Corporate Collapse And Creditor Remedies – Navigating Nigeria's Insolvency Framework

Introduction

Corporate finance is a fundamental aspect of commercial transactions and plays a critical role in the fulfillment of contractual obligations. However, where a company becomes insolvent and is unable to fulfil its contractual obligations, it may collapse and consequently trigger creditor rights. Additionally, the doctrine of corporate personality and liability limiting clauses in contracts may affect the enforcement of creditors' remedies under a contract. For creditors, this poses a significant challenge and navigating this landscape requires an understanding of the options available to the creditors. In this newsletter, we examine the implications, options, and rights available to creditors under Nigerian law in recovering outstanding debts during an insolvency process.

Implications of Corporate Insolvency

The Companies and Allied Matters Act (CAMA /the "Act")¹ refers to insolvency as a situation where a company is unable to pay its debt. Also, an insolvent person is defined in CAMA as "any person in Nigeria who, in respect of any judgment, Act or court order against him, is unable to satisfy execution or other process issued in favour of a creditor, and the execution or other process remains unsatisfied for not less than six weeks²"

On this premise, CAMA makes comprehensive provisions on the implications that would be triggered in the event of corporate insolvency for both the company and its creditors, all of which are geared towards the protection of the creditors. These include:

1. Suspension of Directors' powers – this is one of the first events that arises in the event of corporate insolvency. This involves the surrendering of the decision-making powers of the directors to either a liquidator, receiver or administrator.
2. Impact on Shareholders – where the company is limited by shares, the liability of the shareholders to the company's creditors is limited to the amount unpaid in respect of the shares held by them in the company.
3. Review of Prior Transactions – Corporate insolvency may lead to an examination of the company's previous transactions, particularly those carried out at gross undervalue³, without consideration, or those that amount to a fraudulent preference of certain creditors⁴.
4. Business Rescue Options – Under the Act, companies experiencing insolvency may explore various business rescue arrangements such as the use of administration procedures and voluntary arrangements to restructure and recover their business as described below.

Corporate Insolvency Options under the Companies and Allied Matters Act 2020

The Act provides various insolvency mechanisms options to both creditors and companies that may be utilized in the event of a corporate insolvency. The option to be used is largely dependent on the peculiarities of each case and the overall objective of the creditors/companies. Some corporate insolvency options available to creditors/companies under the Act include –

1. Administration – The primary objective of an administration is to (i) rescue the company as a going concern, (ii) to achieve better results for the company's creditors as a whole, than would be likely if the company were wound up and (iiv) realizing property in order to make a distribution to one or more secured or preferential creditors⁵. An administrator may be appointed by the court, the company or its directors or the holder of a floating charge. The appointed administrator takes over management of the company's affairs, and during this period, no creditor actions may be taken against the company without the consent of the administrator or permission of the court.
2. Company Voluntary Arrangements – This insolvency option serves as a contractual restructuring arrangement. It is utilized by companies to negotiate arrangements with creditors for the settlement of debts⁶. This option is used where a company does not have sufficient funds to pay its debts but can offer other forms of consideration to the creditors as full and final settlement of its obligations. Where this option is approved by the requisite majority of the company's creditors, such arrangement would bind the creditors.
3. Receivership – Receivership is an insolvency mechanism in which creditors with secured interests or debentures appoint a receiver or receiver/manager to take control of the company's assets. The primary objective is to take possession of and protect the assets, receive rents, profits and discharge all outgoings and realize the assets for the benefit of the creditors.⁷
4. Liquidation (Winding-Up) – This is the most drastic corporate insolvency option and should only be adopted where the objective is the dissolution of the company. This procedure may be initiated by either the company's creditors, members or regulatory authorities by filing a petition before the court. The objective of this procedure is to appoint a liquidator to take account and manage the assets of the company for the purpose of settling the company's liabilities.

Creditor Rights in Corporate Insolvency

The rights of a creditor is dependent on the type of debt owed and the corporate insolvency option adopted for the recovery of such debts. Some creditor rights under corporate insolvency include –

1. Commencement of Corporate Insolvency Proceedings: The creditors of a company are the principal parties entitled to initiate any corporate insolvency option against the company. This includes the right to appoint receivers, administrators, or commence winding up proceedings against the company for inability to pay its debt.
2. Control of Insolvency Process: Given that the creditors are primarily responsible for initiating insolvency proceedings against a company, it follows that they also control the process. In a creditor's voluntary winding up, the liquidator is appointed or approved by the creditors and the actions of such liquidator are controlled by the creditors.⁸ The liquidator is expected to act in accordance with the directions of the creditors and in the interest of the creditors in the management of the company.
3. Priority Rights – Priority rights refer to the procedure and rankings with which the debts of the company will be settled. In this regard, the nature of each creditor's debt will determine their priority rights and how they rank. Creditors that are secured by fixed charges rank the highest⁹ followed by the preferential debts (taxes, rates, salaries and charges) which rank higher than company's creditors secured by floating charges.¹⁰.
4. Inspection of Corporate Books – Creditors of a company in insolvency have the right to examine the company's corporate records, including the register of charges, register of debenture holders, and trust deeds securing debentures¹¹. Additionally, during a court-ordered winding-up, creditors may access the liquidator's records and receive the liquidator's statements on the status of the liquidation.

Conclusion

While corporate insolvency often signals financial distress, it does not always mark the end of a company's existence. Under the Nigerian legislative framework, corporate insolvency is a structured process with legal implications for both the insolvent companies and their creditors.

Depending on the preferred insolvency option, there may be opportunities for restructuring, debt compromise, or even business rescue. For creditors, the law provides a wide range of rights as highlighted above. These rights are designed to ensure transparency, while balancing the interest of other stakeholders.

Conclusively, the most effective insolvency option is largely dependent on the peculiarities of each case, the type/amount of debt owed and the objectives of the creditors/the company. The ultimate decision made by a creditor whether to pursue liquidation, accept a voluntary arrangement, or support administration, can significantly affect recovery prospects.

Footnotes

1. S.625 CAMA

2. S. 868 CAMA

3. S. 659 CAMA

4. S. 658 CAMA

5. S.444 CAMA

6. S. 434 CAMA

7. S. 556 CAMA

8. S.590 CAMA

9. S.207 (4) CAMA

10. S. 657 (4) CAMA

11. S.683 (2) CAMA

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.