- CAMA 2020 Priority: The Companies and Allied Matters Act (CAMA) 2020 shifted Nigeria's insolvency framework from a "liquidate-first" approach to a "rescue-first" model.
- Moratorium Benefits: Corporate rescue tools like Administration provide an automatic moratorium, preventing creditors from taking legal action while a recovery plan is developed.
- Director Accountability: Directors face personal financial liability if they continue to trade when they know-or should know-the company is insolvent.
- Priority of Claims: Secured creditors and "fixed charge" holders generally sit at the top of the payment hierarchy, while shareholders are the last to receive distributions.
- Regulated Professionals: Only licensed insolvency practitioners recognized by the Corporate Affairs Commission (CAC) can lead restructuring or liquidation proceedings.
What is a Company Voluntary Arrangement (CVA) in Nigeria?
A Company Voluntary Arrangement (CVA) is a formal agreement between a distressed company and its creditors to repay debts over a specified period. Under CAMA 2020, this mechanism allows a company to avoid liquidation by renegotiating terms with its creditors while the existing management remains in control under the supervision of a nominee.
The CVA process is designed for speed and flexibility, bypassing the need for heavy court involvement. It is particularly effective for businesses that have a viable core operation but are struggling with temporary cash flow issues or high debt service costs.
The CVA Process Step-by-Step
- The Proposal: Directors draft a proposal detailing how much debt will be repaid and the timeline for payments.
- Appointing a Nominee: A licensed insolvency practitioner is appointed to review the proposal and report to the court on its viability.
- Creditors' Meeting: The nominee summons meetings for creditors and shareholders. For the CVA to be approved, it requires a majority of at least 75% in value of the creditors present and voting.
- Implementation: Once approved, the nominee becomes the "supervisor." The company carries out the plan, and the supervisor ensures creditors are paid according to the agreement.
What is the Role of the Administrator in Nigerian Corporate Rescue?
An administrator is a licensed professional appointed to take full control of a distressed company to achieve a specific rescue objective. Their primary goal is to rescue the company as a going concern, or if that is not possible, to achieve a better result for creditors than an immediate liquidation would.
The appointment of an administrator triggers an "interim moratorium." This legal shield stops all lawsuits, foreclosures, and debt enforcement actions against the company, giving the administrator breathing room to evaluate the business and implement a turnaround strategy.
Powers and Duties of the Administrator
- Management Control: They displace the board of directors and assume all powers to run the company's day-to-day operations.
- Asset Disposal: They can sell parts of the business or specific assets to raise capital or satisfy debts.
- Investigation: They have the authority to investigate past transactions to ensure no company funds were wrongfully diverted before their appointment.
- Reporting: Within 60 days of appointment, the administrator must submit a detailed proposal to creditors outlining the path forward.
How Do Netting Provisions Impact Financial Contracts?
Netting provisions under CAMA 2020 allow parties to a financial contract to offset mutual obligations into a single net payment. In the event of insolvency, instead of each party paying their gross debts to the other, the values are "netted" out, and only the balance is paid by the party with the larger debt.
This is a critical protection for Nigeria's financial and derivatives markets. It prevents "cherry-picking," where a liquidator might try to enforce contracts that are profitable for the insolvent company while defaulting on those that are not.
Key Benefits of Netting
- Systemic Risk Reduction: It prevents a domino effect where one company's insolvency causes multiple defaults across the financial sector.
- Legal Certainty: Section 721 of CAMA 2020 explicitly recognizes the enforceability of netting agreements, even during insolvency proceedings.
- Capital Efficiency: Banks and financial institutions can report their exposure on a "net" basis rather than a "gross" basis, which improves their balance sheet health.
What is the Priority of Claims During a Nigerian Liquidation?
The priority of claims determines the order in which stakeholders are paid when a Nigerian company's assets are sold during liquidation. Nigerian law follows a strict "pecking order" where certain classes of creditors are legally mandated to be paid before others.
If a company's assets are insufficient to pay everyone, the funds are exhausted at the level they reach, and those lower on the list receive nothing.
| Rank | Category of Creditor | Description |
|---|---|---|
| 1 | Secured Creditors (Fixed Charge) | Lenders with a specific claim on a tangible asset (e.g., a mortgage on a building). |
| 2 | Costs of Liquidation | Fees for the liquidator, legal costs, and expenses incurred during the wind-up. |
| 3 | Preferential Creditors | Employee wages (up to a limit), statutory taxes (FIRS), and pension contributions. |
| 4 | Floating Charge Holders | Creditors with security over a class of changing assets (e.g., inventory or accounts receivable). |
| 5 | Unsecured Creditors | General trade suppliers, contractors, and some utility providers. |
| 6 | Shareholders | Owners of the company; they receive any remaining residual value. |
What are Directors' Liabilities During Periods of Insolvency?
Directors of Nigerian companies face significant personal liability if they fail to act in the interest of creditors once a company becomes insolvent. Under CAMA 2020, the focus shifts from the shareholders to the creditors the moment the company can no longer pay its debts as they fall due.
If a company enters liquidation and it is discovered that the directors continued to trade while knowing there was no reasonable prospect of avoiding insolvency, the court can order those directors to personally contribute to the company's assets.
Types of Liability
- Wrongful Trading: This occurs when a director continues to incur debt despite knowing the company is insolvent. Liability is civil (financial).
- Fraudulent Trading: If the business was carried on with the intent to defraud creditors, the directors face both personal financial liability and criminal prosecution.
- Misfeasance: Directors can be held liable for misapplying company funds or breaching their fiduciary duties during the lead-up to insolvency.
Common Misconceptions About Nigerian Insolvency
Misconception 1: Insolvency always means the business is dead.
In reality, CAMA 2020 provides for "Business Rescue." Tools like Administration and CVAs are specifically designed to keep the business running, save jobs, and maximize value. Liquidation is now considered the last resort.
Misconception 2: All creditors are treated equally.
Many trade creditors believe they have the same rights as banks. However, because most banks hold "fixed charges" over assets, they are almost always paid before general suppliers.
Misconception 3: Bankruptcy and Insolvency are the same.
In the Nigerian legal context, "bankruptcy" refers to individuals (natural persons), while "insolvency" refers to corporate entities. The laws governing them are distinct.
FAQs
How much does it cost to initiate a CVA or Administration?
The costs include Corporate Affairs Commission (CAC) filing fees (usually ranging from 50,000 NGN to 250,000 NGN depending on the company size) and the professional fees of the Insolvency Practitioner, which are often calculated as a percentage of the assets or a fixed hourly rate.
How long does a corporate administration last?
An administration typically lasts for 12 months, but it can be extended by the court or with the consent of the creditors if more time is needed to complete the rescue plan.
Can a creditor stop a company from entering Administration?
A holder of a "qualifying floating charge" (usually a bank) must be given notice before an administrator is appointed. They have a short window to appoint their own preferred administrator, but they generally cannot block the process entirely if the company is insolvent.
Does the court have to approve a restructuring?
Under CAMA 2020, CVAs can be initiated without a court order, though the paperwork must be filed with the court. Formal "Schemes of Arrangement," however, do require court sanction to be binding.
When to Hire a Lawyer
You should consult a restructuring lawyer if your Nigerian company is facing a liquidity crisis, or if you are a creditor whose debtor has stopped making payments. Legal intervention is critical when:
- Your company cannot meet its payroll or tax obligations.
- You have received a "Winding-Up Petition" or a statutory demand for debt.
- You are a director worried about personal liability for wrongful trading.
- You need to negotiate a complex debt-for-equity swap with institutional lenders.
Next Steps
- Conduct a Solvency Test: Review your balance sheet and cash flow to determine if the company is "cash-flow insolvent" (cannot pay debts today) or "balance-sheet insolvent" (liabilities exceed assets).
- Review Security Documents: Identify which creditors hold fixed or floating charges to understand your "priority" position.
- Engage an Insolvency Practitioner: Contact a licensed professional via the Corporate Affairs Commission to discuss which rescue mechanism-CVA or Administration-is right for your situation.
- Notify Stakeholders: Open transparent communication lines with your bank and key suppliers to explore informal workarounds before moving to formal legal proceedings.
