NIGERIA INSOLVENCY AND RESTRUCTURING. Kemela Okara, Tamuno Atekebo and Yinka Aderemi STREAMSOWERS & KÖHN

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1 NIGERIA INSOLVENCY AND RESTRUCTURING Kemela Okara, Tamuno Atekebo and Yinka Aderemi STREAMSOWERS & KÖHN 1 Legislation What legislation is applicable to bankruptcies and reorganisations? The Companies and Allied Matters Act 1990 (CAMA) and the Companies Winding-Up Rules 2001(CWR) made pursuant to CAMA are applicable to insolvency of companies. The Banks and Other Financial Institutions Act 1991 (BOFIA) and the Nigerian Deposit Insurance Corporation Act 1988 make specific provision for insolvency of banks and other financial Institutions. The Investments and Securities Act 1999 and the CAMA make provision for company reorganisations including reconstructions by way of a scheme for a compromise, arrangement or reconstruction and the Bankruptcy Act 1979 (BA) is the specific legislation as regards bankruptcy of natural persons and partnerships. 2 Excluded entities What entities are excluded from bankruptcy proceedings and what legislation applies to them? No company is exempted from insolvency or winding up proceedings. CAMA and CWR are however not applicable to statutory and other public corporations including those established under federal or state legislations. In addition, there are statutory restrictions on attachment proceedings concerning federal or state agencies. By the provisions of the Sheriffs and Civil Process Act, the consent of the Attorney General of the Federation or State (as the case may be) must be obtained before an attachment of debts by garnishee order can be made against the federal or state government or its agencies. 3 Secured lending and credit (immovables) What are the principal types of security devices (e.g. mortgages, etc) that are taken on immovable (real) property? The principal types of security that may be created over immovable property are mortgages and charges. A mortgage is the legal or equitable transfer of title or interest as security for the payment of a debt or the discharge of some obligation for which it is given subject to the condition that the title shall be reconveyed if the mortgage debt is liquidated or discharged. A charge is a form of security which vests in a creditor the right to have a designated property of a debtor appropriated to discharge a debt. An example of a charge is a debenture secured by a charge over a company s property and such charge may be a fixed or floating charge.

2 Unlike a mortgage, a charge does not transfer or convey ownership of the property to the creditor but merely grants the creditor certain rights over the property as security for a credit facility. 4 Secured lending and credit (movables) What are the principal types of security devices (e.g. mortgages, etc) that are taken on movable (personal) property? Guarantees, pledges, mortgages and charges are the principal modes of security devices taken on movable property. 5 Unsecured credit What remedies are available to unsecured creditors (e.g. seizures, attachments, judgment, etc)? Are the processes difficult or time-consuming? Are prejudgment attachments available? Do any special procedures apply to foreign creditors? An unsecured creditor can commence a civil action in a law court to recover its money and upon judgment apply for a writ of execution to attach or levy execution on the goods and chattels of the judgment debtor. Upon judgment, the judgment creditor may also by way of garnishee proceedings attach the judgment debtor s money in the hands of a third party such as in a bank account. These procedures though not difficult may be time consuming because of the large volume of cases handled and the limited infrastructure available for adjudication. Pre-judgment attachments are available as interim attachments of property or detention of chattels where it is evident that the debtor may obstruct or delay or conceal or evade service and execution of a court order or judgment. There are no special procedures for foreign creditors. A foreign creditor can institute an action in a law court in its name or in the name of an attorney against a debtor for debt recovery in the same manner as a local creditor so long as the debtor or its assets are within jurisdiction or the underlying contract giving rise to the debt was performed within the jurisdiction of the court. The processes and remedies available to a local creditor are also applicable to a foreign creditor. 6 Courts What court(s) are involved in the bankruptcy process? Are there restrictions on the matters that the court(s) can deal with? The Federal High Court is specifically vested with jurisdiction in bankruptcy and insolvency proceedings by virtue of the provisions of Section 407 of CAMA, Section 142 of the Bankruptcy Act and Section 251(e) of the Constitution of the Federal Republic of Nigeria 1999.

3 7 Voluntary liquidations What are the requirements for a debtor to commence a voluntary liquidation of its business? What are the effects of the commencement of the liquidation? A company can commence a voluntary liquidation of its business by carrying out the following: (i) By 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. (ii) A statutory declaration of solvency shall be made and filed at the Corporate Affairs Commission by the directors within 5 weeks immediately preceding the passing of the special resolution. If there is default in complying with the above requirements, the company and every officer of the company is liable to a fine. The effects of the commencement of the liquidation are as follows: (i) From the commencement of the voluntary liquidation, the company shall cease to carry on its business except as may be required for the beneficial winding up of the company. (ii) Any transfer of shares without the sanction of the liquidator and any alteration in the status of the members of the company made after the commencement of the voluntary liquidation shall be void. 8 Involuntary liquidations What are the requirements for creditors to successfully place a debtor in involuntary liquidation? What are the effects of the commencement of the liquidation? Creditors may successfully place a debtor company in involuntary liquidation where the following requirements are met: (i) The debtor company is unable to pay its debts in a sum exceeding =N=2,000 (approximately $15). (ii) The creditor has served on the debtor company a signed demand notice requiring the company to pay the sum due at its registered office or head office. (iii) The debtor company has for 3 weeks after the service of the notice on it neglected to pay the sum. Finally the Creditor will need to apply to the court (Federal High Court) for the winding up of the debtor company by filing a winding up petition. The commencement of the liquidation of a company by petition does not automatically lead to liquidation. The court has unfettered discretion to grant the petition or dismiss it or to adjourn the hearing of the petition conditionally or unconditionally or to make an interim order or any other order as the court deems fit. The effects of commencement of liquidation proceedings are as follows:

4 (i) Any dispositions of the company s property and transfer of shares or alteration in the status of the members made after the commencement of proceedings shall be void unless the court directs otherwise. (ii) Any attachment of or execution against the assets of the company after commencement of the proceedings shall be void. (iii) In any action or proceeding against the company before any other court, the court concerned may stay or restrain proceedings or refer the case to the court hearing the winding up petition. 9 Voluntary reorganisations What are the requirements for a debtor to commence a financial reorganisation? What are the effects of the commencement of the reorganisation? A reorganisation will be subject to negotiations by the relevant parties and it may be done by the management with or without the direct participation of the members of the company. However, a voluntary reorganisation may take place where the members of the company by a special resolution duly passed that the company (Transferor Company) be put into members voluntary winding up and that the liquidator be authorised to sell the whole or part of its undertakings or assets to another body corporate (Transferee Company) in consideration for fully paid shares, debentures, policies, cash or other interests in the transferee company and distribute same among the members of the transferor company in accordance with their rights in the liquidation. Any sale or distribution pursuant to the resolution is binding on the transferor company and its members as each member is deemed to have so agreed with the transferee company. Any dissenting member to the reorganisation must within 30 days of the passing of the resolution in writing express his dissension in respect of any of the shares held by him. Such shares held by any dissenting member can be purchased at an agreed price. Any member who fails to signify their dissent is deemed to have accepted the scheme which becomes binding on such a member. 10 Involuntary reorganisations What are the requirements for creditors to commence an involuntary reorganisation? What are the effects of the commencement of the reorganisation? A creditor may apply to court in a summary way for an order that a meeting of the creditors or class of creditors be summoned in such manner as the court may direct. Where the order is granted, then a meeting is called. The notice summoning the meeting or the advertisement must be accompanied by a statement explaining the effect of the reorganisation or arrangement vis-à-vis the material interests of the directors of the company. The draft scheme must be approved or amended by a majority representing not less than three-fourths in value of the creditors or class of creditors affected and who are present and voting. The court may also refer the scheme to the Securities and Exchange Commission whose investigating inspectors shall submit a report on the fairness of the scheme. Thereafter an application is made to the court to sanction the agreed scheme and where so sanctioned, it becomes binding on the company and on all the creditors or class of creditors or the liquidator as the case may be. A copy of the court order wherein the reorganisation was sanctioned must be delivered to the

5 Corporate Affairs Commission while the court order must be annexed to every copy of the memorandum of the company issued after the court order was made. 11 Mandatory commencement of insolvency proceedings Are companies required to commence insolvency proceedings in particular circumstances (to avoid personal liability to directors and officers or otherwise)? In what circumstances must companies do so? If proceedings are not commenced, what liabilities can result? There are no mandatory provisions under CAMA that require a company or its directors or shareholders to commence insolvency or winding up proceedings in particular circumstances. However, the directors of a company may in some circumstances commence winding up proceedings in order to avoid a third party commencing winding up proceedings or avoid personal liability. A company may apply to the court to be wound up if it is unable to pay its debts or where the membership of the company is reduced below two. Where a company with less than two members carries on business for more than 6 months, every director or officer who has the knowledge of such default shall be liable jointly and severally for the debts contracted by the company. 12 Doing business in reorganisations Under what conditions can the debtor carry on business during a reorganisation? What conditions apply to the use of assets and to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor s business activities? The terms of the scheme of arrangement or compromise will determine whether the debtor company will carry on business during the reorganisation and if the creditors or the court will perform any supervisory role in the management of the business of the company. The scheme will also provide for how the company may deal with its assets and if it can incur further credit. It may be noted that even in the case of a winding up, the liquidator is allowed to continue to carry on the business of the company so far as may be necessary for the beneficial winding up of the company and all expenses or cost incurred thereof shall have priority over other debts. 13 Sale of assets In (a) a reorganisation or (b) a liquidation, what provisions apply to (1) the sale of specific assets out of the ordinary course of business and to (2) the sale of the entire business of the debtor? (a) In a reorganisation, the terms of the reorganisation or scheme if by way of a scheme of arrangement or compromise will determine the provisions applicable to or the basis for the sale of specific assets or the entire business. (b) In a liquidation, whether voluntary or otherwise, the liquidator has the power to sell the property of the company or parts thereof of whatever nature by public auction or private treaty.

6 14 Stay of proceedings/moratoria What prohibitions against the continuation of legal proceedings or the enforcement of claims by secured and unsecured creditors are imposed by legislation or court order in (a) liquidations and (b) reorganisations? In what circumstances can secured or unsecured creditors obtain relief from such prohibitions? (a) Liquidation: Where a winding up petition has been presented, on an application by the company or a creditor or member before the making of a winding up order, any action or proceeding instituted or pending against the company in any court may be stayed by the court concerned or it may refer the case to the court hearing the winding up petition. In addition, no attachments or executions shall be levied against the assets of the company and any judgment debt shall be a claim against the company in the liquidation process. If a winding up order is made or a provisional liquidator is appointed, no action or Section 407 of the Companies and Allied Matters Act proceeding shall be commenced or maintained against the company unless with leave of court. (b) Reorganisations: The terms of the reorganisation will determine if there will be a stay or moratorium on proceedings or enforcement of claims against the company. The scheme may prevent or prohibit creditors, secured or unsecured from instituting or maintaining proceedings against the company within the period of the reorganisation or restructuring. It is important to note that if the scheme is sanctioned by the court, the terms of the scheme are binding on all creditors or class of creditors as the case may be and in the case of a company being wound up, on the liquidator and contributories of the company. 15 Set-off and netting To what extent are creditors able to exercise rights of set-off or netting in liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently? In a voluntary liquidation the general rules of set-off are applicable and in reorganisation, the terms of the scheme will indicate the extent to which creditors can exercise any right of set-off. In the liquidation of insolvent companies, where there has been mutual debt or mutual credits or mutual dealings between a debtor and a creditor, an account shall be taken of what is due from one party to the other in respect of the mutual dealings or debt and the sum due from the one party shall be set-off against any sum due from the other party. Only the balance of the account shall be payable or claimed by either side respectively. The only situation where any creditor can be deprived of the benefit of any set-off against the property of a debtor is where the creditor had at the time of giving the credit to the debtor notice of what may amount to an act of bankruptcy on the part of the debtor.

7 16 Post-filing credit Does your country s insolvency system allow a debtor in (a) a liquidation or (b) a reorganisation to obtain secured or unsecured loans or credit? What priority is given to such loans or credit? A liquidator has the powers to carry on the business of the company in liquidation and can obtain secured or unsecured credit so far as this may be necessary for beneficial winding up of the company. Such debts shall be payable in priority to other claims. In a reorganisation, the terms of the scheme or the understanding reached between the company and creditors will determine whether the company can obtain secured or unsecured loans and the priority to be given to such loans. 17 Successful reorganisations What features are mandatory in a reorganisation plan? How are creditors classified for purposes of a plan and how is the plan approved? Reorganisations are generally consensual. They are therefore subject to negotiation and agreement of the relevant parties which may include the directors, members and creditors secured or unsecured and the reorganisation may be formal requiring the sanction of court or it may be informal. However, a reorganisation by way of a scheme of arrangement or compromise with creditors will have the following features: (i) The company or any of its members or creditors or liquidator may apply to the court to order a meeting of the creditors or class of creditors or members or class of members; (ii) if a majority in number not less than three-quarters in value of the shares of members or of a class thereof or of the interest of creditors or class of creditors approve the scheme, the court may refer the scheme to the Securities and Exchange Commission whose investigating inspectors shall submit a report on the fairness of the scheme; (iii) if the court is satisfied that the scheme is fair, the court shall sanction the scheme and it shall be binding on all creditors or class of creditors or members as the case may be; (iv) a copy of the order shall be registered with the Corporate affairs Commission and shall also be annexed to every copy of the memorandum of the company. 18 Expedited reorganisations Do procedures exist for expedited reorganisations (e.g. prepackaged reorganisations)? There are no provisions for expedited reorganisations. The timing and completion of a reorganisation will be subject to negotiation by the parties who in the case of a scheme of arrangement may need to take into consideration the rules of court. In non-formal reorganisations which may not require the sanction of any regulatory authority, the timetable will be at the discretion of the parties.

8 19 Unsuccessful reorganisations How is a proposed reorganisation defeated and what is the effect of the plan not being approved? What happens if there is default by the debtor in performing an approved plan? A proposed scheme may be defeated where the required majority of votes are not obtained or if the court does not sanction the scheme on the grounds that the terms of the scheme are not fair or are not calculated to benefit the general body of creditors or the objections of a dissenting party are upheld. In any of the above situations, the court may refuse to approve the scheme or may direct that it should be amended where the amendment will best serve the interest of justice. The scheme will usually state the conditions of default and the consequences of default in implementing the scheme and these may include the right of the creditor to apply to court to enforce the scheme or commence winding up proceedings. 20 Bankruptcy processes During a bankruptcy case, what notices are given to creditors? What meetings are held? What committees are or can be formed? What powers or responsibilities do these committees have? Can creditors initiate proceedings to pursue remedies against third parties? On the appointment of a liquidator in a winding up, he is required to advertise his appointment in 2 national newspapers and publish it in the Gazette. In the advertisement, all creditors will be notified of the appointment and will be directed to present proof of any claims they may have against the company. In a creditors winding up or insolvency proceedings, there will also be a notice of a meeting of creditors which will be published in the Gazette and 2 newspapers. A similar procedure will apply to the notice of final meeting of creditors at which meeting the creditors will consider the accounts to be submitted by the liquidator. The court may also direct that a meeting of creditors be called to determine the wishes of the creditors. A committee of inspection may be appointed by the creditors or by the court depending on whether the winding up is a creditors voluntary winding up or winding up under the supervision of the court. The committee shall meet at least once a month and the committee may fix the remuneration of the liquidator. Generally, it is the officers responsible for the liquidation such as the official receiver or liquidator who may pursue proceedings against third parties. However, under Sections 506 and 508 of CAMA, creditors can instigate proceedings against other persons for fraudulent trading or direct that the liquidator refer a matter to the Attorney General for consideration and prosecution.

9 21 Claims and appeals How is a creditor s claim submitted and what are the applicable time limits? How are claims disallowed and how does a creditor appeal a disallowance? Are there any provisions that deal with the purchase, sale or transfer of claims against the debtor? A debt is proved by an affidavit verifying the debt sent to the receiver or liquidator as the case may be. The affidavit must contain the particulars of the debt such as statement of account, receipts, agreement or any documentary evidence to substantiate the claim. Every creditor must prove his debt whether due immediately or payable upon a contingency and if the company is an insolvent company, the bankruptcy rules will apply. There are no specific time limits for the submission of claims by creditors. However, the court may fix a time within which creditors are to prove their claims or be excluded from the benefit of any distribution. A claim can be disallowed if the creditor does not comply with the procedure. Equally a claim may be expunged or reduced by the court upon the application of the liquidator for being improperly admitted. Where a creditor is dissatisfied with any decision in respect of a claim, he may apply to the court to have it reversed or varied. A debtor may also apply to court to have a claim varied or reduced. There are no specific provisions on the purchase, sale or transfer of claims. 22 Priority claims What are the major (a) governmental and (b) non-governmental privileged and priority claims in liquidations and reorganisations? Which priority and privileged claims have priority over secured creditors? In liquidations, the statutory provision for preferential payments gives priority to local rates and charges due from the company; Pay-As-You-Earn tax deductions, assessed tax, property or income tax; all wages or salaries of any clerk or servant or labourer or workman in respect of services rendered to the company; and deductions under the Pension Reform Act. These have priority over all other debts including those of debentures under any floating charges. It may be noted however that the costs and expenses of the liquidation shall take precedence over the preferential payments. 23 Distributions How and when are distributions made to creditors in liquidations and reorganisations? In cases of liquidation, the liquidator will determine when and how distributions or payments will be made to creditors and or contributories after a proper assessment of the assets and liabilities of the company. This may take place from time to time or after the period that may be specified for proof of claims. In a reorganisation, the terms of the scheme of compromise or arrangement will determine when and how payments or transfers as the case may be will be made to creditors.

10 24 Voidable transactions (a) What types of transactions can be annulled or set aside in bankruptcies and what are the grounds? What is the result of a transaction being annulled? Any conveyance, mortgage, delivery of goods, payment, execution or any other acts relating to property or shares of a company done within 3 months preceding the commencement of winding up of a company which is made to have preference over other creditors shall be deemed a fraudulent preference and will accordingly be invalid. Any conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void. The person or company preferred shall be personally liable as surety for the debt. A floating charge granted by an insolvent company within 3 months of the commencement of winding up shall also be invalid except for the amount of any cash paid to the company together with interest on that amount at the current bank rate. (b) Does your country use the concept of a suspect period in determining whether a transaction by an insolvent debtor can be annulled? (If so, how is the suspect period established?) Can voidable transactions be attacked by secured creditors or by unsecured creditors or only by a liquidator or trustee? Can they be attacked in a reorganisation or suspension of payments or only in liquidation? In the determination of fraudulent preference, the relevant date is the date of the presentation of the petition for winding up in the case of winding up by or subject to the supervision of the court or the date the resolution for winding up was passed in case of a voluntary winding up. Any of the above transactions mentioned in paragraph 24(a) executed within this period or thereafter shall be void. Any interested party including a liquidator, member or creditor may challenge a voidable transaction or fraudulent preference in court. 25 Directors and officers (a) Are corporate officers and directors liable for or can they be made to pay obligations owed by their corporations (e.g., amounts owed to government authorities)? Corporate directors and officers are generally not liable for obligations of their companies. Corporate directors, officers and other persons may however be personally liable for the obligations owed by their corporations in cases of fraudulent trading where they knowingly carried on the business of the company in a reckless manner or with intent to defraud creditors. Directors and other officers may also be personally liable in cases of diversion of loans or other property advanced to the company or any misfeasance or breach of duty in relation to the company.

11 (b) Do corporate directors and officers have any liability for pre-bankruptcy actions by their companies? Can they be made subject to sanctions or penalties for other reasons? The liability stated in paragraph 25(a) above is generally the liabilities of directors and officers of a company in the management of the company and is premised upon their duty of care and skill in the management of the company. In addition, CAMA stipulates criminal liability for a person who was a party to the carrying on of the business of the company in a fraudulent manner. There are other offences and sanctions for acts under CAMA against directors and officers of the company. These include sanctions for knowingly presenting defective financial statements, not keeping proper books of account or knowingly continuing to carry on business while the membership of the company is less than 2 members. 26 Creditors enforcement Are there processes by which some or all of the assets of a business can be seized outside of court proceedings? How are these processes carried out? In secured credit transactions where the credit facility is secured by a mortgage or charge on the property of the company or part thereof, a creditor may without any resort to the court exercise its power of sale or appoint a receiver/manager to take over the business and assets of the company. The terms of the instrument creating the charge or mortgage will state the grounds for enforcement of the security. In practice however, it is not unusual for a receiver to obtain the protection of the court by way of an injunction to restrain the company or its officers or agents from interfering with the work of the receiver. This is done in order to forestall the frequency with which companies sometimes seek to frustrate the work of the receiver. 27 Corporate procedures Are there corporate procedures for the liquidation or dissolution of a corporation? How do such processes contrast with bankruptcy proceedings? A company may at the instance of its members or creditors undergo voluntary liquidation and the provisions of CAMA and CWR are applicable to such liquidation. A voluntary liquidation may be done with or without the supervision of the court. In insolvency proceedings, there is the need for court supervision. 28 Conclusion of case How are liquidation and reorganisation cases formally concluded? Where the liquidator has realised all the property of the company or so much of it as may be realised without prolonging the liquidation unnecessarily, he distributes a final dividend if there is any to the company creditors, adjust the rights of the contributories among themselves and then makes a final return if any to the contributories. The liquidator will prepare an account of the winding up, showing how it has been conducted, how the assets of the company have been disposed of and then call a general

12 meeting of the members and a meeting of creditors in the case of a creditors winding up to lay the accounts before them. Within 7 days after the meeting or meetings, as the case may be, the liquidator shall file returns with a copy of the accounts with the Corporate Affairs Commission and the Commission shall register the returns and accounts. On the expiration of 3 months from the date of registration, the company shall be deemed to be dissolved. In a reorganisation, the terms of the scheme of compromise or arrangement or the terms of the court order sanctioning the scheme will determine when the reorganisation will be concluded. 29 UNCITRAL Model Law Is the adoption of the UNCITRAL Model Law on Cross- Border Insolvency under consideration in your country? If so, what is the present status of this consideration? There are no proposals for the consideration of the UNCITRAL Model Law on crossborder insolvency pending before the National Assembly 30 International cases What recognition or relief is available concerning an insolvency proceeding in another country? How are foreign creditors dealt with in liquidations and reorganisations? Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments? Foreign insolvency judgments and orders may be enforced in Nigeria where it is registered in the High Court. For the foreign judgment to be recognised or registered there must be a judgment debt which must be unsatisfied in whole or part and the application to register the judgment must be made within 6 years of the date of the judgment. Section 3 of the Foreign Judgment (Reciprocal Enforcement) Act empowers the Minister of Justice to extend the right to register a foreign country judgment in Nigeria. By this law, only foreign countries which accord reciprocal treatment to judgments given in Nigeria are granted such permission to enforce their judgments in Nigeria. Foreign creditors are not treated differently from local creditors. The processes and remedies available to a local creditor are also applicable to a foreign creditor.

13 31 Cross-border insolvency protocols and joint court hearings In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries? There are no cross-border insolvency protocols and the courts have not held joint hearings with courts in other countries. There are however regulations for the enforcement of foreign judgments by the courts in Nigeria. 32 Pending legislation Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders? There are no new or pending legislations. 33 Developments under the EU Regulation on Insolvency Proceedings Please comment, if applicable, on any significant developments or recent decisions in your country involving the EU Regulation on Insolvency Proceedings. Not applicable. STREAMSOWERS & KÖHN Contacts: Kemela Okara Tamuno Atekebo Yinka Aderemi D Akin Olugbade Street Tel: / Off Adeola Odeku Street Fax: Victoria Island Lagos Nigeria