Effect of an Administration Order on Receivership Under CAMA 2020

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This article by Emmanuel Bassey examines what he refers to as the innovative provisions under the new Companies and Allied Matters Act 2020, which he believes will disrupt the way that companies operate in Nigeria, and also create an enabling environment for the survival and sustenance of businesses

It is no longer news that the Companies and Allied Matters Act, 2020 (“2020 CAMA”) was recently signed into law, to repeal and replace the Companies and Allied Matters Act, 1990 Cap. C20, LFN 2004 (“1990 CAMA”). Some Innovative Provisions of 2020 CAMA:

One of the innovative provisions of the 2020 CAMA, is the business rescue scheme of administration. The scheme allows for the appointment of an administrator to run an ailing company, with the primary aim of rescuing the business and ensuring its survival. This scheme is quite similar to the scheme of appointment of a receiver by the creditors of a company, with the fundamental difference being that receivers are appointed with the primary aim of realising the assets of the company for the purpose of satisfying the debt owed to their appointors.

Administrator v Receiver

Section 449 of the 2020 CAMA states that an administrator would be appointed over a company, where the company is or is likely to become unable to pay its debts, and administration order is likely to achieve the purpose of administration. The purpose of administration is stated in Section 444(2) of the 2020 CAMA, which provides that the rescue of the company is the primary objective of the administrator in the performance of his functions, except where he is of the opinion that it is not reasonably practicable, or a better result can be achieved for the company’s creditors by pursuing some other course. On the other hand, Section 556(1)(2) of the 2020 CAMA provides that the primary function of a receiver is to take possession of and realise the relevant security, for the benefit of those on whose behalf he was appointed. He does not have a primary duty to rescue the ailing company, unlike an administrator. Therein lies the difference, between administration and receivership.

Although, the provisions on receivership under the 2020 CAMA have been left substantially as they were under the 1990 CAMA, insolvency practitioners in Nigeria are keen to learn what would be the interplay between administration and receivership, and the effect of one on the other. These issues will be examined anon.

If there was any apprehension in the minds of existing receivers upon the coming into force of the 2020 CAMA, as to how an administration order might affect a company in receivership, Section 454(c) of the 2020 CAMA was made to allay those fears. It states that an administrator shall not be appointed under the Act, if prior to the commencement of the Act, a receiver was already in office. This is a very significant provision, as it gives assurance to receivers who were appointed whether by the holders of a fixed charge or holders of a floating charge, that their appointment would not be prejudiced in any way by the coming into force of the provisions of the 2020 CAMA on administration.

Also, Section 476(1) of the 2020 CAMA provides protection for receivers appointed by holders of a fixed charge, after the 2020 CAMA had come into force. It says that where there is a receiver of a company based on appointment by a holder of a fixed charge, the Court shall dismiss an administration application in respect of the company unless, among other conditions, the appointor of the receiver consents.

Section 478(2) of the 2020 CAMA further provides that where a company is in administration, any receiver of part of the company’s property appointed by a secured creditor shall vacate office, if the administrator requires him to do so. This section appears to give an administrator the discretion to allow a receiver appointed by secured creditors over a part of the properties of the company, to continue to act while the company is in administration. See London Flight Centre (Stansted) Ltd (Acting by its Administrator) v Osprey Aviation Ltd (2002) BPIR 1115 where at the date of the administration order, receivers had already been appointed of aircraft G-LOVB at the instance of a secured creditor. The receivers had been appointed on 29th March, 2000. In the administration order, the administrator acknowledged that on the making of the order, he would consent to the secured creditor continuing to enforce its security over the aircraft belonging to the Petitioner.

2020 CAMA and England’s Insolvency Act 1986

Section 480 provides a moratorium, against any legal process being commenced against a company in administration. Section 480(2)(a) of 2020 CAMA states that where a company is in administration, no step shall be taken to enforce security over the company’s property except with the consent of the administrator, or the permission of the Court, while Section 480(4) CAMA provides that no legal process, including legal proceedings, execution, distress and diligence shall be instituted or continued against the company or property of a company that is in administration except with the consent of the administrator, or the permission of the court. In SS Agri Power Limited v (1) Mr. Dorins and (2) Privilege [2017] EWHC 3563 (Ch), the Court was called upon to interpret Paragraph 43(2) of Schedule B1 of the Insolvency Act, 1986 of England which is in pari materia with Section 480(2)(a) of 2020 CAMA. The court stated that where a receiver had been appointed prior to the application for an administration order, the receiver would not need the permission of the court to carry out his functions. The court held that the relevant step to enforce security was the appointment of a receiver, which took place before the application for administration order. The court went further to interpret Paragraph 43(6) of Schedule B1 of the Insolvency Act, 1986 of England, which is in pari materia with Section 480(4) of 2020 CAMA, which provides that no legal process, including legal proceedings, execution, distress and diligence shall be instituted or continued against the company or property of the company, except with the consent of the administrator or permission of the court. The court stated that the appointment of the receiver in that case, which preceded the application for administration order, was not caught by Paragraph 43(6) of Schedule B1 of the Insolvency Act, 1986 of England (which is in pari materia with Section 480(4) of CAMA) as a matter of timing. The court held that, the subsequent steps taken by the receiver are not the continuation of a “legal process” within the meaning of paragraph 43(6). The appointment of the receiver, the court stated, gave rise to an agency relationship between the company and the receiver, and that the acts which the receiver subsequently performed, were acts carried out pursuant to that agency relationship, rather than pursuant to any legal process. The court cited with approval the decision of Norris J in Re: Frankice (Golders Green) Limited [2010] Bus LR 1608 in which Norris J considered the meaning of legal process under paragraph 43(6) and held as follows: “I think the word ‘process’ suggests something with a defined beginning and an ascertainable final outcome and which, in the interim, is governed by a recognisable procedure. I think the word ‘legal’ indicates that that process must in some sense invoke the compulsive power of the law, and it suggests that the procedure must be quasi-legal in nature”. The court therefore, concluded that although the conduct of the receivership must of course be conducted according to law, it is not governed by a recognisable procedure. Rather, it will take a course dictated by the particular commercial decisions taken by the receiver, in order to realise the charged assets.

Furthermore, in Bristol Airport Plc v Powdrill and Others [1990] 1 Ch, 744 the UK Court of Appeal stated that, it is not the creation of the security without the consent of the Administrator or the leave of the court which is prohibited by the provision, but the taking of steps to enforce that security. The court therefore, held that “You are not taking steps to enforce a security unless by relying on the security you are preventing the administrator doing something to [the security] in which he has an interest which he would otherwise be entitled to do”. On the condition for the grant of permission by the court, the court in Re Atlantic Computer Systems Plc [1992] Ch 505 at page 542 stated that the moratorium is intended to assist the company, under the management of the administrator, to achieve the purpose for which the administration order was made. Thus, if granting leave to a secured creditor is unlikely to impede the achievement of that purpose, leave should normally be given, while in other cases, the court has to carry out a balancing exercise, balancing the legitimate interests of all the creditors of the company.

Note should however be taken of Section 481(5) of the 2020 CAMA, which provides that if there is a receiver of the company appointed by the holder of a floating charge, the provisions of Section 480 of the 2020 CAMA, which provides a moratorium against other legal process being commenced against a company in administration, shall not apply until the appointor of the receiver consents to the making of an administration order. What this means is that, even while an administration application is pending, a receiver appointed by the holders of a floating charge, whether before or during the pendency of an administration application, can still continue to perform their functions unhindered, as per Section 481(6)(d) of the 2020 CAMA, until an administration order takes effect, after which Section 478(1) will apply.

Section 478(1)(2) of the 2020 CAMA provides that when an administration order takes effect in respect of a company, a receiver of the company appointed by a holder of a floating charge or by the court shall vacate office. But, before then, a holder of a floating charge can still appoint an administrator (see Section 481(6)(c)(d) of the 2020 CAMA), and such an administrator whether appointed before or during the pendency of an administration application, can continue to perform the functions of their office unhindered, until an administration order takes effect.

From the foregoing provisions, it is obvious that, even where a company is in administration, the 2020 CAMA provides different regimes of protection to a receiver appointed before and after the coming into force of the Act, or the making of an administration order. It now behoves insolvency practitioners to take advantage of these provisions, to ensure the realisation of their security.

Emmanuel Abasiubong Bassey, LL.M, Mike Igbokwe SAN & Co., Lagos