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Preventive Debt Restructuring and the Nigerian Draft Insolvency Legislation: Lessons from a Comparative Perspective

Document Cited in Related
Vincent
Date01 February 2020
Pages66-84
Published date01 February 2020
DOI10.3366/ajicl.2020.0302
INTRODUCTION

Insolvency law for Nigeria, as in many developing countries, is important. In the particular context of Nigeria, at least two reasons make this the more imperative. First, as it aspires to strengthen and facilitate access to credit to drive economic growth,1 there is the unfortunate but likely chance that, for varying reasons, the debtor may be unable to make good its promise to repay its creditor(s). This interplay of credit, debt and default are not unusual in credit economies. Scholars have come to accept the fact that credit is important for commerce2 and a concomitant effect of economic systems based on credit is the possibility of default.3 It is in the light of this that a bankruptcy law regime which resolves the failure of (especially) businesses is pertinent, as it assures the fair and equal treatment of similarly placed creditors.4 This does not only promote certainty, but helps creditors make informed lending decisions by properly calibrating their positions ex ante.5 In addition, the hierarchy of creditors facilitated by bankruptcy law enables the courts before which insolvency proceedings are brought to identify the claimants whose economic interests are to be impacted by the proceedings and to help protect such interests.6

The second and equally pertinent point is to do with the vicissitudes of doing business in Nigeria. Nigeria is presently undergoing a major economic downturn.7 What started as a slump in world commodity prices (specifically oil for Nigeria) has spiralled into a foreign exchange nightmare. The second quarter of 2016 saw a decline in the real sector by about 2.06 per cent. Businesses are also not spared the impact of the recession, having to pay increased prices for inputs and for alternative energy.8 Being heavily dependent on imports, it is not unusual that a crisis of this magnitude will impact every facet of the economy and result in large-scale financial distress9 at the firm level. Already businesses in a bid to stay afloat have retrenched workers, meaning that more people are already without jobs.10 At such times, the international experience is that policy-makers have partly responded by addressing lapses in their bankruptcy legislation, as an integral part of addressing financial distress at the level of the firm.11 In the light of this, it may be argued that Nigeria is overdue for dedicated insolvency legislation – not just any insolvency legislation, but also legislation that enables businesses burdened with cash flow problems and financial distress renegotiate their growing debt and possibly trade out of distress.12 A legislative reform that takes such practical considerations into account is not only appropriate but highlights a necessary role which law should play in economic re-engineering.13

In the light of the ongoing legislative process, this article makes a case for the strengthening of the business restructuring framework within the draft legislation. Also, in view of the conditions in which Nigerian businesses have to operate coupled with the existing restructuring framework that seldom leads to the rescue of distressed businesses, a different legislative approach may well be required. The article therefore argues that given the Nigerian business environment, a preventive restructuring framework accessible to debtors who fear imminent distress is imperative for the country. Drawing parallels from the underlying factors that influenced the European Union (EU) Recommendation on business rescue (the EU Recommendation),14 it is argued that there are useful lessons to be learnt from the EU in terms of its recommended prophylactic rescue regime.

The article is divided into four parts. Part II looks at the business restructuring regime that presently exists in Nigeria and the calls for reform. In part III, the response of the EU to the difficulty businesses faced post-2008 is examined in the light of the Recommendation on business rescue and the framework of the proposed preventive restructuring regime is analysed. Part IV takes a snapshot of the Nigerian draft legislation, pointing out that its design may be such that a preventive restructuring regime is precluded, a regime which Nigeria does need. The article is concluded in part V.

 OVERVIEW OF THE EXTANT DEBT RESTRUCTURING REGIME IN NIGERIA AND IMPERATIVES OF REFORM

The passage of the Bill by the Senate, if followed by a successful passage by the Nigerian House of Representatives and given the assent by the Nigerian president,15 will mark a watershed in the insolvency law landscape of Nigeria. While Nigeria has had legislation for personal bankruptcy since 1979,16 the same cannot be said in respect of corporate insolvency. However, the Companies and Allied Matters Act (CAMA) 201017 chiefly filled in the void created by the lack of dedicated corporate insolvency legislation. Although there is no available legislative or reform commission report which outlines the shortcomings of the extant regime,18 legal scholarship does capture some of the misgivings identified by scholars and practitioners both of the Nigerian system and systems similar to it.

Nigeria's personal insolvency law and even CAMA (to a large extent) tracked the extant English law on personal insolvency and company law.19 Unfortunately, Nigerian law on these subjects have not kept pace with the evolution of English law20 or partaken in the growing global convergence in the area of business insolvency legislation.21 Financially distressed businesses in need of restructuring did so under the CAMA. The receivership and arrangement and compromise provisions provided for in the legislation served – or at least ought to have served – restructuring purposes.22 The question that arises is: how well were these procedures suited to achieving this restructuring end?

CAMA provides for the offices of a receiver or receiver/manager, who may be appointed by the court, upon the application of an interested party, where the debtor has defaulted in the payment of interest or principal, or where it is perceived that the property or the security of the corporate debtor is in jeopardy.23 The legislation distinguishes between a mere receiver and a receiver/manager. While the former essentially has the responsibility to (without prejudice to the rights of prior encumbrancers), possess and protect the assets, receive rents and in general terms do all which a common-law receiver may do,24 the latter could, in addition to playing the role of a common-law receiver, carry on the business of the debtor in respect of the particular asset over which (s)he has been appointed receiver.25

Fundamental to business rescue is the office of a receiver/manager. This is in view of the duties imposed on any person appointed as such. Herein lies the possibility of the receiver to achieve the restructuring of the financially distressed debtor. The legislation imposes the duty of a fiduciary on the receiver/manager,26 requiring that (s)he:

act at all times in what [s]he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skilful manager would act in the circumstances.27

The difficulty posed by such a fiduciary duty is that it only comes into effect ex post and never ex ante. Thus misdeeds on the part of the receiver/manager can only be dealt with after the act: when the indiscretion of such a receiver/manager has worsened the situation of the debtor

What is more, it requires the receiver/manager to consider the interests of other stakeholders of the business in addition to those of its appointing secured creditor.28 Attempting to decipher the intention of the draftsman, it has been pointed out that these duties imposed on the receiver/manager ‘suggest that the aim [of the provision] was to protect investors and the Nation as a whole by keep[ing] potentially profitable companies running; while also protecting the interest and right of the secured creditor to repayment.’29

This aim of the draftsman of the legislation mirrors a very important consideration, which is that pursuant to the ex ante bargain of secured creditors, they may well have no real incentive to restructure the insolvent business...

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