other financial crimes before another superior court of record.
Generally, the Nigerian Company Law excludes directors from personal liability for acts performed on behalf of their companies. The law in this regard presupposes that a director is an agent of a company, and as such should not be liable for acts performed on behalf of the company except where the director assumed personal liability.11 This principle is in consonance with the doctrine of corporate personality, which presupposes that a company assumes a separate and distinct personality from its members from the moment of incorporation. The company thus wears a corporate cloak that cannot be pierced unless under circumstances authorised by law.
However, Nigerian courts have lifted the corporate veil in a number of instances, especially in cases of fraud or where the interest of justice demands that the veil be lifted to hold controlling shareholders, directors or other officers (as the directing minds of the company) liable for the acts of the company.
Some exceptions to the doctrine of corporate personality are also included in the CAMA. For instance, Section 506(1) of the CAMA provides that if, in the course of winding up of a company, it appears that any business of a company has been carried on in reckless manner or with intent to defraud the creditors of the company or creditors of any other person for any fraudulent purpose, the court may, on the application of the official receiver, liquidator or any creditor or contributory of the company declare that any persons who were knowingly parties to the carrying on of business as aforesaid be personally liable for the debts or other liability of the company.
Further, Section 290 of the CAMA deals with cases where a company receives money by way of a loan for specific purpose, or receives money or other property by way of an advance payment for the execution of a contract or project. If the company in any of these cases, and with intent to defraud, fails to apply the money or property for the purpose for which it was received, every director or other officer of the company in default is personally liable to the party from whom the money or property was received.
In line with Section 290 of the CAMA, Section 409 of the Asset Management Corporation of Nigeria Act12 holds directors of borrowing companies personally liable for any non-performing loans obtained from eligible financial institutions.
1 Folabi Kuti is a partner, Ugochukwu Obi is a senior associate and Olatunji Oginni is an associate at Perchstone and Graeys.
2 Chapter C20, Laws of the Federation of Nigeria 2004.
3 2001 (CWR).
4 1991 (BOFIA.)
5 2007 (ISA).
6 See Section 251(1)(j) of the Constitution of the Federal Republic of Nigeria 1999.
7 Section 51(1)–(7).
8 Section 52(1)–(5).
9 See Punch Newspaper of 10 July 2016.
10 The body statutorily charged with investigating and prosecuting economic and financial crimes in Nigeria.
11 CAMA, Chapter C20, Laws of the Federation of Nigeria, 2004; Section 279. See also Yesufu v. Kupper International NV  5 NWLR (Part 446) 17 at 28–29.
12 No. 4, 2010.