Advancing Nigeria’s Insolvency and Bankruptcy

CONTRIBUTED BY CYRIL SAMUEL DANDISON Esq

Introduction

The insolvency and business recovery landscape in Nigeria stands at a critical juncture, with a prevailing inclination towards liquidation as the primary recourse for financially encumbered oil firms. However, this conventional approach may not be best suited to fortify the stability and economic viability of these enterprises, particularly in light of fluctuating global oil prices.

This article endeavours to conduct a comprehensive examination of Nigeria’s existing legal framework governing insolvency and business recovery. It aims to spotlight the critical deficiencies in the current system and advocate for a transformative model. This model is designed to not only shield financially encumbered oil enterprises from the adverse impacts of oil price fluctuations but also to modernize the insolvency laws, mitigate conflicts, and ensure equitable asset distribution. To achieve this, a comparative analysis approach will be employed, drawing insights from the insolvency practices of India and the United Kingdom as illuminating case studies.

By embracing this proposed model, Nigeria seeks to foster the revitalization of struggling oil firms, thereby ensuring business continuity, safeguarding employment opportunities, and bolstering investor confidence. This comprehensive overhaul of Nigeria’s insolvency laws is imperative to fortify the financial stability of the oil sector, granting robust firms a fair chance to weather transient market disruptions and contribute to enduring economic stability.^[1]Top of Form

Meaning of Insolvency under CAMA 2020 and Bankruptcy and Insolvency Act 2016

Insolvency in the context of an oil firm means its inability to meet its financial obligations.^[2] Insolvency is also defined under Section 572(a) (b) (c) of the Companies and Allied Matters Act, 2020, and Section 408(d) of the Bankruptcy and Insolvency (Repeal and Re-enactment) Act, 2016, still in an oil firm, to mean the failure of an oil firm to satisfy its financial commitments notably towards creditors when the owed amount exceeds 200,000. The creditor is mandated to formally notify the firm, specifically at its principal office, of the outstanding sum, and this notice remains in effect for a period of three (3) weeks. After this ultimatum, should the firm fail to remit the unsettled amount to the satisfaction of the lender, by the stipulations set forth by the Bankruptcy Act (2016), it is considered insolvent.^[3]

Legal Regime of Insolvency and Business Recovery Practices in Nigeria

The global push for insolvency and business recovery law reform has prompted many nations to enhance their frameworks. Nigeria must follow suit, especially given the economic challenges from the pandemic. Current practices, such as prematurely winding up oil firms, need revision. Major oil companies like Chevron, Total, Royal Dutch Shell, and Eni have divested their onshore assets due to debts, market uncertainties, and policy changes.^[4] Hence a need for government intervention is crucial to prevent job losses post-COVID-19.

The insolvency and business recovery legal framework in Nigeria is anchored by the Bankruptcy Act Cap. B2 LFN, 2004 as amended, along with the corresponding Bankruptcy Rules. These are complemented by provisions within the Federal High Court Rules, aligning with the tenets of the Bankruptcy Act.^[5] Central to this legal landscape are significant statutes such as the Companies and Allied Matters Act, 2020, the Investment and Securities Act, 2007, the Banks and Other Financial Institutions Act (BOFIA), and various financial institution laws. These collectively form the bedrock of the national legal framework regulating insolvency practices in Nigeria. The practice of insolvency and corporate restructuring is open to all, with certain exclusions such as individuals under 21 years of age, persons declared bankrupt by a court, those sentenced by a court, and individuals deemed incompetent. ^[6]

The Banks and Other Financial Institutions Act (BOFIA) governs matters of financial consolidation, rearrangement, amalgamation, and transfer. Furthermore, the Nigeria Deposit Insurance Company Act is in place to safeguard the savings liabilities of approved financial institutions.^[7]

Insolvency refers to businesses facing challenges in meeting their financial obligations, while bankruptcy, is a legal status applicable to individuals and partnerships who cannot settle their debts as defined by the Bankruptcy Act. Having said this, It is vital to delve into the specific procedures for handling insolvent oil firms. Predominantly, the winding-up process of Insolvent oil firms aligns with the guidelines, outlined in section 578 (1) of the Companies and Allied Matters Act, 2020. In this process, the Federal High Court has jurisdiction^[8], taking into account the location of the claimant’s business for a significant part of six months before the filing of the petition. Furthermore, debt restitution by debtors to creditors can be sought in the Federal High Court, at the jurisdiction where the arrangement was made.^[9]

The mergers, acquisitions, and equity purchases of listed public oil firms are tightly regulated by the Investment and Securities Act, 2007, along with the Securities and Exchange Commission Rules, 2013. It’s important to note that corporate entities be it public or private are statutorily barred from participating in insolvency practice. This means that private organizations cannot act as trustees under the Bankruptcy Act.^[10]

While the Nigerian insolvency legal system is robust, there are notable deficiencies. These include the absence of a well-structured process for managing the debts of insolvent oil firms, as well as the need for comprehensive and specific insolvency and firm rehabilitation regulations. The existing shortcomings have resulted in substantial hurdles, including the premature liquidation of oil firms with potential viability and the mismanagement of operations. This is further exacerbated by congested courts and susceptibility to corrupt practices. As a result, insolvency proceedings have been mired in prolonged delays and impediments.^[11]

Legal Regime of Insolvency and Business Recovery Practices in India and the United Kingdom

In India, the Insolvency and Bankruptcy Code of 2016, India, provides a comprehensive framework for regulating insolvency proceedings involving oil firms, partnerships, and individuals. This code facilitates debt restructuring plans, allowing firms to repay their debts and continue operations while safeguarding the interests of all parties involved. It empowers creditors to assess the viability of the insolvent oil firm, either for rescue or liquidation, through the National Company Law Tribunal. An insolvency professional may be appointed after board approval, ensuring a swift resolution process.^[12]

Similarly, in the United Kingdom, the Insolvency Act of 1986 governs insolvency proceedings, while the Directors Disqualification Act of 1986 pertains to directors of insolvent companies. Notably, the UK’s insolvency law does not explicitly define insolvency but rather focuses on conditions indicating an inability to pay debts. There is no designated superior insolvency court, but the High Court has the authority to close any firm registered in England and Wales.^[13]

Both jurisdictions have made significant strides in reforming their insolvency laws to incorporate restructuring and rearrangement procedures. In these advanced economies, there are mechanisms in place to protect the operations of insolvent firms, potentially allowing them to continue under court supervision with a defined turnaround strategy. This approach aims to prevent unnecessary liquidation, particularly in cases where the firm’s financial distress is attributed to factors like mismanagement, regulatory changes, or unforeseeable events.

Additionally, both India^[14] and the UK^[15] have provisions that hold directors personally liable for wrongful acts committed by an oil firm. In India, this can be initiated by creditors through a court request, while in the UK, liquidators or administrators have the authority to pursue legal action against directors for unlawful trading if the firm is deemed insolvent.

Overall, India and the United Kingdom have demonstrated a commitment to modernizing their insolvency frameworks, providing avenues for debt restructuring, and implementing measures to protect the interests of all stakeholders involved in the insolvency process. These reforms aim to facilitate the recovery and sustainability of struggling oil firms while maintaining accountability for directors’ actions.

Comparative analysis between legal framework of Insolvency and Business Recovery Practices in Nigeria, India and the United Kingdom

In Nigeria, the insolvency legal framework appears inclined towards liquidation proceedings, potentially leading to the premature closure of viable oil firms. The existing rescue laws in Nigeria lack the organization and global best practices necessary to facilitate efficient restructuring processes for insolvent oil companies. Notably, Sections 658 and 659 of the Companies Allied Matters Act 2020 require further clarification. For instance, subsection 3 of section 658 fails to define a “connected person,” a term critical in insolvency proceedings. In insolvency proceedings, the term “connected person” holds significant importance as it pertains to individuals or entities closely associated with the insolvent party. These associations could involve business partnerships, or other affiliations that might influence financial transactions. Properly defining a “connected person” ensures that any potential conflicts of interest or preferential treatment are identified and appropriately addressed during the insolvency process. This clarity helps maintain transparency and fairness in proceedings, safeguarding the rights of all parties involved.

India, however, showcases a robust insolvency framework, prominently governed by its Insolvency and Bankruptcy Code of 2016. This comprehensive legislation empowers creditors to assess the viability of insolvent oil firms and make crucial decisions regarding their rescue or liquidation.^[16] The Code not only offers clarity but also extends significant support to both the insolvent firms and their creditors.

Moving to the United Kingdom, its legal system is anchored by the Insolvency Act of 1986. This Act is distinguished by its provisions for compromises and arrangements with creditors and shareholders, facilitating a more flexible approach to resolving insolvency. Furthermore, the UK’s legal framework enables mechanisms to protect the operations of insolvent firms, potentially allowing them to continue under court supervision.^[17]

Additionally, it has been observed that an overreliance on the court system may exacerbate the complexities of rescuing insolvent oil firms, potentially proving neither cost-effective nor time-efficient for these entities. In tandem with establishing a coherent legal system, the legislation must be characterized by clarity. The provisions within any harmonized legal framework must be clearly articulated, using language that is easily comprehensible to those tasked with its application. The absence of such clarity can disrupt the legal process and hinder the endeavours of those striving to uphold the rule of law, inadvertently enabling those seeking to circumvent it.

Even in the United Kingdom, where the two laws remain distinct, a specific bankruptcy statute remains applicable – the Insolvency Act of 1986. To foster an environment conducive to insolvency and business recovery, Nigeria must not only enact clear and well-structured laws but also ensure their effective enforcement. This includes incorporating critical indicators for initiating business rescue, both formal and informal approaches, and moratorium requirements. These laws align with current global trends and would serve as a testament to Nigeria’s commitment to creating business-friendly policies.

In essence, India and the United Kingdom have managed to establish comprehensive and clear legal frameworks for insolvency and business recovery, thus providing avenues for debt restructuring while safeguarding stakeholders’ interests. Nigeria, however, grapples with a legal framework that leans towards liquidation, necessitating urgent reform. Adopting elements from business rescue-oriented legal systems would be instrumental in ensuring the sustainability of insolvent oil firms in Nigeria.

Conclusion

In conclusion, Nigeria needs an effective insolvency framework for rescuing struggling oil firms. This requires limited court intervention, debtor-friendly practices, and specialized courts. Additionally, regulations should mandate financial institutions to support debt restructuring. Adapting to evolving legal standards is crucial for a resilient insolvency system.

Keywords: Insolvency, Bankruptcy, shareholders, creditors, Oil firm, business -recovery, debtors, restructuring,

1. O.J. Olujobi, “Combating insolvency and business recovery problems in the oil industry: proposal for improvement in Nigeria’s insolvency and bankruptcy legal framework” (2021) No 7 Heliyon Journal pg 1 – 11 ↑
2. R. Shamim, M.D., “Bankruptcy laws: a comparative study of India and USA” Int. J. Manag. 10 (2), 247–252. ↑
3. B.A., Adebola, 2012. Corporate Rescue and the Nigerian Insolvency System (Unpublished PhD Thesis Submitted to the University College, London for the Degree of Doctor of Philosophy), Available @ Corporate rescue and the Nigerian Insolvency System | Request PDF (researchgate.net) accessed 15^th October 2023. ↑
4. O.J. Olujobi op cit (fn.1) ↑
5. B., Leonard, 2017. The International Insolvency Institute. In: Restructuring and Insolvency. Available at Restructuring-and-Insolvency-in-Nigeria-2017.pdf (fredyoungandevans.com) accessed 18^th October 2023. W. Latham, Taking security in Nigeria a comparative guide for investors (2017) Available at Taking-Security-In-Africa-Nigeria.pdf (templars-law.com). accessed 18th October 2023. ↑
6. Ibid ↑
7. Ibid ↑
8. Section 251 of constitution of Federal Republic of Nigeria, Section 7 of the Federal High Court Act, Chapter F12, LFN, 2004 ↑
9. B. Adegbemi, A. Onakoya, E. Olotu, Bankruptcy and insolvency: an exploration of relevant theories. Int. J. (2017) Econ. Financ. Issues 7 (3), 706–712. Available @ Bankruptcy and Insolvency: An Exploration of Relevant Theories (repec.org) accessed 21^st October 2023. ↑
10. section 123 of the Bankruptcy Act, Cap. B2, LFN, 2004 as amended, Section 627 Companies and Allied Matters Act 2020 ↑
11. B. Leonard op cit (fn. 5) ↑
12. April, S., Emirzon, J., Syaifuddin, M., 2019. Restructural justice-based legal protection for bankrupt debtors in settling bankruptcy disputes, 10(5. Int. J. Civ. Eng. Technol. 885–897. ↑
13. Opara, L.C., Okere, L.I., Opara, Chinwendu O., 2014. The legal regime of bankruptcy and winding-up proceedings as a tool for debt recovery in Nigeria, an appraisal. Can. Soc. Sci. 10 (5), 61–69. ↑
14. The Insolvency and Bankruptcy code 2016, The Sick Industrial Companies (Special Provisions) Act 1985, and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. ↑
15. Company Directors Disqualification Act (1986 C.46) ↑
16. S. April op cit (fn. 12) ↑
17. Sections 206, 211, 213 and 214 of the Insolvency Act of England and Wales. ↑