Business Facilitation Act 2023: Appraisal of the New Threshold for Cash Flow Insolvency

BY DR KUBI UDOFIA

Introduction

The long-awaited Business Facilitation (Miscellaneous Provisions) Act 2023 (“Act”) was signed to law on 13 February, 2023. The Act codifies Executive Order 001 of 2017 on the Promotion of Transparency and Efficiency in the Business Environment issued on 18 May 2017. It also amends twenty-one business-facilitation laws which are pivotal for promoting ease of doing business in Nigeria. The Act has made twenty amendments to the Companies and Allied Matters Act (CAMA) 2020, three of which are insolvency-related. This discourse examines these three amendments, and in particular the new monetary threshold for cash-flow insolvency. 

The New Threshold for Cash Flow Insolvency

The Act has amended the monetary threshold for cash flow insolvency in Section 572(a) of CAMA 2020. Cash flow insolvency is the inability of a company to pay its debts as they fall due. Prior to the amendment, a company was deemed to be cash flow insolvent where (i) the company was indebted in a sum exceeding N200,000.00 which was due, and (ii) a creditor had served a demand on the company requiring payment of the sum, and (iii) the debtor had neglected to pay the sum three weeks after service of the demand. 

The repealed monetary threshold for cash flow insolvency was expressed as “a sum exceeding N200,000.00”. The Act has now replaced this with: “a sum to be determined by a regulation issued by the Commission”. This amendment effectively removes the N200,000.00 monetary threshold. The Corporate Affairs Commission (CAC) is now empowered, to determine the monetary threshold. In consequence, the power to determine the monetary threshold has been transferred from the National Assembly via an Act, to the CAC via a regulation.

The rationale for the amendment is unclear. It is possible that the amendment is aimed at empowering the CAC to easily adjust the threshold, going forward. In contrast, an amendment of a provision of CAMA can only be done by the National Assembly. It must therefore go through the legislative process, as was the case with the Business Facilitation Act. Contrary to widely held perception, law-making processes at the National Assembly may not always be slow, complicated and plagued with red tape. Cases abound where the National Assembly fast-tracked the passage of Bills in furtherance of certain objectives.

 During the Covid-19  pandemic, some countries had temporarily raised/adjusted the monetary thresholds for cash flow insolvency to curb the deluge of Covid-induced insolvencies. These were done by amending their laws through fast-tracked legislative processes. For instance, Australia raised her threshold from AU$2,000 to AU$20,000; India raised hers from ₹100,000 to ₹10,000,000; Ireland raised her threshold from €10,000 for individual creditors and €20,000 for two or more creditors to €50,000; United Kingdom banned winding-up petitions based on statutory demands for Covid-induced defaults; and Germany suspended a creditor’s statutory right to request for opening of insolvency proceedings for inability to pay due debts. Instructively, in Nigeria, there was no attempt by stakeholders to make any temporary adjustment.

The new monetary threshold for cash flow insolvency is not without demerits. First, the approach may create uncertainty regarding the threshold in particular and Nigeria’s insolvency law framework generally. The fact that CAC may easily and speedily adjust the threshold as it desires will create an air of uncertainty and unpredictability around the threshold. Having the threshold in CAMA, as was previously the case, prevented incessant or unpredictable adjustments and enhanced certainty. In its most recent Principles for Effective Insolvency and Creditor/Debtor Regimes, 2021, the World Bank Group explained the disadvantages of uncertainty and unpredictability of insolvency laws and procedures thus:

“Lenders in emerging markets demand compensation for a number of procedural uncertainties. First, information on local rules and enforcement is often asymmetrically known. There is a widespread perception among lenders that local stakeholders can manipulate procedures to their advantage and often benefit from fraud and favouritism 

In the absence of sufficient and predictable laws and procedures, creditors tend to extend funds only in return for unnecessarily high-risk premiums. In times of crisis they may withdraw financial support altogether. Countries would benefit substantially if creditor/debtor rights and insolvency systems were clarified and applied in a consistent and fully disclosed manner.”

Second, the new approach is relatively novel and contrary to what is the norm and global best practice. It is unclear where this model was adopted from, which jurisdictions have previously applied the model and how those jurisdictions fared. Nigeria is indeed sailing in uncharted waters. Asides Zambia (Section 57(3)(a) Corporate Insolvency Act, 2017) and Malawi (Section 184 Insolvency Act, 2017), the practice in several common law jurisdictions is for the monetary thresholds of cash flow insolvency to be expressly stated in the principal company or insolvency laws. That way, the thresholds are substantially certain and predictable as opposed to being controlled and “determined” by a regulator. 

Notable examples in Africa include: Botswana (100 Pula, Section 171(a) Companies Act, 2003); Ghana (10,000 Cedis, Section 83(5) Insolvency Act, 2020); Kenya (100,000 Kenyan Shillings, Section 384(1)(a) Insolvency Act, 2015); Mauritius (100,000 Mauritian Rupees, Section 180(a) Insolvency Act, 2009); South Africa (100 Rand, Section 345(1)(a) Companies Act, 1973). Examples outside Africa include: Australia (2,000 Australian Dollars, Section 585 Corporations Act, 2001); Canada (200 Canadian Dollars, Section 4 Winding up and Restructuring Act, 1986); Cayman Islands (100 Dollars, Section 93(a) Companies Act, 2022 (Revision)); India (1 Lakh Rupees (i.e. 100,000 Rupees), Section 271(2)(a) Companies Act, 2013); Ireland (10,000 Euros for a creditor and 20,000 Euros for two or more creditors, Section 571(a)/(b) Companies Act, 2014); Malaysia (10,000 Ringgit), Section 466(1)(a) Companies Act, 2016); New Zealand (1000 New Zealand Dollars, Section 289(2)(a) Companies Act, 1993); and Singapore (15,000 Singapore Dollars, Section 125(2)(a) Insolvency, Restructuring and Dissolution Act 2018).

Third, there is a risk of inadvertent or deliberate misuse or abuse of the threshold under the new approach. Even in the absence of real abuse, the approach will create a perception that Nigeria’s threshold for cash flow insolvency is susceptible to manipulation and arbitrary adjustment by a regulator or an influential official. An arbitrary upward or downward adjustment of the cash flow insolvency threshold may have dire consequences on businesses and the Nigerian economy. An increase in the threshold may force hitherto solvent companies into insolvency. This would not necessarily be due to their inability to pay debts that are due; but because of a shift of the goalposts by the CAC. Conversely, a reduction of the threshold may superficially prop-up insolvent companies to become solvent, creating zombie companies to the detriment of the Nigerian business environment and economy.

Instructively, as at 27th February 2023 (that is, two weeks after the repeal of the N200,000.00 threshold), CAC was yet to issue a regulation “determining” or specifying the new cash flow insolvency threshold. 

Proper Definition of Fraudulence Preference

It is not all gloom and doom. Commendably, the Act has amended Section 658(6) of CAMA 2020 by replacing the expression “a period of years” with “a period of two years”. Section 658 of CAMA 2020 provides for fraudulent preferences. A transaction may be set aside for constituting fraudulent preference if a company, during “the specified period” prior to the commencement of formal insolvency procedure, does anything or procures anything to be done which has the effect of giving a creditor, surety or guarantor undue advantage. It must also be shown that the company was influenced to give the preference by a desire to confer an undue advantage on the creditor/surety/guarantor.

In the repealed Section 658(6) of CAMA 2020, the drafters omitted to specify the period within which transactions with persons connected to the company would be vulnerable as fraudulent preference. The repealed provision stipulated thus:

“In the case of a preference which is given to a person who is connected with the company (otherwise than by reason only of being its employee), the relevant time is the period of [x] years ending with the onset of insolvency, and in any other case, the relevant time is the period of three months ending with the onset of insolvency.” (“x” indicates the omission) 

The omission was previously highlighted in the 8th September, 2020 issue of this discourse titled “Revisions to Insolvent Liquidation Framework by CAMA 2020: The Refinements and the Flaws”. The amendment has corrected the omission.

Deletion of Conflicting Definition of “Insolvency Practitioner”

The Act has repealed the definition of “insolvency practitioner” in Section 868(1) of CAMA 2020. The repealed Section 868(1) defined insolvency practitioner as: “a legal practitioner within the meaning of the Legal Practitioners Act or a member of the Institute of Chartered Accountants of Nigeria or such other professional bodies of accountants as is established by an Act of the National Assembly”. 

The import of the repealed definition was that all (i) qualified legal practitioners in Nigeria, (ii) members of Institute of Chartered Accountants; and (iii) members of other professional bodies of accountants, were automatically insolvency practitioners. This conflicted with the accreditation framework in Chapter 26 of CAMA 2020 and Regulation 1.07 of Insolvency Regulations 2022 (IR 2022).

Section 705(1) of CAMA 2020 provides that a person is “only” qualified to act as an insolvency practitioner where he satisfies conditions set out in Section 705(1)(a)-(d). These are: (i) a degree in law, accountancy or a relevant discipline, (ii) a minimum of five years post-qualification experience, (iii) a certified member of a body accredited by the CAC, and (iv) authorisation by CAC.

Section 707(1) of CAMA embodies some of the requirements for CAC’s authorisation but the list is by no means exhaustive. Sections 705(2) and 707(1)(a) of CAMA 2020 empower CAC to prescribe additional qualifications in its regulations. Accordingly, Reg. 1.07(1) and (2) of IR 2022 contain a detailed list of requirements for accreditation as an insolvency practitioner. Furthermore, an insolvency practitioner’s accreditation is renewable after three years: Reg. 1.07(3).

The deletion of the definition of insolvency practitioner in Section 868(1) has resolved the confusion regarding who is qualified to act as an insolvency practitioner that is, receiver, manager, liquidator, administrator, nominee and supervisor. Instructively, Reg. 1.05 of IR 2022 defines an insolvency practitioner as a person duly accredited by the CAC to undertake insolvency proceedings. This is congruent with the accreditation framework in CAMA 2020.

Postscript

Notwithstanding the drawbacks in relation to the new threshold for cash flow insolvency, the Business Facilitation Act is a laudable initiative and a reform-oriented legislation. Several of its provisions have the potential of immensely engendering transparency, eliminating bottlenecks and promoting ease of doing business in Nigeria.