by Dr Sanford Mba
The Companies and Allied Matters Act (CAMA), 1990 is arguably the most significant business legislation in Nigeria.
CAMA 1990 has served as the lodestar for the operation of companies in Nigeria from formation to operation and even to their liquidation and deregistration. This piece of legislation has also served as the basis for the resolution of distress and the insolvency of companies operating in Nigeria. As a distress resolution tool, Nigerian business rescue scholars and practitioners alike have harped on, amongst other things, the inadequacy of the provisions of CAMA, 1990 to enable the efficient resolution of distress for viable businesses, enable their restructuring so that they can emerge from distress and return to profitability.
Understandably, it was with euphoria that the business rescue community anticipated the reform of CAMA, 1990. Without a doubt, it was anticipated that the reform of the insolvency provisions of CAMA 1990 would lean in favour of business rescue, ensuring that the right rescue components would be adapted (or transplanted) and viable businesses could have a second chance at getting it right. It may well still be early to conclude on whether CAMA, 2020 (“the Act”) will enable restructuring. However, the treatment of key restructuring components like the moratorium in the Act leaves much to be desired. Thus, this blog critically examines this element of the recent reforms.
Moratorium as a Key Component of Restructuring Regimes
There appears to be a consensus amongst scholars and practitioners alike that certain key elements make for a successful restructuring regime.
Accordingly, a restructuring regime should aim to enable the distressed borrower to rely on as much of its assets as possible to achieve a turnaround. The distressed borrower should also be afforded a breathing spell, during which certain creditor claims and the enforcement of such claims are suspended. In addition, the distressed borrower should be able to formulate and implement a restructuring plan. Furthermore, the right management (or supervision) must be in place to enable the business to achieve the desired turnaround. Finally, the business should be able to access financing required for the purpose of turnaround.
The moratorium referred to here is a statutory stay of creditor action and claim enforcement for a period specified in the statute. It is that component in the panoply of devices that ensures that upon the commencement of restructuring, the distressed borrower can focus on formulating and implementing its restructuring plan. If all creditors were permitted to enforce their claims against or repossess assets in the possession of the distressed borrower, it may be left with no assets with which to progress its restructuring. In fact, in jurisdictions like the United States with extensive moratorium provisions, the moratorium may be used to extend the financing base of the distressed borrower by including secured creditors (albeit with adequate protection mechanisms) and overriding negative pledge restrictions in prior borrowing contracts.
For non-liquidation procedures whose moratorium provisions are not automatically triggered upon initiation, statutes may also provide for interim moratorium. In the US, for example, the automatic stay in Chapter 11 of the US Bankruptcy Code is triggered upon the filing of the petition. In contrast, the moratorium comes into effect when the appointment of the administrator is made in the UK, which is typically a short period after the initiation of the procedure, whether in or out of court. In the case of a court-initiated administration, for example, initiation commences by making an administration application to the court but the administration commences when the administration order is given.
The interim moratorium therefore ensures that creditors do not take enforcement steps aimed at frustrating the restructuring in the period between initiation and commencement. Given that a moratorium is integral to a successful business rescue or turnaround and the Act does not provide for a moratorium, upon initiation, it is imperative that we investigate the effectiveness of the system in place. It is to this that the we turn next.
The Moratorium Provisions in CAMA 2020: A Critical Examination
The Act provides for moratorium in respect of both administration and the schemes of arrangement procedure. A critical review of their provisions is outlined below.
It bears pointing out that the administration procedure in the Act provides for two types of moratorium in principle: the interim moratorium and the full moratorium.
Each moratorium has different effects. The interim moratorium should come into effect when the procedure is initiated but before the administrator comes into office and the permission of the court must be sought before prohibited actions are taken. The full moratorium should come into effect when an administration has taken up the appointment.
Section 480 of the Act captures the administration moratorium.
The section requires that the consent of the administrator or the court must be sought before the enforcement of security over the distressed borrower’s property or the repossession of goods in the possession of the distressed borrower under a hire purchase agreement. A landlord who wishes to exercise a right of forfeiture by peaceable re-entry into the premises demised to the distressed borrower must also require the consent of the administrator or the court. Similarly, the consent of the administrator or the court must be sought before legal processes or proceedings, execution, distress and diligence may be instituted or continued against the borrower or its property.
The Act goes on to provide for what appears at first sight to be an interim moratorium in section 481.
However, and rather unfortunately, this is hardly the case. Section 481(4) purportedly provides for items which would not require leave of the court during the interim moratorium by cross-referencing sections 475 and 476. However, while section 475 provides for application for administration by a company liquidator, section 476 outlines the effect of the appointment of a receiver by a holder of fixed charge on the application for the appointment of an administrator.
Without an interim moratorium, it is doubtful whether distressed businesses could survive the initiation of the administration process, that is the period until a court order for administration or an out of court appointment comes into effect. Apologists have argued that the Act actually provides for interim moratorium. While the author is still yet to see the bucket list of items covered under the interim moratorium, everyone at least can agree that section 481(4) is inelegantly drafted and may give rise to uncertainties for both creditors and the distressed borrowers.
Schemes of Arrangement
Section 717 imposes a 6-month moratorium on creditors voluntary winding up or enforcement action by both secured and unsecured creditors.
The 6 months commences when the distressed borrower presents to the court, the proposal which it intends to make to its creditors, its statement of affairs and a statement that it requires protection from being wound up pending the arrangement and compromise. The court may also require any additional information from the distressed borrower.
One core purpose of a moratorium is to allow a borrower focus on a restructuring plan. Demanding the proposed plan at the point of application somewhat puts the cart before the horse. While some may argue that the requirement to produce a plan at the outset may forestall abuse, it must be borne in mind that a hastily prepared plan may end up not achieving the desired end. Besides, a supervisor or monitor could be appointed to ensure the integrity of the moratorium and the restructuring process. It is for this reason that the UK amended its Insolvency Act to introduce a standalone moratorium, to provide a breathing spell to companies trying to design a plan. Besides, a monitor (or supervisor as used in the Act) can be appointed whose role will include ensuring the integrity of the moratorium and the restructuring process.
Consistent with the special dispensation for secured creditors, which is commonplace in the rescue regime of the Act, secured creditors can discharge the moratorium on a number of grounds; one of these, is when ‘the company consents in writing for a secured creditor to enforce its right over the company’s asset within the six months moratorium period.’ Provisions such as this raise concerns of regulatory capture by secured creditors.
With this provision, every secured creditor may opt out of participating in the rescue of distressed businesses. Legal advisers to lenders can easily frustrate restructuring by ensuring that at the time of pre-distress lending, they demand executed and undated letters from their borrowers management, consenting to the enforcement of lenders’ secured claims during a moratorium arising from an arrangement and compromise procedure under the Act. A restructuring dependent on the secured asset is in such situations, undoubtedly bound to fail.
CAMA 2020 has been a long time coming after three decades of its predecessor. Remarkably, the Act represents a shift in the way distress should be perceived and resolved in Nigeria.
It is hoped that gaps in the rescue provisions of the Act would be filled by judges, who have been given a pre-eminent role as the gatekeepers. The foregoing notwithstanding, another wave of reform is desirable in the near future, but this new wave of reform need not take another three decades in coming.
Dr Sanford Mba is author of the book “New Financing for Distressed Businesses in the Context of Business Restructuring Law”. He is currently a Senior Counsel in the Corporate and Commercial Law practice group of ACAS-Law. He can be contacted at firstname.lastname@example.org