Insolvency Discourse by Kubi Udofia info@kubiudofia.com
Introduction
Recently, Honeywell Group Ltd (“Honeywell Group”) agreed to sell a 71.69% stake in Honeywell Flour Mill Ltd (“Honeywell Flour”) to Flour Mills of Nigeria Plc (“FMN”) for an enterprise value of N80 billion. Ecobank Nigeria Ltd (“Ecobank”) has objected to this transaction, claiming that it has a pending winding-up petition (Suit No: FHC/L/CP/1571/2015) against Honeywell Group for its inability to pay a debt owed to Ecobank. Although Suit No: FHC/L/CP/1571/2015 was dismissed by the High Court, the Court of Appeal upheld an appeal (CA/L/1041/2016) by Ecobank against the dismissal. A further appeal (SC/700/2019) by Honeywell Group against the Court of Appeal’s decision is yet to be determined by the Supreme Court.
This discourse examines the legal implications of acquiring shares from or in a company with a pending winding-up petition.
Avoidance of Post-petition Dispositions
Section 576 of the Companies and Allied Matters Act 2020 (CAMA) voids certain dispositions of a company’s property done after the presentation/filing of a winding-up petition. Specifically, it voids (i) any disposition of the company’s property, including things in action, and (ii) any transfer of shares or alteration in the status of members of the company. These transactions/dispositions are void except validated by Court. Section 576 is worded in a similar manner as section 127 of the United Kingdom’s Insolvency Act 1985, which replicates Section 227 of the UK Companies Act 1948 and Section 153 of the UK Companies Act 1862.
The impact of Section 576 of CAMA, is amplified by the retrospective nature of the commencement of compulsory winding-up. Winding-up proceedings do not commence on the date a court makes a winding-up order. Rather, when a winding-up order is made, it relates back to the date the petition was presented/filed and takes effect from that date: section 578(2) of CAMA. Nevertheless, the presentation/filing of a winding-up order does not necessarily signify the commencement of winding-up proceedings, the reason being that the petition may subsequently be dismissed by a Court.
In view of the retrospective nature of a winding-up order, dispositions of a company’s property after the presentation/filing of a petition will become void if a winding-up order is subsequently made. Where the petition is unsuccessful and no winding-up order is made, such dispositions remain valid.
Acquisition of Shares from a Company
Honeywell Group’s shares in Honeywell Flour are Honeywell Group’s property. “If” a winding-up order is eventually made against Honeywell Group; the shares in Honeywell Flour will form part of Honeywell Group’s property/assets which would be available to its creditors. Consequently, any disposition of those shares after the presentation/filing of a winding-up petition against Honeywell Group will be void unless validated by the Court. As previously explained, the winding-up proceedings would be deemed to commence on the date the winding-up petition was presented/filed and not the day the Court makes an order.
In Akers & Ors v Samba Financial Group [2017] AC 424, the UK Supreme Court held that the anti-disposition provision will not apply to assets held in trust for a company where the transferee is a bona fide purchaser for value without notice of the company’s interest. This is notwithstanding that such transfer of legal title had the effect of extinguishing the insolvent company’s beneficial interest. The Court explained that the anti-disposition provision was aimed at preventing the dissipation of a company’s legally owned assets and was “neither aimed at nor apt to cover” transfer of equitable interests.
There appears to be a misconception that the anti-disposition provision is aimed at furthering the pari passu rule. The pari passu rule ensures that similarly situated creditors are treated equally, especially in distribution of assets. In furtherance of this objective, the rule may sometimes invalidate dispositions to creditors. However, the pari passu rule cannot be used in invalidating dispositions to non-creditors because they do not partake in the distribution of an insolvent’s property/assets. In contrast to the pari passu rule, the anti-disposition provision invalidates dispositions to both creditors and non-creditors. Its objective is the preservation of the company’s assets from dissipation. It is not concerned with distribution of an insolvent’s assets.
In Coutts & Co. v Stock [2000] 1 WLR 906, Lightmman J rightly explained that the anti-disposition provision is “designed to prevent the directors of a company, when liquidation is imminent, from disposing of the company’s assets to the prejudice of its creditors and to preserve those assets for the benefit of the general body of creditors.” Similarly, in Re Wiltshire Iron Co [1868] 3 Ch App 443 at 447, Lord Cairns explained that the object of the anti-disposition provision is to “prevent, during the period which must elapse before a petition is heard, the improper alienation or dissipation of the property of a company in extremis”.
Acquisition of Shares in a Company
Where shares in a company are sold/transferred after the presentation/filing of a winding-up petition, such sale/transfer will be void if a winding-up order is subsequently made. Shares in a company are not the company’s property, but the property of the company’s shareholders. Consequently, a post-petition sale/transfer of shares in a company will not violate the pari passu rule – which focuses on equal treatment of similarly situated creditors.
In Rudge v Bowman [1868] LR 3 QB 689 at 695, Blackburn J explained that the prohibition on transfer of shares is aimed at preventing a shareholder from transferring his shares to an impecunious person (who may have nothing to lose) with the aim of the transferor evading his liability as a contributory. The Court further opined that a Court would readily validate a transfer from a “pauper” to a “rich man” but not the converse. The rationale for this is that an impecunious transferee may be unable to meet pending liabilities to the company.
Validating Orders
A winding-up petition may have paralytic effect on a company. Third parties may be reluctant to transact with the affected company due to the risk of retrospective invalidations of the transactions if a winding-up order is subsequently made. This may drive marginally solvent companies into insolvency. Even where a winding-up petition is unsuccessful, the company may suffer severe or irreversible financial and reputational damage.
To mitigate the hardship which presentations/filings of winding-up petitions may cause, Section 576 of CAMA empowers Courts to validate certain dispositions. Ideally, parties may obtain prior Court validation for dispositions. Where prior validations are impracticable, parties may seek for retrospective validations. Decided English cases indicate that most retrospective applications for validation are made in response to a liquidator’s challenge of a post-petition disposition of a company’s property.
Whether a Court will validate a post-petition disposition is a matter of judicial discretion to be exercised based on the facts of each case: Re Clifton Place Garage (1970) Ch 477. English Courts will validate dispositions if there are special circumstances showing that it will be or has been for the benefit of the general body of unsecured creditors: Express Electrical Distributors Ltd v Beavis [2016] 1 WLR 4783. Previously, in Gray’s Inn Construction Co Ltd [1980] 1 WLR 711 at 718F-G, Buckley LJ had stated that Courts would validate dispositions done in good faith and in the ordinary course of business at a time when parties were unaware of a pending winding-up petition. This was echoed by Fox LJ in Denney v John Hudson & Co Ltd [1992] BCLC 901 at 904. This is no longer the position of English law. Recent authorities indicate that mere good faith and lack of knowledge of a pending petition will not suffice: Express Electrical Distributors Ltd v Beavis [supra]; Re MKG Convenience Ltd [2019] EWHC 1383.
It has also been suggested that a recipient of an otherwise void disposition may rely on the defence of “change of position”: Express Electrical Distributors Ltd v Beavis [supra]; Re MKG Convenience Ltd (supra). The basis for this position is that a liquidator’s remedy to recover such dispositions is restitutionary. Accordingly, a recipient is entitled to the equitable defence if it shows that it would be unjust to require a return of a disposition because of a change in the recipient’s circumstance.
If Ecobank’s winding-up petition against Honeywell Group is granted on a future date, Honeywell Group’s disposition of its 71.69% stake in Honeywell Flour to FMN will become void. FMN would have to apply to Court for a retrospective validation of the transaction/disposition. In that regard, FMN may have to show that the disposition was for the benefit of the generality of Honeywell Group’s unsecured creditors. Considering FMN’s knowledge of Ecobank’s pending winding-up petition against Honeywell Group, and its disregard for Ecobank’s caveat, it would be arduous for FMN to successfully rely on the equitable defence of change of position due to the equitable doctrine of clean hands.
Implications of FMN’s Pending Appeal
Ecobank’s winding-up petition against Honeywell Group in Suit No: FHC/L/CP/1571/2015 was dismissed by the High Court. Ecobank’s appeal (CA/L/1041/2016) against the decision of the High Court was successful with the Court of Appeal setting aside the High Court’s decision. Honeywell Group has filed an appeal (SC/700/2019) against the Court of Appeal’s decision. The appeal is pending at the Supreme Court.
A mere appeal against a Court’s decision does not affect the validity of the decision appealed against. The decision remains valid until set aside. Accordingly, following the Court of Appeal’s decision in CA/L/1041/2016, the winding-up petition in Suit No: FHC/L/CP/1571/2015 is still pending. Consequently, if a winding-up order is eventually made on a future date in Suit No: FHC/L/CP/1571/2015, Honeywell Group’s disposition of its 71.69% stake in Honeywell Flour will be void unless validated by a Court.
Conclusion
So long as a winding-up petition is not eventually granted, a company’s disposition of its property/shares or alteration of the status of its members (while the winding-up petition is pending) will remain valid. Such disposition or alteration will be void, if a Court subsequently grants the winding-up petition. The Court order granting the winding-up petition will operate retrospectively and take effect from the date the petition was presented/filed. Parties transacting with companies facing winding-up petitions may (prospectively or retrospectively) apply to Court for validation of their transactions.
