An Appraisal of the Legal Regime for Bankruptcy and Insolvency in Nigeria

It is right to say without mincing words that the survival of businesses and human (natural person) existence, rests on the capital or finances in their possession. It is for this reason that financial institutions and economically well-off individuals are issuing credit facilities to business organizations and individuals as loans, to improve and boost their economies. Of course, this is one of the practical ways to improve enterprises and the economy. On the other hand, properly collecting these debts owed by people and corporate entities without bottlenecks, would undoubtedly ensure the long-term viability, financial trust of individuals and financial institution lending.[1]

Therefore, it is imperative to have an effective debt recovery and a viable asset management system, that will maintain and improve Nigeria’s economic success. This is because the financial institutions in the country will only succeed in playing an efficient role in the economy, if aggressive debt recovery legislation and policies, are strictly enforced and complied with.[2]

In light of this, the purpose of this article is to examine the legislative framework of bankruptcy and insolvency in Nigeria, as well as its repercussions and their uses as debt recovery methods.

Meaning 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.” [3] In a nutshell, “bankruptcy” refers to the legally declared inability or impairment of an individual or organization to pay its creditors.

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 (winding up).[4]

The concept of Bankruptcy and Insolvency are designed to protect the honest but unfortunate creditor, as well as discipline if necessary, or punish the incompetent and dishonest debtor. Thereby, maintaining 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, through the mechanism of official receiver (in case of Company Insolvency), or trustee in Bankruptcy (In the case of Individual Bankruptcy).[5]

To this end, the law imposes certain constraints upon the conduct of the creditors, and requires them to behave with a degree of propriety towards their debtors. The law provides debtors with the opportunity to initiate and invoke its machinery, thereby affording them protection against improper pressures from creditors – provided that recourse to some form of solution even before the bankruptcy proceeding starts, such as a scheme of arrangements with his creditors.

Distinction between Bankruptcy and Insolvency

The terms “Insolvency” and “Bankruptcy” are often incorrectly used interchangeably, as if they were synonymous. However, an in-depth analysis of the two concepts will reveal that they are two distinct concepts, though interrelated as tools of debt recovery mechanisms.

While Insolvency may generally refer to the condition of being unable to pay debts as they fall due or in the usual course of business, it more appropriately describes “corporate insolvency.”[6]

Conversely, Individual Insolvency is more appropriately described as ‘’bankruptcy ‘’ under Nigerian Law and is governed by the Bankruptcy Act[7]. While Corporate insolvency is known as winding-up or liquidation and is governed by the Companies and Allied Matters Act 2020 and Companies Winding Up Rules 2010.

The distinction between Bankruptcy and Insolvency is not merely a technical point or a matter of nomenclature, as it has legal significance. Bankruptcy proceedings unlike Insolvency proceedings cannot be obtained in a primary action. In other words, Bankruptcy proceedings are only available to enforce the obligations of a debtor, after such obligations would have been established in a separate judicial proceeding. Therefore, the creditor would first have to institute an action, to obtain judgment against the debtor in the High Court, and then institute a separate judicial proceeding, in the event of the debtor’s inability to satisfy the judgment debt, to declare the debtor bankrupt in the Federal High Court. This process is cumbersome and makes Bankruptcy no more significant as debt recovery mechanism than the conventional modes of enforcing court judgments (e.g., garnishee, writ of fife etc).[8]


The distinction between Bankruptcy proceedings and Corporate Insolvency (winding up) proceedings, is evident in the legal regimes governing both proceedings. While Bankruptcy proceedings are regulated by the Bankruptcy Act and Bankruptcy Proceedings Rules,[9] Corporate Insolvency (Winding-up) proceedings are regulated by the CAMA and Companies Winding Up Rules 2010.[10] This means that the circumstances under which a person or corporate entity will be declared bankrupt or insolvent by the court of law, depending on the applicable law and or the status of the debtor.[11]

The truth is that Nigerian bankruptcy law in its current form is far from ideal, owing to the fact that, among other things, Bankruptcy proceedings cannot serve the dual purpose of “establishing” and “enforcing” a debtor’s obligations in a single action. This is due to the fact that, 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 Act,[12] and there are only four situations recognised as constituting acts of bankruptcy to wit;

  1. Where the creditor obtains a final judgment or final order against the debtor and serves as a bankruptcy notice on the debtor;
  2. Where execution is levied against the property of the debtor under process in an action or proceedings in court and such property have been sold or held by the bailiff for twenty-one days;
  3. Where the debtor files in court a declaration of his inability to pay his debts; and
  4. Where the debtor presents a bankruptcy petition against himself.
  5. The act of bankruptcy must have occurred 3 months preceding the presentation of the petition.
  6. The debt must be;
  7. Due and payable either immediately or at a certain future date;
  8. A specific and liquidated sum;
  9. Must not be less than N 2000(Two Thousand Naira).
  10. The debtor must have, within a year prior to the presentation of the petition;
  11. Been ordinarily resident in Nigeria;
  12. Owned a dwelling house or place of Business in Nigeria
  13. Conducted business in Nigeria either personally or through an agent or manager
  14. Been a member of a firm or partnership having business in Nigeria through a partner, agent or manager.[13]

Upon the fulfilment of these conditions, the petition can be presented; the creditor applies to the Registrar of the Federal High Court for a Notice of Bankruptcy to be issued. A certified copy of the judgment and an affidavit stating that he had levied execution on the debtor’s goods, and the proceeds of the sale of the goods could not satisfy the judgment debt, must support this. The Registrar 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.

Following the above, the creditor then obtains a receiving order from the court, which enables him to proceed against the assets of the debtor. The receiving order would be published in the Federal Gazette and advertised in a national newspaper; a receiver-manager/trustee is also appointed to manage the debtor’s assets. There and then, the debtor is then required to give the official receiver in affidavit form, a statement of his affairs showing particulars of his assets; debts, and liabilities in Nigeria and abroad. The debtor has the option of proposing a scheme of arrangement to his creditors, but this is subject to its acceptability to them. If they reject his scheme, then within fourteen days from the date they reject the arrangement, the court will adjudge the petition and declare the debtor bankrupt. Notice of adjudication order would be published in the Federal Gazette, and advertised in at least two national newspapers.[14]

Similarly, by the provisions of the Act,[15] if any person is adjudged bankrupt, or in respect of whose estate a receiving order has been made, after the presentation of a bankruptcy petition by or against him, or within six months before such presentation, leaves Nigeria and takes with him, or attempts or makes preparation to quit Nigeria and take with him, any part of his property to the amount of N500 or upwards, which is sought by the law to be divided amongst his creditors, he shall (unless he proves that he had no intent to defraud) be guilty of an offence under the Act, and shall be liable on conviction to imprisonment for one year.

Finally, it should be noted that the Bankruptcy Act does not cover companies, as section 108 of the Act prohibits the court from making a receiving order against any association or company, registered under the Companies and Allied Matters Act.

In relation to corporate entities, the CAMA 2020 changes the focus of Insolvency practice, from business liquidation to business rescue, thereby, improving the Nigerian environment for insolvency practice and development of a business rescue culture.[16]

Corporate Insolvency involves several processes ranging across actions for recovery of debt, the appointment of a receiver, petition for winding up and appointment of a liquidator, arrangement and compromise etc. Corporate Insolvency law embodies a variety of objectives, some of which include the following: facilitating the recovery of companies in difficulty; suspending the pursuit of rights and remedies by individual creditors; divesting the directors of their management powers; providing for the avoidance of transfers and transactions which unfairly prejudice the general creditors, and procuring an orderly distribution of the estate.

The CAMA 2020[17] specifically enables a company to borrow money for the purpose of its business or objects, mortgage or charge its assets, issue debentures and other securities whether outright or as security for any debt, liability or obligation of the company.

In Corporate Insolvency, the fundamental question before the Court is whether a company is paying its undisputed debts. Section 572 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;

    1. 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 for it to the reasonable satisfaction of the creditor;
    2. execution or other process issued on a judgment, act or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or
    3. 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 intendment of the above provision is, where a company which evidently has the ability to pay its debt but still fails to do so will be deemed insolvent.[18]

The provisions of CAMA 2020 as relates to Corporate Insolvency, appear to be largely modelled after the United Kingdom Insolvency Act 1986[19]. It is clear that the draftspersons realized that when a company’s economic fortunes take a downward turn, ailing companies are encouraged to pursue healthy corporate restructuring options, rather than fizzle out through liquidation or harsh legal framework. As a result, the current Act appears to be more focused on business rescue and restructuring, than the Repealed Act’s liquidation-centric model (CAMA 2004). Some of the current Act’s innovations relating to Corporate Insolvency are highlighted below:

  1. Company Voluntary Arrangement

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 debts or a scheme of arrangement of its affairs.[20] A nominee who must be qualified to act as an Insolvency Practitioner should be appointed as a trustee or supervisor of the voluntary arrangement.[21] The nominee shall within twenty-eight (28) days of notice of his appointment, report to Court on whether a meeting of the company and its creditors should hold,[22] failing which the nominee may be replaced on application by the person making proposal for the arrangement to the Court.[23] The meeting summoned may approve the proposal with or without modifications but no modification can affect the right of a secured creditor to enforce his security, without the creditor’s concurrence to such modification.[24] The proposal or its modification shall not approve payment of non-preferential debts, in priority to preferential debts or a proportion of preferential debt, smaller to what is paid other preferential debt holders without the concurrence of the preferential debt holder.[25] The Chairman of the meeting shall also report the outcome of the meeting to the Federal High Court.[26] The decision takes effect if it has been taken by both meetings, or by the creditors’ meeting summoned pursuant to a Court order.[27]

Any person dissatisfied with the decision of the supervisor of the voluntary arrangement, may apply to Court which may modify, reverse, confirm or make any order as it deems fit.[28] The supervisor may apply to the court for directions, in relation to any particular matter arising under the voluntary arrangement, and may apply to the court for the winding-up of the company, or for an administration order to be made in relation to it when necessary.[29]

  1. Appointment Of Administrators

An administrator can be appointed pursuant to an administrative order of Court, by a holder of a floating charge or the company or its directors.[30]

An administration order may be made by the Federal High Court upon application by company, directors, creditors or any official of the Court designated to act as a receiver under the Act or any legislation,[31]where the Court is satisfied that the company is or is likely to become unable to pay its debts.[32] The Court has wide powers to make any order as it deems fit, upon hearing the application for an administrative order.[33]

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.[34] 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.[35] A holder of a floating charge cannot appoint an administrator in several instances, such as, when the floating charge is unenforceable; the provisional liquidator of the company has been appointed under section 585 of the Act; or there is a receiver or manager in office at the time of commencement of the Act.[36]

When an administration order is made in respect of the company, any winding up petition against such company shall be dismissed or suspended, if the application for administration order was made by the liquidator of the company.[37] This would not apply where the winding-up petition is presented under special banking provisions of the Banks, and Other Financial Institutions Act (BOFIA), Nigerian Deposit Insurance Corporation (NDIC) Act, or any law or rule by a financial services and markets regulator.[38]

Furthermore, an administrator shall issue a notice of appointment to the company, all its creditors, the CAC, and publish the notice in any prescribed manner not later than 14 days, after the appointment takes effect. [39]An administrator has the obligation to prepare a proposal of how they intend to achieve the purpose of administration, which may include the proposal for the company’s voluntary arrangement, scheme of arrangement and compromise, and explain where necessary why business rescue will not be achievable. The proposal shall be sent to the CAC, the creditors, and members of the company within 30 days of the company being in administration.[40] The administrator shall thereafter, summon creditors’ meeting where the proposal may be approved or modified. The report of the creditors’ meeting shall be made to the court, the CAC, and every other person prescribed by the Minister for Trade.[41]

  1. Conversion Of Administration to Voluntary Winding Up

A company shall be wound up if a resolution under Section 620 of the Act was passed, where an administrator issues a notice to the CAC that the section applies. Upon registration of this notice by CAC, the administrator’s appointment shall cease to have effect.[42]

Where the administrator of a company thinks that the company has no property which might permit distribution to its creditors, notifies the CAC of this fact for the purpose of registration, files the notice in Court, and sends the filed notice to all creditors, the company shall be deemed dissolved within three months of the registration of the notice.[43] 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.[44] Where the Court so does, the administrator has the obligation to notify CAC.

  1. Moratorium On Creditors Voluntary Winding Up in A Scheme of Arrangement

One of the innovations of the extant Act relates to 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, provides all the requisite documents for such arrangement or compromise, to the Court.[45]

However, a secured creditor may, by application to the Court, file within 30 days of notice of the arrangement and compromise, discharge the six months 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.[46] The company, upon the approval or consent, shall file a further affidavit updating the court of 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.

  1. Netting[47]

The concept of netting was not statutorily recognized prior to the enactment of CAMA 2020. Therefore, parties could only avail themselves of its operation based on their private agreement. Netting relates to the financial industry and financial contracts. Netting is a reconciliation and payment mechanism under which amounts owed between contracting parties are consolidated into a single, smaller payment 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.[48] 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; 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; or any other provision of law that may be applicable to an insolvent party, subject to the conditions contained in the applicable netting agreement.[49]

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.[50]

It has been opined that a strong netting system generally gives rise to a thriving derivatives market, as it provides the most accurate picture of a company’s financial position, solvency and liquidity risk and its benefits are; reduction of credit risk; reduction of settlement risk; reduction of liquidity risk; and reduction of systemic risk.[51]


The proviso to Section 577 of CAMA 2020, contemplates that where a company is being wound up, only a fixed charge holder, or any other validly created and perfected security interest other than a floating charge holder, will be able to enforce security, sequestrate, attach or levy execution on the assets of the company. The proviso to Section 656 of CAMA 2020, states that nothing shall affect the power of any secured creditor to realize or otherwise deal with his security, during the winding up of an insolvent company registered in Nigeria.

Another innovation under the new Act is that upon winding up, priority must now be given to deductions made from the remuneration of employees, contributions of the company under the Pension Reform Act, and contributions and obligations of the company under the Employees’ Compensation Act.[52]

Furthermore, a company’s debts shall rank equally among themselves, after the expenses of the winding-up have been settled and the debts shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.[53]


It is pertinent to note that Bankruptcy as a debt recovery facility, is requiring a complete overhaul of the relevant legislation, that is, Bankruptcy Act of 2004, by removing the provisions which reduce the bankruptcy process, to a merely secondary procedure for debt recoveries.

The CAMA 2020, makes a paradigm shift from the dissolution of Insolvent Company to the restructuring of Insolvent Companies, to allow recovery and continuity of business. Insolvency is now more conducive and has or will enjoy(ed) a better degree of implementation, when compared to its counterpart under bankruptcy law.

  1. H. Onigbinde, “Corporate Insolvency Regime in Nigeria: An Appraisal Of The Innovations Under The Companies And Allied Matters Act 2020”, [2021] 4(2) Unilag Law Review <> accessed February 18 2022
  2. Oke G. D. Bankruptcy in Nigeria Socio-Legal Constraints 1998 Pg. 4
  3. Black’s Law Dictionary 10th Edition.
  4. S. G Mashkur, ‘An appraisal of legal Regime of Bankruptcy and Insolvency in Nigeria, (2014) (2), Journal of Private and Comparative Law, accessed February 18 2022
  5. Ibid (n2)
  6. Ibid (n2)
  7. LFN 2004, Cap B2 Vol. 1
  8. O. Akanle . Bankruptcy Law and Practice (Mono Publishers Ltd, 1996).
  9. Bankruptcy Proceeding Rules 1990.
  10. LFN Cap C20 2020.
  11. S. Mba, “Rethinking Business Rescue in Nigeria: Borrowing Virtues from Chapter 11 of the US Bankruptcy Code” [2015] 1(1) SSRN accessed February 19 2022
  12. S. 1 Bankruptcy Act
  13. S. 1(1)-(4) Bankruptcy Act, Cap B2 LFN 2004
  14. S. 140 and 141 Bankruptcy Act, Cap B2 Vol 1 LFN 2004
  15. S. 140 and 141 Bankruptcy Act, Cap B2 Vol. 1 LFN 2004
  16. Ibid (n1)
  17. S. 191 CAMA 2020.
  18. O. Olanipekun (ed), Banking: Theory, Regulation, Law and Practice (AU Courant Publishers, 2016.)
  19. The UK Insolvency Act
  20. S. 434 (10) and 3 CAMA 2020
  21. S. 434(2) CAMA 2020
  22. S. 435 (2) CAMA 2020
  23. S. 435 (4) CAMA 2020
  24. S. 437 CAMA 2020
  25. S. 437 (3) CAMA 2020
  26. S. 437 (6) CAMA 2020
  27. S. 438 CAMA 2020
  28. S. 442(3) CAMA 2020
  29. S. 442(4) CAMA 2020
  30. S. 443(1) CAMA 2020
  31. S. 450(1) CAMA 2020
  32. S. 449 CAMA 2020
  33. S. 451 (1) CAMA 2020
  34. S. 452 and 453 (1) CAMA 2020
  35. S. 452(2) CAMA 2020
  36. S. 454 CAMA 2020
  37. S. 477(3) CAMA 2020
  38. S. 446 CAMA2020
  39. S. 483 CAMA 2020
  40. S. 486 CAMA 2020
  41. S. 490 CAMA 2020
  42. S. 521 CAMA 2020
  43. S. 522 CAMA 2020.
  44. S. 522(7) CAMA 2020
  45. S. 717 CAMA 2020
  46. S. 717 (2) CAMA 2020
  47. S. 718-721 CAMA 2020
  48. O. Kalu and T. Nnamani, ‘’Chapter 28 of the Companies and Allied Matters Act 2020- Netting in Nigeria’’, [2020] 1(1) Mondaq <> accessed February 16 2022
  49. S. 721 CAMA 2020
  50. S. 721(6) CAMA 2020
  51. S. 173 CAMA 2020
  52. S. 657 CAMA 2020
  53. ibid

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