Latest Issues in Corporate Restructuring and Insolvency

Corporate restructuring is the re-organization of a company’s operational structure, usually in response to its financial distress, for the purpose of stabilizing the company so that it can continue its business as a going concern. A corporate restructuring process can either be internal or external.

It is conventional for a company to first exhaust the internal restructuring options before embarking on external restructuring. It is trite that a country’s economic strength can be measured by the resilience of its businesses; its capability to survive insolvency, restructure, and revert to viability.

The previous statutory proceedings, Companies and Allied Matters Act CAP C20, LFN 2004 (“CAMA 2004”) did not make adequate provision for rescue and or restructuring of a debtor company’s operations as the insolvency framework leans towards liquidation proceedings.

Part XVI of CAMA 2004 provided for schemes of arrangement and compromise which offer a broad framework for the rescue of failing companies including agreements with their creditors for restructuring, mergers and acquisitions that can be sanctioned by the court as provided in Sections 537 to 540 of the CAMA 2004 LFN.

The CAMA 2020 has in line with global best practices introduced various mechanisms for business rescue as a going concern. The rationale behind a business rescue mechanism is to preserve the status quo of a company while a way forward is negotiated for implementation. This rescue mechanism substitutes the endless contest to seize the assets of a debtor company once it is insolvent, with a system that gives the debtor an opportunity to reorganize its affairs. A business rescue identifies the need to preserve the going concern value of the corporation alongside maximising the returns for the creditors.

The law now protects the interests of both the debtor and creditor as opposed to protecting the creditor only.

The previous corporate restructuring framework analyses the internal and external restructuring mechanisms below:

1. Arrangement and compromise Arrangement on sale
2. Buy-out
3. Mergers and Acquisition
4. Takeover
5. Purchase and assumption

Corporate restructuring is the process of changing the composition of a business or group with the goal of making it more profitable.

Financial Restructuring: Where businesses have debts and tax considerations, it’s often necessary to restructure financially to reduce liabilities and increase profitability.

Organizational restructuring: a business or group’s organizational structure can become inefficient either because of surplus services or complex employee hierarchies.

The new CAMA 2020 introduced new provisions that promote ease of doing business and reduce regulatory hurdles.

World Bank Report 2020 also commented that “Nigeria made starting a business easier by reducing the time needed to register a company and by improving online platforms.” Business Rescue provisions for Insolvent Companies – The new Act introduces a framework for rescuing a company in distress and keeping it alive against such an entity to become insolvent.

Provisions were made with respect to Company Voluntary Arrangements (S.434 to S.442), Administration (S.443 to S.549) and Netting (S.718 to S.721).

Administration S.443 to S.549 CAMA 2020

Pursuant to Chapter 18 of the CAMA 2020, company administration was introduced into the body of Nigerian company law and an Administration is a process that involves the appointment of an administrator to manage the company’s assets, with a view to rescuing the whole or part of the company’s undertaking as a going concern.

The administration is an alternative or a foundation to winding up, administration provides the possibility for a company to survive its financial troubles and continue trading as a going concern. See Section 444 of the CAMA 2020.

The CAMA 2020 provides that immediately after the appointment of an administrator takes effect, no legal action (including legal proceedings, execution, distress etc.) may be instituted or continued against the company or the company’s property, except with the permission of the Federal High Court (the “Court”) or the consent of the administrator.  The intent of this is mainly to protect the company from enforcement proceedings and legal action from its creditors which might lead to the winding up of the company, thereby enabling the administrator to focus on implementing measures that are aimed at rescuing the business of the company.

Purpose of Administration

The administrator of a company may do all such things as may be necessary for the management of the affairs, business and property of the company, and shall perform his functions with the objective of

(a) rescuing the company, the whole or any part of its undertaking, as a going concern;

(b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up, without first being in administration; or

(c) realizing property in order to make a distribution to one or more secured or preferential creditors.

Appointment of Administrator by Court

 A Court may make an administration order in relation to a company, where it is satisfied that the-(a) company is or is likely to become unable to pay its debts; and (b) administration order is likely to achieve the purpose of administration. Section 449 of CAMA 2020. An application for an administration order can be made by: 

1. the company;
2. its directors;
3. one or more creditors of the company;
4. the designated officer of the Court appointed to act as receiver, a
5. liquidator, the holder of a floating charge in special circumstances; or a combination of any persons listed in 1) and 4)

Insolvency

A company is insolvent if its assets. are insufficient to discharge its debts and liabilities. Often, an insolvent company Is unable to pay its debts as they fall due (cash-flow insolvency). Has liabilities in excess of its assets (balance-sheet insolvency).

Key indicators of Insolvency 

-Low cash inflow

-Future cash flow projections

-Total assets

-Liabilities piling up

-Decreased production

-Poor revenue

-Contingency plans

Insurance 

Corporate Restructuring within the Insurance Sector has largely been in response to NAICOM’s Regulatory Directives. Prior to the Commission’s 2019 recapitalization mandate. It had by a circular dated 27th August 2018 issued directives to operators compelling the latter to comply with the Tier Based Minimum Solvency Capital requirement (TBMSC). Essentially, the TBMSC was aimed at prescribing Minimum Solvency Capital by categorizing insurance companies along with the nature, size/scale and complexities of risks underwritten by them. In response to this, an insurance company embarked on capital reconstruction, balance sheet restructuring and capital reduction through:

Recapitalization Directive of the CBN

The recapitalisation of the banking sector. which was done in 2005, and required the banks to raise their capital base from N2bn to N25bn. The exercise then saw the emergence of 24 Deposit Money Banks following the merger of some of them as well as the acquisition of many that could not raise the required capital.

Notable restructuring exercises following regulatory directives

INSURANCE INDUSTRY

-ARM’s divestment of ARM Life to Tangerine Life -African Alliance- Divestment of its significant minority stakes in its Pension Asset (PAL)

-AXA Mansard Divestment of its Pensions Assets to Tangerine Group

– Allco Insurance Plc. concluded plans for a right issue of 4, 357, 770, 954 ordinary shares of fifty kobos each at eighty kobos per share, based on five new ordinary shares for every 13 ordinary shares held.

BANKING INDUSTRY

-CBN takeover over Skye Bank in 2018, and established of Polaris Bank as a bridge bank to take over its assets and liabilities.

Acquisition of 75% stake in Intercontinental Bank by Access Bank in 2011

The merger of Magnum Trust Bank, NBM Bank, Trust Bank of Africa and Indo-Nigeria Merchant Bank (INMB) in 2006 to become Sterling Bank.

Recently, Zenith Bank secured its shareholders’ approval to cancel unissued shares in compliance with

Section 124 CAMA 2020 and Regulation 13 Companies’ regulation 2021.

Debt Restructuring

Some restructuring activities are underpinned by piling debt obligations which could ultimately result in reputational damages. To avoid these embarrassments and stay afloat. some companies resort to debt restructuring

Alternatively, a company may embark on voluntary winding up which is a legally binding arrangement between a company and its creditors particularly where the company believes it will return to profitability in the nearest future.

Basically, this provides a short-term relief (breather) and helps the company to stay afloat/liquid return for a guarantee/undertaken that it will honor its debts obligations in the future.

Some popular examples include:

AMCON/BOI on lending transaction- AMCON buying over the debt/liability portfolio of Nigerian Banks Honeywell Group’s divestment of majority stakes in Honeywell Flour Mills to Flour Mills Nigeria PLC in order to restructure loan portfolio with FBN.

Rebranding of Etisalat to 9mobile in satisfaction of a syndicated loan of $1.2Billion granted by a consortium of 13 Banks.

HITV relinquishment of its EPL license to DSTV

Cost Reduction

Where a company is facing growing debt, it’s likely that its running costs are too high. In these situations, reviewing the corporate structure can highlight overspending, whether in the administration or operation of your business. – In order to reduce costs it may consider liquidating redundant companies within the group to release assets; reducing the number of employees, or restructuring departments to remove unnecessary management costs. Some notable examples include African Alliance Insurance Plc. Voluntary winding-up proceedings to liquidate its Airline (Axiom Air) and fast food (Frenchies Foods) businesses.

Conclusion

Corporate restructuring can serve many purposes and can take numerous forms. The position and status of a company would determine whether restructuring would be employed as a magic potion to cure a company’s ill health, or simply a booster to greater fortunes. The market is changing globally, and new trends are emerging. 2022 is already shaping up to be full of corporate activity.

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THIS IS REFLECTIONS, our weekly roundup of events in the legal and technology sector, covering various topics and interesting learning points for today’s professionals.

The above event took place on 24 May 2022 and the speakers were Abisola Akinrin; Company Secretary/Head of Legal Services at Custodian Trustees Limites, Seyi Akinwunmi; Partner Akinwunmi & Busari LP, and Kubi Udofia PhD; Partner Babalakin & Co Legal Practitioners

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