Corporate Insolvency Procedures: Overview of Applicable Laws and Key Institutions

CONTRIBUTOR:  OLUGBADE JOHNSON ABIOLA

INTRODUCTION

Corporate Insolvency is generally defined as a situation where a company lacks sufficient funds to settle debts and acquire necessary goods.

In Nigeria, corporate insolvency is primarily governed by the Companies and Allied Matters Act, 2020 (CAMA), along with other relevant laws and regulations.

This article explores corporate insolvency and its procedures, provides an overview of the applicable legal framework, and examines key regulatory institutions.

MEANING OF CORPORATE INSOLVENCY

Insolvency refers to when a company or person can’t pay debts when they are due^[1] While the Companies and Allied Matters Act, 2020 (“CAMA”) does not expressly define “insolvency,” it specifies the circumstances under which a company will be deemed unable to pay its debts, namely when (a) a creditor who the company owes a sum exceeding N200,000 (Two Hundred Thousand Naira) delivers to the company’s head or registered office a written demand and the company has neglected or refused to pay the sum for a period of 3 (three) weeks; (b) the company fails to satisfy the execution of a Court’s judgment against it in favour of a creditor either in part or in whole; and (c) the Court is satisfied that the Company is unable to pay its debts.^[2]

CORPORATE INSOVENCY PROCEDURES

Several corporate insolvency procedures are available to Companies under the Companies and Allied Matters Act 2020. The Include but not limited to the following:

1. Receivership: A company enters into receivership when a Receiver/Manager is appointed on behalf of a creditor to recover the debt owed by the company. The receiver can be appointed by the Court pursuant to the provisions of the CAMA^[3].

However, a creditor seeking to appoint a receiver without the Court’s intervention must expressly include the power to do so in the security agreement governing the transaction, in accordance with the provisions of CAMA^[4].

PERSONS WHO CANNOT BE APPOINTED A RECEIVER

Generally, not all persons can be appointed a Receiver. According to the CAMA^[5], the following persons cannot be appointed as Receivers:

1. An Infant
2. Any person found by a competent Court to be of unsound mind
3. A body Corporate
4. An undischarged Bankrupt, unless special approval is granted by the Court
5. A Director or Auditor of the Company
6. Any person convicted of any offence involving fraud, dishonesty, official corruption, or moral turpitude.
7. Arrangements and Compromises: According to CAMA^[6] Arrangement is any change in the rights or liabilities of members, debenture holders or creditors of a company or any class of them or in the regulation of a company, other than a change effected under any other provision of this Act or by the unanimous agreement of all parties affected.

The implication of the above is that a company facing financial difficulties may negotiate with its creditors, requiring them to relinquish certain rights in a fair and balanced manner to sustain the company as a going concern.

1. Winding up Liquidation: Liquidation is a process where the company’s assets are seized and realised, with the resulting proceeds used to pay off its debts and liabilities^[7]

CIRCUMSTANCES IN WHICH COMPANIES MAY BE WOUND UP BY COURT. The following are the circumstances and grounds upon which a company may be wound up in line with the provisions of CAMA^[8]:

1. The company has by special resolution resolved that the company be wound up by the Court;
2. Default is made in delivering the statutory report to the CAC or in holding the statutory meeting;
3. The number of members is reduced below two, in the case of a non-single-member company;
4. The company is unable to pay its debts; or
5. The court is of the opinion that it is just and equitable that the company should be wound-up.

APPLICABLE LAWS

Some of the laws that regulate insolvency practice in Nigeria include, but are not limited to the following:

1. Companies and Allied Matters Act (CAMA) 2020: This extant CAMA was signed into law on Friday 7, August 2020, as the Companies and Allied Matters Act 2020, repealing and replacing the Companies and Allied Matters Act 1990.

Not until the enactment of the Companies and Allied Matters Act, 2020 (“CAMA 2020”), did Nigeria’s insolvency practice lack a well-defined legal framework. Once a court declared an incorporated entity insolvent, creditors typically initiated winding-up proceedings as their primary means of debt recovery, often without considering alternative mechanisms for business rehabilitation and debt repayment. However, with the introduction of CAMA 2020, there is now a structured legal framework for insolvency proceedings, emphasizing the need for modern insolvency regulations that prioritize business re-organization and restructuring over liquidation. Therefore, focus has shifted towards rescuing financially distressed companies to maintain economic stability and financial propriety rather than resorting to corporate dissolution. This evolving insolvency landscape aims to balance the interests of creditors and debtors, fostering a more sustainable approach to financial recovery.

It should be noted, however, that insolvency provisions in CAMA are applicable to all entities, regardless of their sector, save for sector-specific laws such as BOFIA, the NAICOM Act, the Insurance Act, the PRA, the AMCON Act, and the NDIC Act take precedence over laws of general application in matters within their regulatory scope.

1. Banks and Other Financial Institutions Act, 2020: Indeed, Banks play a crucial role in global economic development. Hence, Nigeria passed the Banks and other Financial Institutions Act 2020 (BOFIA 2020) into law on 13 November 2020, repealing the erstwhile Banks and other Financial Institutions Act 1991 (BOFIA 1991). The new Act (BOFIA 2020) makes provisions for a more modern, more conducive and more business-friendly legal framework for the insolvency and restructuring of banks and other financial institutions in Nigeria.
2. Asset Management Corporation of Nigeria (AMCON) Act, 2010: The AMCON Bill was signed into law on the 9th day of July, 2010 as an Act to establish the Asset Management Corporation of Nigeria for the purpose of efficiently resolving the non-performing loan assets of Banks in Nigeria and for related matters.^[9]

^[10]The powers of the Corporation are wide and include, but not limited to: issue bonds or other debt instruments as consideration for the acquisition of eligible bank assets; maintain a portfolio of diverse assets including equities, fixed income bonds and real estate; borrow or raise money, with or without the guarantee of the Central Bank of Nigeria (including money in a currency other than the naira); initiate or participate in any enforcement, restructuring re-organisation, programme of arrangement or other compromise.

KEY INSTITUTIONS

1. Federal High Court

There is without doubt that the existence of an efficient Court system or judicial machinery is essential to the success of any legal regime.

In Nigeria, corporate insolvency cases are first handled by the Federal High Court, which is by virtue of the provision of Section of the Constitution^[11] of the Federal Republic of Nigeria, 1999, is vested with the exclusive jurisdiction to handle insolvency matters. Appeals may, however, be made to the Court of Appeal and thereafter to the Supreme Court of Nigeria. The Federal High Court that would exercise jurisdiction in winding up, should be situated within the judicial division of the registered office or head office of the company and for this purpose, the registered office or head office means the place which has longest been the registered office or head office of the company during the six (6) months immediately preceding the presentation of the petition for winding up in line with the provision of CAMA^[12]

1. Corporate Affairs Commission

The CAC has primary oversight over all companies. All insolvency proceedings are required to be notified to the CAC after the necessary approvals have been obtained from the Court.

The functions of the Commission as specified by the CAMA^[13] shall be to:

1. administer this Act, including the registration, regulation and supervision of (i) the formation, incorporation, management, striking off and winding up of companies,
2. (ii) business names, management and removal of names from the register, and
3. (iii) the formation, incorporation, management and dissolution of incorporated trustees;
4. (b) establish and maintain a company’s registry and office in each State of the Federation, suitably and adequately equipped to perform its functions under this Act or any other law;
5. (c) arrange or conduct an investigation into the affairs of any company, incorporated trustees or business names where the interest of shareholders, members, partners or the public so demands;
6. (d) ensure compliance by companies, business names and incorporated trustees with the provisions of this Act and such other regulations as may be made by the Commission;
7. (e) perform such other functions as may be specified in this Act or any other law; and
8. (f) undertake such other activities as are necessary or expedient to give full effect to the provisions of this Act.

CONCLUSION

While insolvency is a situation where a company lacks sufficient funds to settle debts and acquire necessary goods. A company facing financial difficulties may negotiate with its creditors, requiring them to relinquish certain rights in a fair and balanced manner to sustain the company as a going concern. Hence, focus should be shifted towards rescuing financially distressed companies to maintain economic stability and financial propriety rather than resorting to corporate dissolution.

REFERENCE

1. Australian Securities & Investments Commission “Insolvency” Available at: https://asic.gov.au/regulatory-resources/insolvency/ Accessed on the 21 February 2025 ↑
2. CAMA, s. 572. ↑
3. Ss. 205, 551, and 552 ↑
4. S. 553(1) ↑
5. S.550(1) ↑
6. S.710 ↑
7. Ministry of Law Singapore “About Liquidation or Winding Up” Available at: https://io.mlaw.gov.sg/corporate-insolvency/about-liquidation-or-winding-up/ Accessed on 21 February 2024 ↑
8. S.571 ↑
9. Mosun Oke “An Appraisal of the Asset management Corporation of Nigeria (AMCON) Act 2010” Available at: https://www.mondaq.com/nigeria/fund-management-reits/1464400/an-appraisal-of-the-asset-management-corporation-of-nigeria-amcon-act-2010 Accessed on 21st February 2025. ↑
10. Ibid ↑
11. S.251(1) ↑
12. S.570(1& 2) ↑
13. S.8(1) ↑