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FRAMING THE FOUNDATIONS FOR BUSINESS RESCUE IN NIGERIA1

INTRODUCTION

The policy emphasis in insolvency law and practice globally was traditionally

targeted at the recovery of credit. Indeed, in England, (from where Nigeria draws its

legal heritage), before the English Companies Act of 1862, and before the

establishment of a collective procedure for the administration of an insolvent‟s

estate,2 a disappointed creditor could, at common law, proceed against the property of

the debtor and the debtor himself!3 Overtime, and with passage of the Companies Act

of 1862 came procedures for the winding up of companies unable to pay their debts

and the distribution of their assets. With it also came the formal concept of receivers,

who were appointed by the courts to safeguard creditors‟ interests.4 Later on in this

timeline, creditors acquired the right to appoint receivers out of Court.5

It is in this context that we see the historical competition between divergent interests.

For the debtor company, the only reason that it has sought credit is for the

advancement of its enterprise, i.e. meeting cash flow obligations, making investments

and expanding.6 For the lender on the other hand, its primary objective is its principal

and interest, or if the debtor does not pay, to have recourse to the security, or where

he is not a secured creditor, to be able to claim in the liquidation of the debtor

company.

Yet, while at first blush, the creditor and debtor may seem at cross-purposes, there are

some fundamental meeting points. This is because by and large, both parties are

interested in the success of the debtor‟s enterprise. The debtor, primarily because the

enterprise is its source of livelihood, and the creditor, because it desires its money

back.

1 Dr Nnamdi Dimgba, Partner and Opeoluwa Osinubi, Associate, both of Olaniwun Ajayi LP

2 At least, before the Statute of Bankrupts 1542

3 E. Cooke, Debtor and Creditor, (Butterworth, 1829); V. Lester, Victorian Insolvency, (Oxford

University Press, Oxford, 1996)

4 Hopkins v Worcester & Birmingham Canal Proprietors (1868) L.R. 6 Eq 437.

5 See Lightman & Moss, The Law of Receivers and Administrators of Companies, (Sweet &

Maxwell, 2000) 1 6 It has been said that “Credit facilitates the smooth running and expansion of business and in

good trading conditions, gives a company leverage to increase its profits by undertaking more

business that would be possible if it were restricted to using its own funds.” See R. Goode,

Principles of Corporate Insolvency Law, (Sweet & Maxwell 2nd

Ed., 2005), 2

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This is sometimes still the case when the debtor is experiencing difficulties in

repaying the debt. In this circumstance, the creditors and debtor may decide that there

is still some value to be unlocked in a troubled company and wish, therefore, to

embark on a course of rescue.

The recognition of the possibility of this sort of consensus between both creditor and

debtor was material in the shift of emphasis in a number of jurisdictions, from the

promotion of one party‟s interest over the other (often the creditor‟s interests over the

debtor‟s), to the need to seek to strike a balance between both interests – to preserve

the enterprise and secure the credit advanced.

While there has been much agitation for the deployment of such an overarching

policy in the Nigerian insolvency regime, the suggested reforms to Nigerian

insolvency laws have not, as yet, been effected. However, through ingenious

interpretation and application of existing provisions of insolvency statutes, it may be

possible to trace out the outlines of a business rescue practice that seeks to work out

an optimal balance between different interests.

Following this introduction, this paper is divided into two sections. In the first section,

we consider briefly, the legal framework governing corporate insolvency in Nigeria

and highlight how the law treats the interests of creditors and debtors. In the second

section, we test the suitability of the existing legal regime for business rescue and

point out the possibilities for reform in Nigerian insolvency laws.

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SECTION ONE – THE EXISTING FRAMEWORK FOR CORPORATE INSOLVENCY

Meaning of Insolvency

Under Nigerian law, there is still some uncertainty as to when a company is insolvent.

This is because the Companies and Allied Matters Act (CAMA),7 the principal

legislation regulating companies, does not define an insolvent company.8

First,

CAMA provides a definition for an “insolvent person” which is a definition that ties

insolvency to the existence of a judgment debt.9 Second, CAMA sets out a regime for

circumstances where a company would be deemed as being unable to pay its debts.10

There is support for the adoption of either regime, in determining insolvency,11

and

this undoubtedly points to a need to establish some clarity in the law.

Importantly, insolvency regimes in other jurisdictions envisage the distinction

between cash-flow and balance-sheet insolvency – a distinction that should also be

introduced into Nigerian laws. In this context it has been suggested that the winding

up of a company is justifiable where the said company is found to be balance sheet

insolvent, while business rescue is the more appropriate measure for companies that

are cash-flow insolvent.12

Framework for Business Rescue

The habitability of an insolvency regime to business rescue depends almost entirely

on the rights and correlative duties of creditors and debtors, and the freedom given to

each to exercise their rights, and the accommodations provided, particularly to the

debtor against the exercise of such rights.

7 Cap C 20 Laws of the Federation of Nigeria 2004

8 This is so despite the fact that the CAMA specifically refers to Insolvent companies in Section

492 and 493 of the CAMA 9 Section 567 of the CAMA.

10 Section 409 of CAMA, a company would be deemed as unable to pay its debts, (and thus

become eligible for the Court to make an order of compulsory winding up) where a company

which was served with a demand by a creditor to which it owes more than N2000, neglected

to pay the debt within three weeks of the notice. 11

See D. Sasegbon, Nigerian Companies and Allied Matters Act Law and Practice, (DSc

Publishing, 1st Edition 1991), 852, A. Idigbe, “Using Existing Insolvency Framework to Drive

Business Recovery in Nigeria: The Role of the Judges. “<http://www.insol.org/_

files/Africa%20Round%20Table/Using%20existing%20insolvency%20framework%20to%20

drive%20business%20recovery%20in%20Nigeria.pdf > Accessed on 28 September 2013. 12

This forms the fulcrum for the criticism of Section 409 of the CAMA which defines a

company as being unable to pay its debts, and hence, in very broad terms, insolvent, where it

fails to liquidate a debt of N2000 upon three weeks‟ notice. For him, the company may only

be cash-flow insolvent and not balance sheet insolvent and thus be an ideal candidate for some

breathing space to enable it meet its obligations

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Under Nigerian law, the creditor is principally entitled to the repayment of his

principal and interest. Where he is a secured creditor, because of the general principle

that insolvency law will respect proprietary claims,13

he/she will also have the right to

the enforcement of his/her security whether by the exercise of the power of sale;14

or

by applying to court for judicial sale; or by taking possession of the secured asset; 15

or by appointing a receiver either out of Court or pursuant to an order of court; or by

bringing an action for foreclosure;16

or by petitioning (where entitled so to do) the

Court17

for the winding up of the debtor company under the CAMA (or alternatively

participating in a creditors‟ voluntary winding up). The unsecured creditor on the

other hand, is only entitled to share pari passu with other creditors in the common

pool of assets. The preeminent position accorded to the secured creditor is perhaps

indicative of the general tenor of Nigerian insolvency laws.

That said, in the exercise of his/her rights, the creditor continues to owe a number of

obligations that are established under common law, as well as by a number of relevant

statutes. For instance, under the CAMA and any of the Property and Conveyancing

Laws, the Conveyancing Act or the Mortgage and Property Law of Lagos (as may be

relevant depending on the nature and location of the secured interest and the subject

matter of the security), the creditor must, in general, exercise his powers in good faith.

Section 390 of the CAMA for instance, regarding receivers or managers appointed

over the undertakings of the debtor company, goes further to impose a duty on the

said receiver to act in the interests of the company and promote the purposes for

which it was formed.

Creditors also have a number of duties established under the general law. As such, a

creditor may be liable inter alia: as a shadow director under the CAMA; in respect of

fraudulent and voidable dispositions; for breach of commitments under loan

agreements, and for breach of duties of confidentiality.18

13

See Goode n 6 above 69 14

For instance, if the creditor is a legal mortgagee. See Union Bank of Nigeria Plc v Olori

Motors Co Ltd [1998] 5 NWLR (Pt. 554) 652 where the court noted that where the power of

sale has arisen it may be exercised by a mortgagee notwithstanding a debt recovery judgment

in his favor 15

Four Maids Limited v Dudley Marshall (Properties) Ltd [1957] Ch 317 at 320 16

See Ogundiani v Araba & Anor [1978] II NSCC p 334 17

Section 410 of the CAMA 18

See generally, J. Donovan, Lenders Liability (Sweet & Maxwell, English Edition, 2005)

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The debtor too is not left without rights; to this end, and depending on the nature of

the credit advanced, the debtor will generally continue, subject to the foreclosure of

his/her interest in the secured assets, to have the right of ownership over the said

assets. The debtor may also be entitled to exercise the right of sale, and the equitable

right to redeem the secured asset. He/she will also be entitled to insist on the release

of the creditor‟s rights upon payment of the secured debt.

An examination of the general rights of creditors and debtors may suggest the

inference that the legal framework in Nigeria is primarily directed to ensuring a return

for the creditor (in particular, the secured creditor). In addition to this, it is worth

highlighting other indicators that have been put forward to aid the classification of

jurisdictions either as pro-creditor or pro-debtor, although these must be applied with

caution.19

Were we to classify Nigeria‟s insolvency regime based on the state of the law today,

where would Nigeria fall, pro-creditor or pro-debtor? 20

We propose to adopt some

these key indicators proposed, in determining this. They include „the scope and

efficiency, on bankruptcy, of security and title financing; insolvency set off, corporate

rehabilitation statutes; ownership of the assets in the possession of the debtor;

honouring the veil of incorporation and protection of directors against personal

liability; preferential transfers; contracts and lease rescission; and priority creditors.‟21

Considering a few of these indicators, we note that Nigeria, unlike other countries

with a common law heritage, does not have any corporate rehabilitation statutes. On

the contrary, the corporate insolvency regime is ensconced within the general statute

on corporate law – the CAMA, as well as the Companies Winding Up Rules made

pursuant to it. Further, unlike the United States of America, with its Chapter 11 of the

Bankruptcy Code, there are no special provisions for the protection and regulation of

the activities of debtors in possession.

19

P. Wood, General Principles of Insolvency, (Sweet & Maxwell, 1995), 4 20

Wood suggests that Nigeria, being English influenced, will fall among the pro-creditor states.

Ibid, 9 21 Ibid

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Nigeria does not have netting legislation, and there is some uncertainty under

Nigerian law regarding insolvency set-off, and the enforceability of netting

arrangements. While title-financings are not unusual, to the best of our knowledge, no

questions revolving around the effect on insolvency on transactions have yet been

submitted or answered by Nigerian courts.

The foregoing notwithstanding, and as is submitted above, Nigerian law does preserve

as sacrosanct, the priority of the secured creditors.22

A secured creditor can as such

pay itself out of the secured assets, which do not form part of the general pool of

assets of an insolvent company. The ability of the secured creditor to appoint

receivers over the undertakings of a company out of the court, perhaps also points to

the outlook of the Nigerian insolvency regime. By and large, Nigerian courts will

honour the veil of incorporation, and will not generally look to hold directors

personally liable for the debts of a company, save in limited circumstances.

It is may perhaps be concluded on the basis of these criteria, that Nigeria is a largely

pro-creditor state, and the question that arises is the extent to which, the existing

provisions of the law can be interpreted so as to also take into account the debtor‟s

interests.

Business Rescue– Rehabilitation vs The Silver Bullet

Unlike other pro-creditor states, some of whom Nigeria shares a common legal

heritage with, (such as Singapore and the United Kingdom) Nigeria does not have an

explicit business rescue regime. On the contrary, as has already been suggested, under

Nigerian law, the primary options open to a creditor,23

in the main; appear to be

directed to the end of the existence of the debtor company that is insolvent i.e. a silver

bullet.24

22

Unlike Jurisdictions such as France 23

Pursuant to the provisions of the CAMA, a creditor of a troubled debtor will have the choice

of a number of options, viz: (a) appointment of a receiver (on application to the Court or

outside the Court); (b) petition for compulsory winding up; (c) arrangements and sale,

arrangements and compromise; (d) mergers, acquisitions, takeovers. It has however also been

argued that Nigerian insolvency law emphasizes liquidation above the other options, such as

mergers and acquisitions. See Idigbe n 11 above 24

Although there has been the welcome introduction of the Asset Management Corporation Act

of Nigeria 2010 by which the Asset Management Corporation of Nigeria is entitled to

designate bad or toxic loans as eligible assets and purchase them from eligible persons such as

banks

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However, as already noted, the preferred option will turn on the factual circumstances

in each case. First of all, there are many circumstances where the debtor company,

while cash flow insolvent, owns valuable assets and holds important licenses. At other

times, creditors may experience real challenges in trying to wind up and dissolve a

company, particularly where the debt is disputed. There could also be several secured

creditors that all rank differently according to the terms of their security and the

nature of their security interest, which might make liquidation an unattractive option.

Also, in circumstances where the secured creditor(s) take security for less than the

amount advanced, the debtor‟s insolvency presents even further complications, and

the said creditor(s) would, upon liquidation, be compelled to claim with the general

pool of creditors for the portion that is unsecured. 25

Finally, the various public policy

reasons that encouraged the passage of rehabilitation statutes in international

jurisdictions are, by and large, also relevant in Nigeria today. These include – the

protection of public investors, protection of employees, the protection of big

businesses (such as business deemed to be too big to fail), the need to maintain

investor confidence, shore up the economy, the protection of small businesses and of

enterprises deemed to be of national importance.26

This much is attested to by the

remedial actions of the Central Bank of Nigeria, the Nigerian Deposit Insurance

Corporation and the Asset Management Corporation of Nigeria in intervening in the

Nigerian economy at various times to safeguard key interests.

It is thus clear that in a number of circumstances, neither the objectives of the creditor

nor the debtor on one hand, or the entirety of the financial system on the other, are

met by the liquidation of troubled institutions. This realization has impelled a number

of jurisdictions to shift focus, from the execution of the company to the execution of

the company‟s contracts, rights and obligations - i.e. maintaining the company as a

going concern.27

Section Two – Fitting a Business Rescue Regime in the Insolvency Framework

25

Furthermore, an unsecured creditor will rank behind preferential creditors. Sections 448,

494(5) of CAMA, Rule 167 of the Companies Winding Up Rules 26

Wood, note 19 above, 175 27

Some regimes with business rescue provisions include the Australian Law Reform Act 1992,

English 1986 Insolvency Act, Singapore Companies (Amendment) Act 1987), Chapter 11

proceedings of the Bankruptcy Code in the United States of America, New Zealand

Corporations (Investigation and Management) Act. 1989 and French Redressement Judicaire

1985 (Redressement)

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The foregoing perhaps makes clear the need to reconsider the legal regime regarding

insolvency in Nigeria, in particular to envisage the convergence of debtor and creditor

interests in the rehabilitation of failing companies.

Although all this is true, it has been suggested, which is our view also, that the

existing legal framework can be interpreted by the Courts in a manner that balances

the interests of all concerned.

For one, it appears that winding up is largely conceived by litigants in Nigerian

Courts as a debt-recovery mechanism and is used principally to harass debtors, even

when the debts are disputed. This is so despite the repeated pronouncements by the

Nigerian judidiary that a petition for the compulsory winding up of a company on the

ground of indebtedness is ill-suited for the recovery of debt;28

a point that is doubtless

bolstered by the fact that a petition for the compulsory winding of a company already

implies that the company is insolvent and thus, generally unable to pay its debts. As

such, it is clear that the first change that is required is of attitude, particularly amongst

legal advisers and other insolvency practitioners, and of course by Judges, to

discourage the abuse of the judicial process.

Second, and with respect to the non-collective procedure of appointing receivers, it

has been suggested that there is basis for contending that the receiver/manager has as

its principal objective, the rehabilitation of the debtor company29

– this in keeping

with section 390 (2), CAMA, which provides: „receiver or manager… shall act at all

times in what he believes to be the best interests of the company as a whole so as to

preserve its assets, further its business and promote the purposes for which it was

formed…‟

In this light, Adebola30

has argued that unlike English law, 31

Nigerian law, by virtue

of the express provisions of section 390(2), CAMA, entitles the debtor company to

28

Oriental Airlines Limited v. Air Via Limited (1998) 12 NWLR (Pt. 577) 271 at 280 29

Idigbe argues that the upon the exercise of a receiver‟s power of sale, Section 393 of the

CAMA may permit that Court, upon the application of an interested party, to determine the

propriety of the sale and whether the receiver has acted in the best interests of the company.

See n 11 above 30

Adebola, “The Duty of the Nigerian Receiver „to Manage‟ the Company,” Vol. 8, Issue 4

International Corporate Rescue , 2011, 12

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prevent a receiver from taking actions that are not in the interest of the company.

Reliance for this is placed on the decision of the Court of Appeal in Union Bank of

Nigeria Ltd v Tropic Foods Ltd (Union Bank Case), 32 a decision that, it is argued, gives

judicial support to this proposition. Further, as there is no dispute that Section 390 of

the CAMA applies to both court appointed receivers as well as receivers/managers

appointed outside the Court, 33

it has been submitted that these duties to act in the

interests of the debtor company and for the promotion of the business and objects for

which it was formed apply to both receivers/managers appointed by Court and

receivers/managers appointed outside the Court.

The Union Bank case, involved an application for injunction by a debtor company that

was contesting the appointment of a receiver. The Court held in précis that by virtue of

sections 390 and 391 of the CAMA, a debtor was entitled to challenge the appointment of

a receiver manager by debenture holders (which was what was in issue in the case) and to

halt or prevent an unjustifiable exercise of the power of the receiver/manager even after

his appointment has been made (which was not directly in issue in the case).

The policy objective inherent in the Court‟s decision, albeit obiter is certainly welcome as

it holds the receiver/manager to a duty to effectively manage the assets of the company.

On the other hand however, as a matter of law, there are a few conceptual difficulties in

rationalizing the latter limb of the court‟s decision as set out above.

In our view, the question must be asked whether Section 390 of the CAMA actually

creates enforceable rights in favour of stakeholders of the company i.e. shareholders,

directors, the company itself or other interested persons, to query the manner of exercise

of a receiver‟s powers. This question is necessary, because as a matter of law, where a

receiver/manager has been appointed over the affairs of a company, the power of the

directors to manage the property and assets of the company cease and are in abeyance

until the receivership is concluded.34 The difficulty here revolves around the capacity of

the company to institute legal proceedings to enforce the said duties of the receiver, and

31

Where the receiver is responsible to the party who appointed him, and has no general duty to

manage the company. See Downsview Nominees Ltd v First City Corp Ltd, [1993] A.C. 295. 32

[1992] 3NWLR [Pt 228] 231 CA. See also West African Breweries v Savannah Ventures Ltd

[2002] 10 NWLR [Pt775] 401 SC 33

This is because Section 209 (6) of the CAMA provides that the provisions of Section 387 to

400 will apply to receiver/managers appointed by the Court pursuant to Section 209 34

See Intercontractors Nigeria Ltd v U.A.C [1988] 2 NWLR (Pt. 76) 330 H – 331A

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as we see it, this difficulty is not side-stepped by the provision of the CAMA that the

receiver is to act in the interests of the Company.35

The Court in O.B.I. Ltd v UBN Plc36 puts it best, when it noted that:

“it is true however that, although the receiver has no title to the assets in receivership,

(which still vests in the company), he is the only one who can sue or be sued in respect

of the assets while the receivership lasts. The company cannot bring the action. The

receiver/manager can only bring the action in the name of the company. The exception

however is where a party contends that a receiver‟s appointment is void ab initio”

It does seem, therefore, that the effect of the Union Bank case is merely to permit a

company to maintain an action where the appointment of a receiver/manager is in

issue, in contradistinction to circumstances where it is sought to enforce the duty of

the said receiver under Section 390(2), CAMA. The conclusion is that as a practical

matter, there is much difficulty in enforcing the performance of any obligations on a

receiver created under Section 390, CAMA. created by Section 390; during the

pendency of the receivership or over assets which form part of the receivership.

That said, in principle, the dictum of the court in the Union Bank case retains some

precedential value, until set aside, although it will be preferable for the law on this point

to be definitively determined by the courts.37 Until such a time, Section 390, CAMA may

provide some succor to debtor companies that seek to emphasise the duty of

receiver/managers not only to manage the company for the purpose of receiving its assets,

but to administer the company as would a faithful, diligent, careful and ordinarily skillful

manager.

35

In the Union Bank case, the Court was swayed by the fact that despite the fact of receivership,

the company retains its personality and rights to the assets which are subject of the

receivership. However, whilst this is so, as long as the receivership is not contested, and the

powers of the directors have ceased, the company cannot institute any action to enforce the

said rights in respect of assets covered by the receivership during the pendency of the

receivership 36

[2009] 3 NWLR (Pt. 1129) 129 – 159 at 157 D- F 37

We are not aware of any appeal setting aside the decision of the Court in the Union Bank case.

See however the decision in NBCI v Alfirjir Mining Nigeria Limited [1993] 4 NWLR (Pt. 287)

346 which appears to contradict the decision of the court of appeal in the Union Bank case. It

must be noted however that the NBCI case was decided on the basis of the old Companies Act

and not the CAMA

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In addition to the foregoing, it has also been suggested that the existing legal

framework can be augmented38

by practice directions issued by a commercially

minded court39

and there is indeed some merit in this approach. This is because

wholesale amendments to the provisions of the CAMA, and winding-up rules may be

difficult to achieve, given the generally arduous process involved in amending

statutory instruments.

It has been suggested that such practice directions may include a requirement on

persons either challenging the appointment of a receiver by creditors or disputing the

winding up of a debtor company, to provide a business rescue plan. Practice

directions may also require the court to request from creditors seeking to appoint a

receiver, or seeking reliefs in aid of a receivership (such as injunctions), to provide a

plan that either justifies business rehabilitation or asset realization.40

Such Practice

Directions may also require that court appointed receivers are suitable, skilled and

licensed insolvency practitioners,41

and it is clear that the licensing of insolvency

practitioners will also go a long way to ensure that the receivers and liquidators are

suitable people with the requisite integrity and skills set; and should require regular

reporting from the appointed receiver/liquidator. The Practice Directions should

require the Official Receiver, to appoint qualified practitioners, in instances where the

Official Receiver is appointed as a liquidator under Section 436 of the CAMA.42

In

addition also, the directions should require the Court to demand that petitioners for

the winding up of a company present it with sufficient materials showing that the

subject company is not a viable going concern.

The major drawback of this approach is, of course, practical. Such practice directions

will contribute to the workload of a Federal High Court,43

a court that is, from all

38

Care must of course be adopted in such an approach because practice directions, by their

nature are subsidiary legislation and cannot vary, add to and arguably supplement the

provisions of the principal legislation(s). See Onazulike v CDS Anambra [1992] 3 NWLR (Pt.

232) 791 39

This approach has been advocated by Idigbe, See n 11 above; see also B. Adebola, “The Duty

of the Nigerian Receiver to 'Manage' the Company,” Vol. 8, Issue 4 International Corporate

Rescue , 2011. 40

See Idigbe, n 11 above, 18 41

I. Oyedepo, „The Imperatives of a Vibrant Insolvency Practice in Nigeria,‟

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1089345 accessed 28 September 2013 42

Ibid 43 Which is the court with jurisdiction to entertain, inter alia, matters concerning companies

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indications, already dangerously overladen.44

This reality does not of course, discount

the utility of the proposal, but emphasizes the importance of its being employed as

part of an integrated strategy that also involves the promotion of reforms that improve

the efficiency of the judiciary.

Another challenge that will be encountered in applying these suggestions concerns the

capacity of the judiciary to deal with these matters, given that judges will often be

called upon to exercise their judicial discretion in day to day matters. Finally, there is

a limit to what may be achieved by the issuance of practice directions, because as

noted above subsidiary legislation cannot be inconsistent with substantive provisions

of law.

Focus must, therefore, be placed on the training of the judiciary in the nuances of

insolvency law, perhaps even with a view, as in England or the United States, of

establishing a dedicated bankruptcy/insolvency court or division, and as a longer term

objective, specific amendments to the insolvency framework that, as relevant to this

work, to recognize and balance the interests of creditors and debtors should be

proposed and enacted into law.

CONCLUSION

While that the debtor and the creditor in the relationship are motivated by different

objectives in pursuing and consummating the said relationships, at the core of their

intentions, for the most part, there is a commonality of purpose, in that, both parties

desire the well-being of the enterprise. The task today is for the legislature to legislate

needed reforms and for practitioners and judges to push the needle of the law to

develop a business rescue climate.

44

For more on the issue of delay in Nigerian courts, see O Ajayi, O Osinubi et al, Finance

litigation issues: term loans & special financial instruments, (being a paper delivered at the

Department for International Development (DFID) UK Department for International

Development Seminar for Nigerian Judges) 2, 6