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This article aims to study and analyze bankruptcy and insolvency under Nigerian legislation as well as compare both of them in terms of definition and conditions to be considered in its application. Many people mistakenly believe insolvency and bankruptcy are the same thing. While Insolvency and bankruptcy are two terms that are often closely associated with debt, they however have different meanings. Insolvency on one hand refers to a financial state, while bankruptcy is a legal procedure.
Individuals are declared bankrupt while corporate bodies are insolvent in the event of the corporate bodies’ inability to meet their total liability. A corporation may also be wound up if it is unable to pay its debt. The concepts of Bankruptcy and Insolvency are therefore designed to protect the honest but unfortunate creditor, as well as discipline if/ where necessary, or punish the incompetent and dishonest debtor. This aims to maintain the equilibrium between the need to recover the debts of an unsatisfied creditor, and the protection of the insolvent from wastage of his assets in the debt recovery process, usually through the mechanism of official receiver in case of company insolvency, or trustee in the case of individual bankruptcy.
The distinction between bankruptcy proceedings and corporate insolvency (winding up) proceedings is also evident in the legal regimes governing both proceedings. While Bankruptcy proceedings are regulated by the Bankruptcy Act 2004 and the Bankruptcy Proceedings Rules, Corporate insolvency (Winding-up) proceedings are regulated by the Companies and Allied Matter Act (CAMA ) 2004 and Companies Winding-up Rules 2010.
In Nigeria, to practice as an insolvency practitioner (IP) one must mandatorily be registered with the Business Recovery and Insolvency Practitioners Association of Nigeria (BRIPAN).
DEFINITION OF BANKRUPTCY AND INSOLVENCY
The tenth edition of Black’s Law Dictionary defines bankruptcy as “the quality, state or condition of not having enough money to pay back what one owes.”It is the state of being or act of becoming bankrupt. A Bankrupt is one who breaks or fails in business or any person who cannot pay his debts of a stated amount which has the propensity to disqualify the person from holding certain electives and other public offices or from practicing any recognized and regulated profession except those who are employees. Bankruptcy involves both the debtor and the creditor. The creditor can obtain a final judgment order against the debtor for any amount, and execute the same after service of bankruptcy notice on the bankrupt.
On the other hand, Insolvency refers to the legal process by which a company is divested of the right to administer its property and business on the ground that it is unable to pay its debt at maturity. It is when a company can no longer meet its financial obligations to its lender as debts become due. The term insolvency has also been ascribed to a situation when liabilities are greater than the value of the company. The law, Companies and Allied Matter Act (CAMA), regulating insolvency provides that companies cannot be bankrupt but insolvent.
CONDITIONS FOR BANKRUPTCY
In order for a creditor’s petition to be successful under bankruptcy law, the creditor must demonstrate, among other things, that the debtor committed “an act of bankruptcy” under the Bankruptcy Act. The law recognizes/contemplates only four situations as constituting acts of bankruptcy to wit;
1)
a) Where the creditor obtains a final judgment or final order
against the debtor and serves a bankruptcy notice on the debtor;
b) Where execution is levied against the property of the debtor
under process in an action or proceedings in court and such
property has been sold or held by the bailiff for twenty-one
days;
c) Where the debtor files in court a declaration of his inability to
pay his debts; and
d) Where the debtor presents a bankruptcy petition against himself.
With regards to the conditions to be considered before a petition is being filed for a person to be adjudged bankrupt, the following must have occurred:
2) The act of bankruptcy must have occurred 3 months preceding
the presentation of the petition.
3) The debt must be;
a) Due and payable either immediately or at a certain future date;
b) A specific and liquidated sum;
c) Must not be less than N 2000(Two Thousand Naira).
4) The debtor must have, within a year prior to the presentation of
the petition;
a) Been ordinarily resident in Nigeria;
b) Owned a dwelling house or place of business in Nigeria
c) Conducted business in Nigeria either personally or through an
agent or manager
d) Been a member of a firm or partnership having business in
Nigeria through a partner, agent, or manager.
Upon the fulfillment of these conditions, the petition can be presented. The procedure to file/present the petition entails the creditor applying to the Registrar of the Federal High Court for a Notice of Bankruptcy to be issued against the debtor. A certified copy of the judgment and an affidavit stating that he had levied execution on the debtor and that the proceeds of the sale of the goods could not satisfy the judgment debt must support this. The Registrar upon satisfaction of the compliance with these conditions, then issues the bankruptcy notice that would mandate the debtor to pay the debt within a specified period or he would have committed an act of bankruptcy.
CONDITIONS AND PROCEDURE FOR INSOLVENCY
In Corporate Insolvency, the fundamental question before the Court is whether a company is paying its undisputed debts. Section 572 of the CAMA 2020, provides the statutory test for determining when a company is unable to pay its debt.
It states thus;
(572) A company is deemed to be unable to pay its debts if;
a. creditor, by assignment or otherwise, to whom the company
is indebted in a sum exceeding ₦200,000, then due, has served
on the company, by leaving it at its registered office or head
office, a demand under his hand requiring the company to pay
the sum due, and the company has for three weeks thereafter
neglected to pay the sum or to secure or compound it to
the reasonable satisfaction of the creditor;
b. execution or other process issued on a judgment, act, or order
of any Court in favor of a creditor of the company is returned unsatisfied in whole or in part; or
c. the Court, after taking into account any contingent or
prospective liability of the company is satisfied that the company is unable to pay its debts.
The amendment of the above provision is to ensure that a company that evidently has the ability to pay its debt but still fails to do so is pronounced/adjudged insolvent. The following actions are used when a corporate body is declared insolvent by its creditors:
Receivership is a long-established method by which secured creditors can enforce their security. This is available to only secured creditors. A debenture holder whose debt is due to be paid becomes entitled to appoint a receiver/manager to enforce the security. A receiver’s duty is to realize the debenture holder’s security by receiving rents and profits over the assets of the company and not to manage the affairs of the company. A manager has the power to carry on the business of the company, run its undertaking, or manage its affairs. A manager is not generally appointed except to carry on the business for the purpose of selling it as a going concern.
Where a creditor enforces his security by appointing a receiver/manager, the assets belonging to the debtor company now come under the receiver/manager. Thus, upon the appointment of a receiver/manager, the powers to manage the company’s business automatically became vested in the receiver/manager.
The receiver could be appointed by the court when the company defaults on a debenture that is secured by a fixed or floating charge over all or most of the company’s assets. The court can also appoint a receiver/manager where the debenture deed does not provide for the appointment of a receiver/manager. The court grants an application to appoint a receiver/manager where it appears just and convenient to do so and for the protection and preservation of the assets of the company for the benefit of those who have an interest in it.
A receiver/manager appointed by the court shall be deemed to be an officer of the court and not of the company and act in accordance with the directions of the court. A receiver/manager appointed out of court is also deemed to be the agent of those who appointed him. The powers of the directors of a debtor company under receivership to deal with the property or undertaking over which a receiver/manager is appointed ceases until the receiver/manager is discharged.
The receiver/manager stands in a fiduciary position with the company and has the obligation to act at all times in the best interest of the company to preserve its assets, further its business, and promote the purposes for which it was formed in a manner that a faithful, diligent, careful and ordinarily skillful manager would act in the circumstances.
Winding up signifies the process by which the existence of a company is brought to an end. Black’s Law Dictionary 11th Edition sees it as the process of settling accounts and liquidating assets in anticipation of a corporation’s dissolution. It is the Federal High Court (FHC) (within the area of the company’s registered office) that has jurisdiction over winding up. There are three types of winding up;
– By Court (Compulsory Winding Up).
– Voluntary Winding-up (here the company was set up for a particular purpose which has been concluded).
– Winding up under the supervision of the court: usually done when some people are not happy with the way winding up proceedings are being conducted. They then apply to the court for it (the court) to supervise the winding-up process.
A company may be wound up by the court if‐
Section 407 CAMA,
(a) the company has by special resolution resolved that the company be wound up by the court. Note that the meeting where the special resolution will be passed should be properly constituted (proper quorum) and the resolution should be passed by ¾ majority.
(b) default is made in delivering due returns to the Corporate Affairs Commission or prolonged failure to hold the company’s meeting. Note that statutory meeting only applies to public companies.
(c) the company is unable to pay its debts after due demand has been made.
(d) The fourth situation where a winding-up petition may be ordered is if the court is of the opinion that it is just and equitable that the company should be wound up.
Once any of the above is the situation of the debtor, a liquidator is then appointed to ensure a smooth winding up and settlement of claims. Note that the winding-up proceeding should be the final resort and the same should not be used for debt recovery.
This is a proposal by the directors of a company, the administrator of a company in administration, or the liquidator of a company being wound up to its creditors for a composition in satisfaction of its debtor scheme of arrangement of its affairs.
An administrator can be appointed pursuant to an administrative order of the Court by a holder of a floating charge or the company or its directors. An administration order may be made by the Federal High Court upon application by the company, directors, creditors or any official of the Court designated to act as a receiver under the Act or any legislation, where the Court is satisfied that the company is or is likely to become unable to pay its debts. The Court has wide powers to make any order as it deems fit, upon hearing the application for an administrative order.
A holder of a floating charge over the assets of the company may appoint an administrator if the administrator has given at least two (2) working days of written notice to the holder of a prior floating charge, or the latter has consented to the appointment in writing. This provision will only apply where the instrument creating the charge specifies so, or where it empowers the holder to appoint an administrator or receiver over the assets so secured.
A company shall be wound up if a resolution under Section 620 of the Act is passed where an administrator issues a notice to the CAC that the section applies. Upon registration of this notice at CAC, the administrator’s appointment shall cease to have effect.
Where the administrator of a company thinks that the company has no property which might permit and distribution to its creditors he will notify the CAC of this fact for the purpose of registration, file the notice in Court. He shall send the filed notice to all creditors and the company shall be deemed dissolved within three months of the registration of the notice. The Court on the application of the administrator has the power to extend or suspend the three-month period or discontinue the entire registration of the notice altogether. Where the Court so does, the administrator has the obligation to notify the CAC.
Another procedure available to a creditor under insolvency is arrangement and compromise. It provides that no winding up petition or enforcement action by a creditor (secured or unsecured), shall be entertained against any company or its assets, that has commenced a process of arrangement and compromise with its creditors for six months, from the time that the relevant company, by way of affidavit, provided all the requisite documents for such arrangement or compromise to the Court.
However, a secured creditor may, by application to the Court, filed within 30 days of notice of the arrangement and compromise seek to discharge the six-month moratorium period if: the secured creditor can prove that the asset of the company sought to be enforced by the creditor, does not form part of the company’s pool of assets to be considered under the arrangement and compromise; or they are perishable goods; the company consents to the security being enforced; or it has been enforced before the security holder got notice of the arrangement and compromise. The company, upon approval or consent, shall file a further affidavit updating the court on the dissipation of the said asset. This provision avails the secured creditor, a leeway out of the moratorium period if any of the conditions so stated can be met.
Netting is a reconciliation and payment mechanism under which amounts owed between contracting parties are consolidated into single, smaller payments from one party to another. Netting is used to denote contractual arrangements, by which claims of different parties against each other are reduced to a single balance. Netting may be defined as a method of reducing credit and other risks of financial contracts, by aggregating two or more obligations to achieve a reduced net obligation. The provisions of a netting agreement are enforceable in accordance with their terms, including against an insolvent party, and, where applicable, against a guarantor or other person providing security for a party. The operation of the netting agreement shall not be stayed, avoided, or otherwise limited by the action of a liquidator; or any other provision of Law relating to bankruptcy, reorganization, composition with creditors, receivership, or any other insolvency proceeding. An insolvent party may be subject to; any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement.
However, the liquidator may avoid the terms of a netting agreement, where there is clear and convincing evidence that the non-insolvent party incurred such obligation, with actual intent to delay or defraud any entity to which the insolvent party was indebted or became indebted, on or after the date that such transfer was made or such obligation was incurred.
CONCLUSION
It is evident from the foregoing that, the procedures relating to the bankruptcy and winding-up proceedings (insolvency proceedings) are quite tasking. This process starts from the issuance of all statutory notices, filing valid processes in the Court, complying with all relevant provisions of the applicable Acts and Rules, and obtaining the orders sought from the competent court. The legal framework of Bankruptcy and Insolvency Law in Nigeria has developed especially with particular reference to the recent amendments to the CAMA which has now introduced business rescue provisions into Nigeria’s insolvency framework. The rescue process discussed in this article is in relation to insolvent viable corporations and non-viable corporations so as to guard against deferred liquidations.
REFERENCES
Written by Adenike Badaru for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com
Telephone Number: +234 810 159 9159