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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;
- 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.
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.
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.
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.
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