One of the advantages of incorporation of a company, as provided by the Companies and Allied Matters Act, is that it gives such a company a distinct legal personality from its owners. That is, in the eyes of the law, it is a human being and has the rights, liabilities, and capacities of a human being. Therefore, such a company can enter into a contract in its name, acquire and discharge properties, sue and be sued, and just like humans, these companies can also birth other companies, fall sick and recover from the same, and finally, it can die.
A company falling sick is synonymous with it having challenges in its finances and management. Therefore, it can decide to change its financial, structural, and operational features to ensure that it gets business investment opportunities, cut down costs, and keeps being a going concern. This can be done either internally, that is amongst the company and its creditors, or externally, that is involving a third party. This process is called Corporate restructuring.
This article will explain what Corporate restructuring is and the forms of restructuring available to companies in Nigeria.
WHAT IS CORPORATE RESTRUCTURING
According to Investopedia, Corporate restructuring is the process of reorganizing a company. It is a corporate action done by a company to significantly change its financial and operational features. Companies may need to restructure their operations at some point during the course of their business. Usually, restructuring becomes a necessity when a company is facing financial difficulties. Companies may also restructure to comply with new regulatory requirements as the need arises, or when there is a change in ownership of the company. This restructure usually brings about a change in the legal, ownership, or operational structure of the company.
CORPORATE RESTRUCTURING OPTIONS FOR COMPANIES IN NIGERIA
There are several restructuring options as provided by the laws that a company may decide to explore, depending on the current situation and needs of the company. This can be an internal restructuring or an external restructuring. Internal restructuring is a restructuring process involving the companies and their creditors. Examples of internal restructuring are Arrangement and compromise, Buy-out, etc., while external restructuring is a restructuring process that involves the company and another company. Examples are Mergers, Acquisitions, Take-over, etc.
ARRANGEMENT AND COMPROMISE
Arrangement is defined as any change in the right and liabilities of members, debentures holders or creditors, or any class of them, or in the regulation of the company other than a change, effect under any other provision of this Act, or by the unanimous agreement of all parties affected. It can take the form of compelling the shareholders to contribute further capital or agreeing with preference shareholders to convert their preference shares into ordinary shares, or reduction of dividend right by preference shareholders etc.
Where a company proposes an arrangement or compromise between it and its creditors, the company or the creditors, or the liquidator for a company being wound up will apply to the Court in a summary way, to order a meeting of the creditors or members of the company as the Court may direct.
The compromise arrangement or compromise will be presented and votes will be cast by the members present at the meeting. If a majority of at least three-quarters of the members present at the meeting agree to the arrangement or compromise, the arrangement or compromise will be referred by the Court to the Securities and Exchange Commission, which will investigate the fairness of the arrangement or compromise.
If the Court is satisfied with the fairness of the arrangement or compromise, it will be sanctioned. When this arrangement or compromise is sanctioned, it becomes binding on the creditors, members, or company as the case may be. Such sanction will not be effective until a certified true copy of the arrangement or compromise is submitted by the company to the Corporate Affairs Commission, and is annexed to the memorandum of the company prepared after the arrangement or compromise has been sanctioned by the Court.
ARRANGEMENT ON SALE
This occurs when a company by a special resolution, resolve that the company is put into a members voluntary winding up, and a liquidator be appointed to sell part or whole of the company’s undertaking and assets, to another corporate body, whether a company or not in consideration part or fully paid shares, to be distributed among the members of the company, in accordance with their rights in liquidation.
All sales or distributions done in pursuance of the special resolution are binding on the company and its members, and the members are deemed to have agreed with the transferee company to accept the fully paid shares, debentures, policies, cash, or others like interest to which they are entitled under such distribution. However, where a member brings an action on grounds of unfairly prejudicial and oppressive conduct for the winding up of the company, the arrangement for sale and distribution shall not be valid unless sanctioned by the Court.