Enforceability of Netting Agreements Under CAMA 2020

CONTRIBUTED BY CHIBUEZE .K. JAMES

INTRODUCTION

One of the key innovations brought about by the new Companies and Allied Matters Act 2020^[1] (CAMA) was the introduction of provisions in relation to netting agreements and the exemption of such agreements from the ordinary company insolvency regime.

Generally, Netting can be described as a process by which an exposure or obligation is reduced by combining two or more positions.^[2] In netting, the value of multiple positions is analyzed and offset, and eventually, the parties that need to be paid and pay are determined.^[3] Financial transactions such as derivative contracts use it to lessen credit, settlement and additional risks, by combining two or more obligations into one with a reduced net obligation.^[4]

It is important to note that netting and setting off are terms that are sometimes misconstrued in financial transactions. In netting two or more obligations are combined to achieve a reduced net obligation. Whereas, Set-off is a method of payment that involves the discharge of reciprocal obligations between the parties which is discharged to the extent of the other party’s monetary obligation.^[5] In other words, a debtor can offset the cross-claim owed to him against the main claim owed to his creditor. Thus, rather than paying money, he uses the claim owed him to pay the claim he owes.

Considering the aforementioned, this article sets to examine the scope of netting under the Company and Allied Matters Act 2020 (CAMA), the legal framework for netting vis-à-vis the enforceability of netting agreements under CAMA.

THE CONCEPT OF NETTING^[6]

Netting is a reconciliation and payment technique which entails combining and converting mutual payment obligations into a single claim, allowing the party owing the bigger aggregate amount to make a net payment to the party owing the lesser aggregate amount.

There are various forms of netting and applications for the netting concept. They include:

1. Novation Netting: This type of netting is used to cancel out offsetting obligations and replace them with a fresh set of responsibilities. Essentially, if two different organizations owe each other an obligation on the same value date, the net amount is computed. Instead of transferring the net difference to the owing party, novation netting terminates the contracts.^[7]
2. Multilateral Netting: This type of netting involves more than just the two parties involved. The parties who engage in multilateral netting use a clearinghouse or central exchange to control the transactions and effects of netting. Companies with multiple subsidiaries can also use multilateral netting to offset the payments received and owed to its various divisions.^[8]
3. Settlement Netting: This is also referred to as payment netting. Under settlement netting, all monies owed or received by the concerned party are combined and offset; the difference, or netted amount, is then given to the party with greater exposure or responsibility. Settlement netting aims to reduce risk by netting off obligations, leaving the party with overdue payments with only a net sum to pay.^[9]
4. Close-out Netting: close-out netting happens in the case of a default. Any ongoing transactions are ended in such a case, and the transaction values are determined. After the values are netted, the party who is due the payment receives the leftover value in one lump sum payment. Close-out netting aims to minimize exposures on open or executory contracts in case one party becomes bankrupt before the valuation date.^[10]

LEGAL FRAMEWORK FOR NETTING AGREEMENTS UNDER CAMA

Prior to the enactment of the Act,^[11] Nigeria lacked a regulatory framework for enforcing netting arrangements in financial derivative transactions. As a result, legal advice regarding the enforceability of netting arrangements heavily relied on compelling English authorities that have acknowledged the enforcement of netting terms in financial derivative agreements, as well as contractual principles. ^[12]

Also, certain elements of netting agreements could not be enforced after the procedure for winding up began without a court order. This was because, under Nigerian law, any disposal of the company’s property done after the commencement of the winding up shall be void, unless the court otherwise rules.^[13]

However, a new legal framework for the recognition and implementation of netting agreements in financial derivative contracts between parties has been brought about by the enactment of the CAMA 2020.^[14] Also, the Act’s netting provisions have been modelled after the 2018 International Swaps and Derivatives Association (ISDA) Model Netting Act and Policy Guide, which is the internationally accepted metric for assessing the efficiency of netting regulations.^[15]

ENFORCEABILITY OF NETTING AGREEMENTS UNDER CAMA 2020

Netting agreement under the Act^[16] is defined to mean any –

1. Agreement between two parties that provides for netting of present or future payment or delivery obligations or entitlements arising under or in connection with one or more qualified financial contracts entered into under the agreements by the parties to the agreement (a “master netting agreement”);
2. Master agreement between two parties that provides for netting of the amounts due under two or more master netting agreements (a “master-master netting agreement”); and
3. Collateral arrangement related to or forming part of one or more of the foregoing.

From the foregoing provision, one of the essential requirements for the enforcement of netting arrangement under the Act is that the transaction in question is a qualified financial contract falling under the purview of the Act. According to the Act, a “qualified financial contract” is any type of financial transaction, including futures, forwards, options, swaps, collateral arrangements, and others, for which payment or delivery obligations must be fulfilled at or before a specific date, as well as any additional deal, contract, or transaction that is designated as such by a financial regulatory body.^[17]

In addition, the act covers any other type of financial contract that may be created in the future by financial regulatory bodies like the Securities Exchange Commission, the National Insurance Commission, the Central Bank of Nigeria, and other regulators of the financial services industry.^[18] It also accommodates other types of financial derivative contracts that are not listed in the Act.

Also, with regard to the enforcement of netting agreements, the Act broadens the definition of a person and a party to include natural, corporate, and statutory bodies, foreign entities, and other entities.^[19] This means that non-enforcement of netting agreement cannot be justified by a party’s organization under a different law than Nigerian law, as the definition includes foreign entities and international organizations.

Another essential requirement is that the parties’ agreement, as indicated by the Qualified Financial Contract, be a netting agreement with “netting” consequences for the required acts.

It is important to note that the Act prioritizes netting provisions in qualified financial contracts over any actions taken by a liquidator, bankruptcy, re-organization, composition with creditors, receivership, or other insolvency proceedings that may seek to preclude their enforcement.^[20]

However, this principle, may not be used by a liquidator in the event that there is substantial proof that the non-insolvent party made the transfer or assumed the obligation with the genuine intention of impeding, delaying, or deceiving any organization to whom the bankrupt party owed money, either before or after the date the transfer was made or the obligation was incurred.^[21]

CONCLUSION

In conclusion, netting agreements now fall under a substantial legal framework courtesy of the Companies and Allied Matters Act 2020 (CAMA), which is a major improvement for Nigeria’s financial derivatives market. In addition to offering clarity and certainty about insolvency, the introduction of specific Netting legislation improves the Nigerian Capital Market’s competitiveness internationally.

Most importantly, the Act gives enforcement of netting clauses in qualified financial contracts precedence over liquidator actions, bankruptcy cases, and other actions pertaining to insolvency. This guarantees that the netting arrangements will be maintained and binding to the parties even in the case of insolvency proceedings; giving parties involved in financial derivative transactions certainty and protection.

The recognition and enforcement of netting agreements give the parties to these transactions the assurance that their contractual rights will be respected, which helps to create a more favourable atmosphere for risk management and financial activities.

1. Which repealed the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria, 2004. ↑
2. Corporate Finance Institute ‘Netting’ Available at https://corporatefinanceinstitute.com/resources/valuation/netting/ accessed on 17^th January 2024. ↑
3. Ibid, Pg1. ↑
4. Olaniwun Ajayi LP ‘An Appraisal of Netting Provisions under the Companies and Allied Matters Act 2020’ (2020) Available at https://www.olaniwunajayi.net/wp-content/uploads/2020/10/An-Appraisal-of-Netting-Provisions-Under-the-Companies-and-Allied-Matters-ACT-2020.pdf accessed on 17th January 2024. ↑
5. Ibid, pg2. ↑
6. Corporate Finance Institute ‘Netting’ Available at https://corporatefinanceinstitute.com/resources/valuation/netting/ accessed on 17^th January 2024. ↑
7. Ibid, Pg 1. ↑
8. Ibid, pg 1. ↑
9. Ibid, pg 1 ↑
10. Corporate Finance Institute ‘Netting’ Available at https://corporatefinanceinstitute.com/resources/valuation/netting/ accessed on 17^th January 2024 ↑
11. Companies and Allied Matters Act 2020. ↑
12. Olaniwun Ajayi LP ‘An Appraisal of Netting Provisions under the Companies and Allied Matters Act 2020’ (2020) Available at https://www.olaniwunajayi.net/wp-content/uploads/2020/10/An-Appraisal-of-Netting-Provisions-Under-the-Companies-and-Allied-Matters-ACT-2020.pdf accessed on 17th January 2024. ↑
13. Companies and Allied Matters Act 2004, Section 413 ↑
14. Companies and Allied Matters Act 2020, Chapter 28. ↑
15. Olaniwun Ajayi LP ‘An Appraisal of Netting Provisions under the Companies and Allied Matters Act 2020’ (2020) Available at https://www.olaniwunajayi.net/wp-content/uploads/2020/10/An-Appraisal-of-Netting-Provisions-Under-the-Companies-and-Allied-Matters-ACT-2020.pdf accessed on 17th January 2024. ↑
16. Companies and Allied Matters Act 2020, Section 718. ↑
17. Ibid, Section 718. ↑
18. Ibid, Section 719. ↑
19. Companies and Allied Matters Act 2020, Section 718. ↑
20. Ibid, Section 721. ↑
21. Ibid, Section 721(6) ↑