Insolvency Discourse by Kubi Udofia email@example.com
This discourse examines the revisions made by the Companies and Allied Matters Act, 2020 (CAMA 2020), to Nigeria’s insolvent liquidation framework.
Registered Office of Insolvent Company
Section 407(2) of Companies and Allied Matters Act, 1990 (CAMA 1990) defined the registered or head office of a company for the purpose of winding-up as “the place which has longest been the registered office or head office of the company during the 6 months” preceding the process. Section 570(2) of CAMA 2020 has redefined same as “the place which has longest been the principal place of business of the company during the six months” preceding the process. This revision may give rise to disputations regarding a company’s factual principal place of business.
Cash Flow Insolvency
Commendably, the monetary threshold for cash flow insolvency has been increased to N200,000: s.572(a) of CAMA 2020. The previous amount was N2000: s.409(a) of CAMA 1990. The threshold for unregistered companies is now N100,000: s.699(d)(i) of CAMA 2020. The previous threshold was N100: s.532(d)(i) of CAMA 1990.
Avoidance of Transactions
Section 577 of CAMA 2020, replicates s.414 of CAMA 1990. The section voids any attachment, sequestration, distress or execution put in force against a company after the commencement of winding-up. However, s.577 introduces a proviso stating that the avoidance provision does not apply to a fixed charge or any other validly created/perfected security interest, other than a floating charge. It is unclear what purpose this proviso serves, considering that the section targets execution creditors and has nothing to do with security interests. Interestingly, s.661 of CAMA 2020 embodies a similar avoidance provision for winding-up subject to supervision of courts, but has no similar proviso. This is also the case with s.666.
CAMA 2020 has revised certain trivial penalties which littered CAMA 1990. Some penalties are to be prescribed by the Corporate Affairs Commission (CAC), via Regulations. For instance, s.601(5) replaces s.438(5) of CAMA 1990 which imposed a penalty of N25; s.617(3) replaces s.454(3) of CAMA 1990 which imposed a fine of N25; s.654(2) replaces s.491(2) of CAMA 1990 which imposed a penalty of N25; s.671(1) replaces s.505(1) of CAMA 1990 which imposed a penalty of N250; s.676(2) replaces s.509(2) of CAMA 1990 which imposed a fine not exceeding N2,500 on corporations and N500 on individuals; s.679(2) replaces s.512(2) of CAMA 1990 which imposed a fine of N100; s.682(4) replaces s.515(4) of CAMA 1990 which imposed a fine of N1000. These are commendable revisions, provided that the Regulations would impose reasonable penalties for the infractions.
While CAMA 2020 imposes jail terms for some infractions, lawmakers appeared to shy away from specifying the fines which are options to imprisonment. Rather, CAMA 2020 requires courts to impose fines “as they deem fit”, for the infractions e.g. Sections 669, 672(3), 676(2) and 677. This approach may create uncertainty and inexplicable differentials, in fines imposed by courts.
Surprisingly, s.583(5) of CAMA 2020 has increased the daily fine for default in submitting a company’s statement of affairs to an official receiver in compulsory liquidations, from N25 (in s.420(5) of CAMA 1990) to a paltry N100. In 1990, N25 was $184.75 (at the then exchange rate of N7.39 to $1). Presently, N100 is about $0.26 (at the rate of N380 to $1).
Payment into Companies Liquidation Account
Section 428(2) of CAMA 1990 required a liquidator of a company wound up by the court, to pay monies received into a dedicated account. A liquidator was not permitted to retain an amount in excess of N500, or such amount as the CAC may approve for more than ten days. This amount has been increased in s.591(3) of CAMA 2020, to N50,000.
Application of Bankruptcy Rules
Sections 492 and 493 of CAMA 1990 required the application of provisions of the Bankruptcy Act, 1979 in proving debts and in relation to the rights of creditors, provable debts, future and contingent liabilities in insolvent winding-up. Surprisingly, s.656 of CAMA 2020 has retained this reference to the 41-year-old Bankruptcy Act, instead of setting out the rules/principles in CAMA 2020.
Section 656 of CAMA 2020 has introduced a proviso, stating that the section shall not affect the power of a secured creditor to realise or deal with his security during insolvent winding-up. This proviso is needless considering that insolvent winding up does not interfere with security interests.
CAMA 2020 has revised preferential debts under s.494 of CAMA 1990. References to the National Provident Fund Act, 1961 and Workman’s Compensation Decree, 1988 have been deleted. Deductions, contributions and obligations under the Pension Reform Act and the Employees’ Compensation Act have been included as preferential debts: Sections 657(1)(b) and (c) of CAMA 2020.
Section 657(4)(a) of CAMA 2020 replicates s.494(4)(a) of CAMA 1990. It provides for equal ranking of all preferential payments, and for payment in full. Where assets are insufficient, they are to abate in equal proportions. It also inserts a revision stating that preferential debts rank below expenses of winding-up. This revision is needless given that s.657(5) of CAMA 2020 (s.494(5) of CAMA 1990) gives costs and expenses of winding-up priority over preferential payments.
Ranking of Secured Creditors and Equity Holders
Section 657(6)(b) of CAMA 2020 has a new provision which says that the claims of equity holders, shall rank last.
Curiously, s.657(6)(a) of CAMA 2020 ranks claims of secured creditors in priority over other claims/expenses. Ranking secured creditors is flawed, considering that secured creditors are never in competition with unsecured creditors in winding up. Only assets which belong to an insolvent company may be distributed in winding up. Assets subject to security do not belong to the company, in this context. The company only has an equity of redemption. If a secured creditor is under-secured, it may prove for the deficiency in the winding up as an unsecured creditor: Moor v Anglo-Italian Bank (1879) 10 Ch.D 681 at 689-690.
Section 495(1) of CAMA 1990 made reference to the Bankruptcy Act 1979, for the definition of fraudulent preference. Commendably, Section 658 of CAMA 2020 provides a comprehensive definition of the infraction. A transaction may be avoided for constituting fraudulent preference if a company, during the specified vulnerable period, does anything or procures anything to be done which has the effect of giving a creditor, surety or guarantor undue advantage.
However and bizarrely, lawmakers omitted to insert the number of years within which transactions with connected persons may be vulnerable as fraudulent preferences: s.658(6) of CAMA 2020. The provision says “the relevant time is the period of years ending with the onset of insolvency”.
Transactions at an Undervalue
Section 659 of CAMA 2020 has introduced provisions for avoidance of transactions at an undervalue, involving a company in liquidation or administration. A transaction may be at an undervalue if it is entered into by the company at specified periods prior to insolvency/administration, and in which the company receives no consideration or receives consideration, the value of which is significantly less than what it has given.
Disclaimer of Onerous Property
Section 663(1) of CAMA 2020 has revised the provisions empowering a liquidator to disclaim onerous property in s.499(1) of CAMA 1990. In CAMA 1990, a liquidator desiring to disclaim a property for being “unsaleable or not readily saleable” had to show that inability to sell was because he was bound to perform any onerous act or pay money. This condition has been removed in s.663(1).
Suppliers of Utilities
Section 665 of CAMA 2020 is a novel provision. It bars utilities suppliers from making the payment of outstanding charges which pre-date winding-up or administration a condition for supply of utilities during the procedure. Suppliers of utilities may require an officeholder to personally guarantee payment of supplies.
Offences Antecedent to or in the Course of Winding-up
Section 668 of CAMA 2020 deals with offences closely linked to winding-up. It replicates s.502 of CAMA 1990. However, it is blighted by erroneous numbering. Section 502(1) of CAMA 1990 embodied s.502(1)(a) to s.502(1)(i), each of which contained a distinct offence. Section 502(1)(i) was further divided into sub-paragraphs (i) to (vii) i.e. s.502(1)(i)(i) to s.502(1)(i)(vii).
CAMA 2020 has erroneously renumbered sub-paragraph (i) of s.502(1)(i) (i.e. s.502(1)(i)(i)) as s.688(1)(j) instead of s.668(1)(i)(i). Having separated s.688(1)(i) from its seven sub-paragraphs, s.688(1)(i) in its present form is meaningless and embodies no offence. It provides thus: “within 12 months immediately preceding the commencement of the winding up or at any time thereafter”.
Section 688(1)(j) of CAMA 2020 is meant to be the first sub-paragraph of s.688(1)(i) i.e. s.688(1)(i)(i). However, it has been misnumbered as a paragraph under s.688(1) and its co sub-paragraphs have become its sub-paragraphs. Section 502(1)(i) of CAMA 1990 limited the offences in its seven sub-paragraphs, to those committed within 12 months before commencement of winding-up. The misnumbering has altered this position. Besides, there is no correlation between s.688(1)(j) and its six sub-paragraphs (i) to (vi).
Curiously, the proviso in s.668(1)(k) makes reference to s.688(1)(i)(v) and (vi) which are non-existent due to the misnumbering.
Prosecution of Delinquent Personnel
Section 675(3) CAMA 2020 deals with the prosecution of delinquent officers or members of a company. It is meant to replicate s.508(3) of CAMA 1990. The latter part of s.675(3) has been broken into two sub-paragraphs, and this distorts the real thrust of the provision. In its previous form, the provision gave the Attorney-General the discretion to apply to court for an order conferring on him or any designated person, powers to investigate the affairs of a company being wound-up. The creation of sub-paragraphs is unnecessary, and reflects lack of understanding of the provision.
Chapter 28 is another laudable novel provision in CAMA 2020. The provisions protect financial contracts and netting arrangements, from the impact of a counter-party’s insolvency. This provision is modelled after s.548(a)(1)(A) of the United States Bankruptcy Code. There appears to be errors in s.721(6)(b)(i) and (ii). First, erroneous reference is made to “non-insolvent party”. Second, breaking the provision into sub-paragraphs is needless, and may impede proper interpretation.