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Legal framework

Legislation

What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

Insolvencies and reorganisations are generally governed by the Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004).

The Investment and Securities Act 2007 and the Securities and Exchange Commission Rules 2013 regulate mergers, takeovers and acquisitions of shares in publicly traded companies.

The Banks and Other Financial Institutions Act (CAP B3, Laws of the Federation of Nigeria, 2004) regulates the restructuring, reorganisation, merger and disposal of banks.

The Nigeria Deposit Insurance Corporation Act (CAP N102, Laws of the Federation of Nigeria, 2004) regulates deposit insurance liabilities in relation to licensed banks and other financial institutions, to protect the interests of depositors against a bank’s imminent or actual financial difficulties.

The Assets Management Corporation of Nigeria Act 2010 establishes the Assets Management Corporation of Nigeria in order to resolve banks’ non-performing loan assets.

The Bankruptcy and Insolvency (Repeal and Re-enactment) Act 2016 (the new Bankruptcy and Insolvency Act) and Bankruptcy Rules regulate bankruptcy proceedings in Nigeria.

Regulatory climate

On an international spectrum, is your jurisdiction more creditor or debtor friendly?

Nigeria is more creditor friendly. Section 471 of the Companies and Allied Matters Act provides for the voluntary winding up of a company by creditors. Where a company is indebted to a creditor in an amount above N2,000, the creditor may issue a statutory demand letter to the company to settle the debt. If the company refuses or fails to pay the debt within three weeks, the creditor may petition for the company to be wound up.

In addition, under Section 493 of the Companies and Allied Matters Act, both secured and unsecured creditors are ranked above the members of the company during a winding up.

Section 10 of the Foreign Judgment (Reciprocal Enforcement) Act (CAP F35, Laws of the Federation of Nigeria 2004) allows judgment creditors to enforce foreign judgments in Nigeria within 12 months of the date on which the judgment was delivered. 

Sector-specific regimes

Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?

Insurers are excluded from customary insolvency proceedings. The Insurance Act 2003 provides for the liquidation of insurers on the petition of either 50 policyholders or the National Insurance Commission. Section 33 of the act prohibits the voluntary winding up of an insurance business, unless this is done to effect an amalgamation, transfer or acquisition.

The Banks and Other Financial Institutions Act prohibits the restructure, re-organisation or merger of, or disposal of interests in, banks without the prior consent of the governor of the Central Bank of Nigeria.

Apart from its core duty of regulating deposit insurers for Nigerian banks and other financial institutions, the Deposit Insurance Corporation Act regulates the framework for corporate restructuring and rescue of failing financial institutions.

Reform

Are any reforms to the legal framework envisaged?

The new Bankruptcy and Insolvency Act 2016 is a welcome development.

Section 4 of the new act provides that a person will be considered to have committed an act of bankruptcy if he or she, in Nigeria or abroad:

  • makes an assignment to a trustee for the benefit of creditors;
  • makes a fraudulent gift or transfer of property;
  • transfers property which is interpreted to be a fraudulent preference under the act;
  • leaves Nigeria and remains abroad with the intent of defrauding his or her creditors;
  • fails to redeem his or her property after 21 days of its seizure pursuant to an execution; or
  • discloses statements to his or her creditors that he or she is insolvent and gives notice that he or she is about to suspend payment of debts to creditors. 

Section 5 of the new act provides that a creditor may file a bankruptcy petition if the debtor owes it up to N1 million or commits any acts of bankruptcy within six months of presenting the petition. 

Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

A director has a fiduciary duty to act in the interest of the creditors as a whole if the company is insolvent and must not take any action which is detrimental to the company’s creditors. The circumstances under which a director may be held liable for a company’s insolvency are provided for in Sections 505 to 507 of the Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004) and include the following:

  • Fraudulent trading – this occurs where it appears that the company’s business has been carried out in a reckless manner or to defraud creditors or any other person for any fraudulent purpose, including lying to creditors or entering false accounting information.
  • Misfeasance – this occurs where the directors or parent company misapply or retain or become liable or accountable for any of the company’s money or property. This includes using the company’s property for non-company purposes or paying illegal dividends to shareholders.
  • Undervalue – this is where the director sells or transfers the company’s assets at undervalue.
  • Wrongful trading – this occurs where credit is obtained for the company with no realistic prospects of it being able to repay such credit but the company continues to do business with knowledge of its insolvency.

A parent company may be liable for the obligations of its subsidiaries or affiliates and vice versa if there is a contract between them to that effect or evidence of fraud. 

Defences

What defences are available to a liable director or parent company?

Defences available to a liable director include as follows:

  • He or she took every reasonable step to prevent the company from incurring the debt which caused the insolvency.
  • He or she had reasonable grounds to expect that the company was solvent when the debt was incurred.
  • He or she had reasonable grounds to expect that the company would remain solvent if it incurred the debt.
  • He or she relied on the advice of certified experts.

A director must have reasonable grounds to believe that:

  • another competent and reliable person could provide adequate information about the solvency of the company;
  • the other person was fulfilling that responsibility; and
  • the company was solvent at the time and would remain solvent even if it incurred debts based on the information provided.

Defences available to a liable parent company A subsidiary is a distinct corporate entity from its parent company. Thus, unless there is a contract to the effect that the parent company is liable to its subsidiaries’ creditors for fraud in the case of management of the subsidiaries to the benefit of the parent company, which leads to the insolvency of the subsidiary, the parent company cannot be held liable for its subsidiary’s debt.

Due diligence

What due diligence should be conducted to limit liability?

Due diligence includes:

  • taking steps to minimise the potential loss to the company’s creditors and performing fiduciary duties diligently;
  • taking creditors’ interests into account in decision making and complying with statutory directors’ duty;
  • monitoring the company’s financial position at all times and controlling the company’s debts;
  • taking specialist advice and, if there is a prospect of insolvency, refraining from incurring new liabilities;
  • if there is an indication of the company’s insolvency, considering discontinuing business and commencing appropriate insolvency proceedings before creditors do so; and
  • if there is a reasonable chance of saving the business, taking appropriate action – for example, negotiating new financing and working with creditors to settle the debt amicably. 

Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

Pledge

A pledge is created when movable and immovable property is delivered by a debtor to its creditor as security for a monetary obligation. The pledgor transfers the possession and use of the asset to the pledgee as guarantee for the payment of a loan with the common intention of redeeming the asset on payment of the debt. Under Nigerian law, property can be pledged only if it transferrable by delivery of possession.

Mortgage Under Nigerian law, taking security over real property is usually done by way of legal mortgage. This involves the transfer of the legal title in the property to the creditors as security for the loan, subject to the borrower’s equity of redemption (ie, the right to have the property transferred back once the debt has been repaid). The mode of creation of a legal mortgage over real property in Nigeria depends on whether the property is situated in a Conveyancing Act state or a Property and Conveyancing Law state.

Charge Another way in which creditors can take security is by way of a charge. A charge is an equitable proprietary interest granted by way of security without the transfer of title or assets in the discharge of liability. Chares are distinct from a mortgage, as the creditor obtains neither legal nor beneficial title to the charged asset. However, the chargee obtains an equitable proprietary interest in the asset by way of security. A charge created by a company may be fixed or floating.

A fixed charge results in the acquisition of immediate real rights over the property and prevents the charger from dealing with the property as soon as the charge is created, except where the chargee’s consent has been obtained. Assets subject to a fixed charge cannot be disposed of without the chargee’s consent.

A floating charge is an equitable charge over the whole or a specified part of the company’s undertakings and assets. The company is allowed to continue to deal with such assets until the security becomes enforceable, in which case the holder – pursuant to the power in the security deed – will appoint a receiver or manager or enter into possession of such assets. The courts may appoint a receiver or manager of the assets on application by the holder or if the company goes into liquidation.

Floating charges can include cash and the company’s uncalled capital and can be extended to cover the company’s future property. The essence of a floating charge is to enable the charger, while continuing to carry on its day-to-day business, to charge its changing assets as security for loans.

Before any security is recognised, it must have been validly created under the applicable law and perfected. The perfection of a security interest in the assets of a Nigerian company is generally determined by:

  • the type of asset over which the security interest is created; and
  • the type of security interest which will be created.

In accordance with Section 197 of the Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004), every charge created by a company that is intended to provide security will be void against the liquidator and any creditor of the company unless it is registered with the Corporate Affairs Commission (CAC) within 90 days of its creation.

While the failure to register a registrable charge with the CAC does not render the document illegal or non-binding among the parties, nor does it prejudice any obligation for repayment of monies secured by the charge, it does renders the security void against the liquidator or any creditor. Effectively, the secured creditor loses priority to other competing creditors that validly registered their security.

In the event of breach by a borrower, creditors may enforce their security in Nigeria by means of foreclosure, sale, the appointment of a receiver or through a court action to recover the debt.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

In insolvency proceedings, creditors are ranked according to the type of security that they possess over the insolvent company’s assets. In accordance with Section 494 of the Companies and Allied Matters Act, secured creditors with fixed charges are paid first, followed by secured creditors with floating charges and then unsecured debentures.

Can this ranking be amended in any way?

This ranking can change if the terms of the floating charge prohibit the company from granting any later charge with priority over the floating charge and the person in whose favour such later charge was granted had actual notice of such prohibition when the charge was granted. 

Foreign creditors

What is the status of foreign creditors in filing claims?

A foreign creditor can institute an action in court in its name or in the name of its attorney against a debtor for debt recovery in the same manner as a local creditor, as long as the debtor or its assets, or the underlying contract which gave rise to the debt was performed, within the jurisdiction of the court. The processes and remedies available to a local creditor also apply to a foreign creditor.

Section 238 of the Bankruptcy and Insolvency (Repeal and Re-enactment) Act 2016 provides that where there is a bankruptcy, insolvency or reorganisation order made against a debtor in a foreign proceeding, a certified copy of the order is, in the absence of contrary evidence, proof that the debtor is insolvent and a foreign representative has been appointed. In this instance, following an application of the foreign representative, the court can limit the property that the Nigerian trustee has power over.

In respect of a foreign proceeding commenced for the purposes of effecting a composition, extension of time or scheme of arrangement, on application by a foreign representative in a Nigerian court, the court may grant a stay of the proceeding against the debtor. 

Unsecured creditors

Are any special remedies available to unsecured creditors?

The remedies available to unsecured creditors include:

  • applying to the court for the judicial sale of the company’s assets in order to recover the debts;
  • applying to the court for the appointment of a receiver in order to recover the debts of the company; or 
  • commencing recovery proceedings for the principal debt and interest following a court order.

After judgment is obtained, it may be enforced on the moveable and immovable assets of the debtor through attachment of movable or immovable property, garnishee proceedings, sequestration proceedings or judgment summons. 

Debt recovery

By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?

There are several legal means available to creditors to recover unpaid debts other than through insolvency proceedings, including the following.

Demand letters The first option available to the creditor is to issue a demand letter, requesting the outstanding sum from the debtor and stating a period within which the debtor should pay the debt or risk legal action.

Summary proceedings If the debtor fails to pay a liquidated sum and the debtor does not have a defence on the merit of the claim, the creditor may commence summary judgment proceedings or undefended list proceedings against the debtor to recover the sum.

An application for summary judgment proceedings is accompanied by an affidavit stating the grounds on which the claim is based and that the debtor has no defence on the merit of the claim. The court will enter the claim in the ‘undefended list’ if it is satisfied that the defendant has no defence to the claim.

Debt recovery action If the debt is not a liquidated sum, the creditor can commence an action to recover the debt. The court will list the case in the general cause list if it finds that the debtor has a defence on the merits to the matter filed under the undefended list.

Alternative dispute resolution Alternative dispute resolution (ADR) mechanisms have become exceedingly popular in resolving business disputes in Nigeria. Most contracts contain an arbitration or mediation clause. The appeal of ADR is that:

  • the parties’ disputes are resolved timeously;
  • the venue and content of proceedings are private;
  • the procedure is less formal;
  • complex rules of procedure and evidence are not used; and
  • there is hope that the business relationship between the creditor and debtor will be preserved.

Enforcement of security Where the credit facility was granted with a security, the creditors may commence an action to enforce it when the timeline for payment of the debt given in lieu of the security has elapsed.

Is trade credit insurance commonly purchased in your jurisdiction?

Exporters in Nigeria face the risk of overseas consumers not paying for goods. The sale of goods and services creates risks which are not immediately under the control of the supplier. Managing these risks is a priority for businesses and thus trade credit insurance is commonly purchased in Nigeria. Trade credit insurance is an insurance policy and a risk management product offered by private insurers in Nigeria and governmental export credit agencies (eg, the Nigerian Export-Import Bank) to business entities wishing to protect their accounts receivable from loss due to credit risks, such as protracted default, insolvency and bankruptcy.

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

The Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004) provides a list of persons eligible to initiate a liquidation procedure, including:

  • the company;
  • creditors of the company;
  • the official receiver;
  • contributories;
  • the trustee in bankruptcy, personal representative or creditors; and
  • the Corporate Affairs Commission (CAC), on approval by the Attorney-general of the Federation.

Insurers are barred from initiating liquidation procedures. The Insurance Act 2003 provides for the liquidation of insurers on the petition of either 50 policyholders or the National Insurance Commission. Section 33 of the act prohibits the voluntary winding up of insurance businesses, except for the purpose of effecting an amalgamation, transfer or acquisition.

The Banks and Other Financial Institutions Act (CAP B3, Laws of the Federation of Nigeria, 2004) prohibits the restructure, reorganisation, merger or disposal of interests in banks without the prior consent of the governor of the Central Bank of Nigeria.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

Section 401 of the Companies and Allied Matters Act provides the three major procedures used to liquidate (also known as winding up) an insolvent company in Nigeria:

  • court-ordered winding up;
  • voluntary winding up, which may either be:
    • members’ voluntary winding up; or
    • creditors’ voluntary winding up; or
  • court-supervised winding up.

Court-ordered winding up A company may be wound up by the court if:

  • the company resolved by special resolution to be liquidated by the court;
  • the company defaults in holding statutory meetings or filing statutory reports;
  • the company has fewer than two members;
  • the company is unable to pay its debts; or
  • the court finds that it is just and equitable to do so.

Voluntary winding up The members of a company may voluntary resolve to wind up the company if:

  • the fixed term set out in the articles of association expires or the articles allow them to wind up the company voluntarily under certain conditions, provided that the company passes a resolution in the general meeting; or
  • the company resolves by special resolution that it should be wound up voluntarily.

Court-supervised winding up This occurs where a company passes a resolution to wind up the company and makes a petition to the court to supervise the process. The court may order the company to be wound up subject to its supervision and provide creditors, contributories and others with the right to apply to the court. The winding up will be effected on such terms and conditions as the court thinks just.

How are liquidation procedures formally approved?

Liquidation procedures are approved depending on the procedure adopted.

For members’ voluntary winding up, the company will pass a board and company resolution to wind up the company and appoint a liquidator, after which a copy of the resolution, a statutory declaration of solvency and all others documents must be filed with the CAC. The registrar of the CAC will approve the procedure once it is shown that all documents filed with the CAC are in accordance with the act.

For creditors’ voluntary winding up, after a meeting of the creditors, a liquidator is nominated to liquidate the company’s assets.

Court-supervised winding ups require the court’s approval.

What effects do liquidation procedures have on existing contracts?

The commencement of a liquidation procedure does not affect the company’s contracts unless a contract itself makes insolvency or liquidation a basis for termination. Once a company has been wound up, its contracts are terminated. The appointed liquidator has no power to carry on the contracts. Most contracts provide for termination in the event of liquidation without prejudice to the liabilities incurred before termination.

What is the typical timeframe for completion of liquidation procedures?

It usually takes between 12 and 24 months. 

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

Under Section 422 of the Companies and Allied Matters Act, the liquidator is appointed by the court. The liquidator’s powers and responsibilities include:

  • bringing or defending any action or other legal proceeding in the name and on behalf of the company;
  • carrying on the company’s business, insofar as this benefits the winding up;
  • appointing a legal practitioner or any other relevant professional to assist in the performance of his or her duties;
  • paying any classes of creditor in full; and
  • making any compromise or arrangement with creditors, persons claiming to be creditors or persons having or alleging to have an existing or future claim or potential claim against the company or whereby the company may be rendered liable.

The liquidator has the power to:

  • sell the company’s property by public auction or private contract and transfer the property to any person or company or sell the same in parcels;
  • preform all acts and execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose to use, when necessary, the company’s seal;
  • prove, rank and claim during the bankruptcy, insolvency or sequestration of a contributory for any balance against the estate, and to receive dividends in respect of that balance as a separate debt due from the bankrupt or insolvent, alongside the other separate creditors;
  • draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company with the same effect as if the bill or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business;
  • raise money on the security of the company’s assets; and
  • appoint an agent to do any business which the liquidator is unable.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

During a liquidation procedure, the courts are greatly involved and have significant powers. First, the court – particularly the Federal High Court – has jurisdiction to wind up a company, whether in a creditors’ voluntary winding up or liquidation caused by a court-ordered winding up.

The court will hear petitions for the winding up of the company on application by the company or its creditors, official receiver or contributories.

During a winding up, the court can stay or restrain proceedings against the company. Once the court has appointed the liquidators, it will order the delivery of the company’s properties to the liquidator after a winding-up order has been made, as well as order that payments be made to the liquidator’s account. The court has the power to exclude creditors that failed to prove their claims within the fixed time limit or prevent them from benefitting from any distributions made before the debts are proved.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

A creditor can present a winding-up petition when the company is unable to pay its debt. The Companies and Allied Matters Act provides that before a petition is filed in court, the creditor must be able to establish that the debt owed by the company exceeds N2,000 and that the company failed or refused to pay this amount after a statutory demand notice had been served on it.

However, a liquidation petition does not automatically lead to liquidation. The court has unfettered discretion to:

  • grant or dismiss the petition;
  • adjourn the hearing of the petition conditionally or unconditionally; or
  • make an interim order or any other order as it deems fit.

During the course of proceedings, creditors cannot exercise their right to enforce their security, as any attachment of or execution against the company’s assets after commencement of the proceedings will be void. Further, no recovery action can remain against a company after the commencement of a winding-up petition, as the court would readily stay the proceedings of such action in favour of a winding-up petition. Any execution levied by the judgment creditor on the company’s assets in the process of winding up will be rendered void.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

During a company’s voluntary winding up, the directors will pass a board resolution and the shareholders will pass a company special resolution and appoint a liquidator to wind up the company. In the event of a creditors’ voluntary winding up or court-ordered winding up, notices will be given to shareholders before the commencement of the winding-up proceedings. In accordance with Section 464 of the Companies and Allied Matters Act, once the liquidator is appointed in a voluntary winding up, the directors’ powers cease, except with regard to the company’s general meeting or where the liquidator approves the continuance of their powers.

Restructuring procedures

Eligibility

What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?

The Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004) provides a list of persons eligible to initiate a liquidation procedure, including:

  • the company;
  • creditors of the company;
  • the official receiver;
  • contributories;
  • the trustee in bankruptcy, personal representative or creditors; and
  • the Corporate Affairs Commission (CAC), on approval by the Attorney-general of the Federation.

Insurers are barred from initiating liquidation procedures. The Insurance Act 2003 provides for the liquidation of insurers on the petition of either 50 policyholders or the National Insurance Commission. Section 33 of the act prohibits the voluntary winding up of insurance businesses, except for the purpose of effecting an amalgamation, transfer or acquisition.

The Banks and Other Financial Institutions Act (CAP B3, Laws of the Federation of Nigeria, 2004) prohibits the restructure, reorganisation, merger or disposal of interests in banks without the prior consent of the governor of the Central Bank of Nigeria.

Procedures

What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?

The decision to restructure a company is necessary where:

  • the company’s liabilities exceed its assets;
  • the company is on the verge of collapsing; or
  • the company is a going concern and expansion is desirable.

Internal restructuring options include:

  • arrangement and compromise;
  • sales arrangements;
  • management buy-out;
  • reduction of share capital; and
  • downsizing.

External restructuring options include:

  • mergers and acquisitions;
  • takeovers;
  • cherry picking; and
  • purchase and assumption.

Internal options Arrangement and compromise  As provided under Section 539 of the Companies and Allied Matters Actthe company can alter the rights of its members and creditors with the court’s approval – for example, through an agreement with preference shareholders to cancel their dividends in arrears. The procedure for arrangement and compromise is that an application must first be made to the court to call a meeting of the creditors and members. Notice of the meeting will served on the members, accompanied with a statement showing the effect of the arrangement on the directors, creditors and shareholders. Following investigations by the court and the Securities and Exchange Commission (SEC), the court will make an order approving the arrangement.

Sales arrangements  Under Section 538 of the Companies and Allied Matters Act, a sales arrangement commences with a voluntary resolution to wind up the company and a liquidator is appointed to sell or transfer the company’s assets to another viable company. The difference between the liquidation process in corporate restructuring and that of dissolution is that while winding up in restructuring results in the resurrection of the company in another form, the other brings the company to a permanent end. In sales arrangements, the members will pass a special resolution to wind up the company voluntarily and appoint a liquidator to sell the company’s assets. Once the scheme of arrangement is approved, the directors will make a declaration of solvency as the basis of winding up.

A dissenting member or creditor may write the liquidator within 30 days of the passing of the resolution asking him or her either to abstain from carrying out the resolution or purchase his or her own shares at a determined price. The arrangement will be valid if no objection has been raised within a year.

Management buy-outs Management buy-outs are the acquisition by a company’s management of the controlling shares of the company or its subsidiaries. This process favours director and employee share ownership schemes. For a management buy-out to be valid, the management team must file an application, accompanied by:

  • a shareholder resolution approving the buy-out;
  • a management resolution agreeing to undertake the management buy-out; and
  • incorporation documents and the sales agreement between the company and the management team.

Reduction of share capital This is the process of decreasing a company's shareholder equity through share cancellations and share repurchases. Companies reduce their share capital to increase shareholder value and produce a more efficient capital structure.

Downsizing  This involves reducing the number of employees on a company’s payroll. This is different from a layoff because downsizing is a permanent downscaling, whereas a layoff is a temporary downscaling in which employees may later be rehired.

External options  Mergers and acquisitions This occurs when a viable company takes over another company or two companies decide to merge in order to form a new company or maintain the earlier names of one of the companies. Both the boards of directors and the companies’ management will pass separate resolutions for the merger. The merger scheme is referred to both the court and the SEC for approval. Both companies must apply to the SEC as per the pre-merger notice attached with the necessary documents and, after the merger, the companies must make a post-merger notification. If approved, the merger and acquisition is considered final.

Takeovers In a takeover, a company which later becomes a holding company acquires the issued share capital of another company (usually referred to as the subsidiary) in order to have control over the target’s management. One of the conditions for a takeover to be effective is that a minimum of 30% of the shares of the target must be bided on.

Cherry picking An insolvent company can inspect the books, assets, operations and business activities of a failed company in order to cherry pick the aspects that it could save by integrating them into its own operations.

Purchase and assumption This occurs where a solvent company purchases assets of an insolvent company and assumes its liabilities.

How are restructuring plans formally approved?

There are different options in corporate restructuring and the procedure for formal approval depends on the particular restructuring plan.

In arrangements and compromises, the company can alter the rights of its members and creditors with court approval. Before it is approved, an application must be made to the court to call a meeting of the creditors and members. Notice of the meeting is then served on the members, accompanied with a statement showing the effect of the arrangement on the directors, creditors and shareholders. If a 75% majority vote in favour of it, a report will be made to the court.

The court will then refer the scheme to the SEC to investigate its fairness and issue a report. The SEC will appoint investigators to investigate the arrangement and issue reports to the court. If the court receives a positive SEC report, it will formally approve the arrangement.

In mergers and acquisitions, a pre-merger notification must be made to the SEC before it is formally approved.

In takeovers, the company acquires the issued share capital of another company. The acquiring company must formally approve the takeover by passing a resolution to bid for the shares of the other company and send the takeover bid to the SEC and the target for approval.

What effects do restructuring procedures have on existing contracts?

The restructuring procedure does not affect a company’s contracts, unless a contract itself makes restructure of the company a basis for termination. However, on the restructure of the company, the scheme of arrangement may provide for the mode of compliance with existing contracts.

What is the typical timeframe for completion of restructuring procedures?

A typical restructuring process takes a period of 6-12 months.

Court involvement

What is the extent of the court’s involvement in restructuring procedures?

The court is involved in all restructuring procedures, but the extent of its involvement depends on the type of restructuring. On application by the company, the court will call a meeting between the company and its creditors and members for any restructuring procedure. The court will also order investigations into the fairness of a scheme and approve it accordingly.

Creditor involvement

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

Creditors are given notice of any meetings regarding proposals for restructuring procedures. This is because most restructuring procedures entail alterations to creditors’ rights. Creditors must vote in favour of schemes of arrangement or mergers. Dissenting shareholders can write to an appointed liquidator requesting to abstain from the arrangement. They can also compel the acquisition of their shares.

Under what conditions may dissenting creditors be crammed down?

Where the court deems the scheme of arrangement or merger to be fair and equitable to the dissenting creditors, the arrangement or merger will continue, despite the dissenting creditors’ refusal. 

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in restructuring procedures?

The directors and shareholders of a company may propose a restructuring plan. Members and shareholders of a company must approve whatever restructuring option has been proposed by the company. Shareholders can apply summarily for the court to order a meeting of the creditors or members in order to agree to and determine the scheme. Dissenting shareholders can write to an appointed liquidator requesting to abstain from the arrangement. They can also compel the acquisition of their shares.

Informal work-outs

Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?

There are no specific provisions on out-of-court restructuring, but informal work-outs are common practice in Nigeria because of debtors’ increasing interest in thwarting the liquidation process. This has resulted in heightened interest in using turnaround management to promote corporate recovery. This can happen only where a receiver or manager is appointed over the whole or a substantial part of the company’s undertaking, the business is viable and the creditors are cooperative.

The work-out may involve restructuring the company’s operations, structure, business, workforce or terms of the company’s debt as it responds to the corporate crisis. Such restructuring may involve restructuring the terms of a company’s debt contracts to remedy or avoid default achieved by private negotiations with its creditors outside formal proceedings.

Companies may also undergo corporate reorganisation or restructuring, whereby their workforce is reduced through retrenchment or redundancy and several other informal options available to distressed companies. 

Transaction avoidance

Setting aside transactions

What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?

Under Section 506 of the Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004), if during the winding up of a company, the liquidator, official receiver, contributories or creditors discover that the company’s officers carried out its business in a reckless manner in order to defraud the company, they may reject the transaction and apply to the court to declare that the officers involved be held personally liable without limitation to the debts or loss arising from such transaction.

Officers would be guilty of an offence and, on conviction, liable to a fine and two years’ imprisonment. 

Operating during insolvency

Criteria

Under what circumstances can a company continue to conduct business during an insolvency procedure?

A liquidator has the power to carry on the business of a company in liquidation, insofar as this necessary for the beneficial winding up of the company, and all expenses or cost incurred thereof will have priority over the debts. 

Stakeholder and court involvement

To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?

Once a liquidator is appointed by the court, the stakeholders cease to be involved in the company’s business during an insolvency procedure.

Nevertheless, the stakeholders may apply to court if the liquidator takes steps in the management of the company that are detrimental to their interests. 

Financing

Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?

A company in liquidation may obtain secured or unsecured loans or credit from the liquidator or receiver-manager appointed by the court, but such loan must be for the purpose of carrying on the company’s business for the period provided by the court in the liquidation order for the purpose of settling the creditors’ claim.

Employees

Effect of insolvency on employees

How does a company’s insolvency affect employees and the company’s legal obligations to employees?

Employees may not bring claims with respect to wrongful termination, but can bring claims regarding payment of their benefits in preference to all other claims. Where employee pension plans or schemes exist, claims for deficiencies in such plans will have priority in liquidation because pensions are now a statutory requirement and, in practice, when unpaid, the employee may have recourse to request the court to enforce same.

Cross-border insolvency

Recognition of foreign proceedings

Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?

Nigerian courts will seek to coordinate both local and foreign insolvency proceedings and give effect to the respective orders. 

In the same vein, foreign insolvency judgments and orders may be enforced in Nigeria if they comply with Section 10 of the Foreign (Reciprocal Enforcement) Act (CAP F35, Laws of the Federation of Nigeria, 2004), which requires the existence of a wholly or partly unsatisfied foreign monetary judgment debt. This law is based on the reciprocity of treatment of similar judgments in the original country.

Winding up foreign companies

What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?

Foreign companies intending to carry on business in Nigeria must take all necessary steps to obtain incorporation as a separate entity in Nigeria for that purpose. Therefore, foreign companies carrying on business in Nigeria are treated the same as the local companies as long as they are registered in Nigeria, as required by the Companies and Allied Matters Act (CAP C20, Laws of the Federation of Nigeria, 2004).

The courts have the same powers with regard to winding up foreign and local companies. The court can order the compulsory winding up of foreign companies registered in Nigeria:

  • where the company resolved to be wound up by special resolution;
  • where the company has fewer than two members;
  • where the company cannot pay its debts; or
  • on just and equitable grounds as determined by the court.

Centre of main interests

How is the centre of main interests determined in your jurisdiction?

The centre of main interest is determined as the place where the company carries on its business. In most cases, this is the company’s registered address or headquarters. 

Cross-border cooperation

What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?

The courts may apply the legal or equitable rules governing the recognition of foreign insolvency orders and assist foreign representatives, as long as this is consistent with the Bankruptcy and Insolvency (Repeal and Re-enactment) Act 2016.