Introduction
Companies, like human beings, may experience periods of strength and vulnerability. A business that begins with promising prospects may subsequently encounter financial difficulties arising from excessive indebtedness, poor management, adverse market conditions, cash-flow problems or other commercial pressures. Where these difficulties become severe, the company may become unable to meet its financial obligations and face the risk of insolvency.
For many years, Nigerian company law provided limited mechanisms through which a financially distressed company could be rescued. Under the Companies and Allied Matters Act, Cap C20, Laws of the Federation of Nigeria 2004 (“old CAMA”), the principal insolvency mechanisms were receivership and winding-up. While these mechanisms served the legitimate purpose of protecting and realising creditors’ interests, they offered limited opportunity for preserving the distressed company as a going concern.
The Companies and Allied Matters Act, 2020 (“CAMA”) introduced a significant change by providing for Company Voluntary Arrangement (“CVA”)[1] and Administration of Companies (“AOC”).[2] These mechanisms reflect a broader approach to insolvency by recognising that, in appropriate circumstances, preserving a distressed company may produce greater value than bringing its existence to an end.
This article examines the position under the old CAMA, the limitations of the traditional insolvency mechanisms and the rescue opportunities created by AOC under CAMA. It also considers selected international approaches to corporate rescue and the prospects for the development of administration in Nigeria.
The Pre-CAMA 2020 Position
Under the old CAMA, receivership and winding-up constituted the principal statutory responses to corporate insolvency.[3] Receivership was primarily concerned with taking possession and control of a company’s property for the benefit of the creditor whose interest the receiver represented. A receiver and manager could, where appropriate, continue the company’s business while seeking to realise the creditor’s investment.
Winding-up took a more terminal approach. The company’s assets were collected and realised by the liquidator, with the proceeds applied towards the company’s liabilities before the company was ultimately dissolved.
Neither mechanism was inherently incapable of producing value. The difficulty was that the framework was largely concerned with recovery and realisation rather than rehabilitation. Consequently, a company facing serious financial distress could find itself on a path towards receivership or liquidation even where some prospect of preserving its underlying business existed.
The economic consequences of corporate failure extend beyond the company itself. Employees may lose their livelihoods, suppliers may lose customers, creditors may suffer substantial losses and valuable businesses may disappear from the market. Reports that at least 800 Nigerian companies closed between 2009 and 2011 due to bad debt illustrate the scale of the problem. AfriBank Nigeria Plc and Spring Bank Plc were among institutions wound up in 2011,[4] while Evans Medical Plc was reported to have been wound up in 2017.[5]
Limitations of the Traditional Approach
One significant limitation of receivership and winding-up was the displacement of the company’s management. Under the old CAMA, the appointment of a receiver or commencement of winding-up substantially affected the ability of directors and officers to control the company’s affairs. This could be commercially significant because directors ordinarily possess detailed knowledge of the company’s operations, customers, market and business strategy.
There was also the risk of substantial employment losses. Liquidation ultimately brings the company’s existence to an end, while receivership may encourage significant cost-cutting and asset realisation. The result can be the loss of employment and disruption of established commercial relationships.
A further difficulty was the limited opportunity available to an insolvent company to interrupt winding-up proceedings and pursue a structured rescue. Under section 408(d) of the old CAMA, an inability to satisfy the relevant requirements for avoiding a winding-up order left the company vulnerable to liquidation.[6]
Asset preservation was another concern. The sale of individual assets may generate immediate funds for creditors but can destroy the value inherent in keeping those assets together as part of an operating business. A functioning company may therefore be worth more as a going concern than the aggregate value of its assets when separately sold.
Administration Under CAMA 2020
CAMA 2020 seeks to address these limitations through the introduction of administration. Administration permits a qualified insolvency practitioner to assume responsibility for a company’s affairs, business and property with the objective of achieving one or more statutory outcomes.
Section 444(1)[7] identifies three principal objectives: rescuing the company or the whole or part of its undertaking as a going concern; achieving a better result for the company’s creditors than would likely be obtained through winding-up without administration; or realising property for distribution to secured or preferential creditors.
The importance of these objectives is that they place corporate rescue alongside creditor recovery within the insolvency framework. Administration therefore does not necessarily treat insolvency as the end of the company. Instead, it creates an opportunity to determine whether the business can be reorganised and preserved.
The suitability of administration will naturally depend on the circumstances of the company. Where financial distress is substantially connected to management or operational difficulties, professional intervention may create an opportunity for restructuring. Where the underlying business has no realistic prospect of viability, however, administration may not provide a meaningful solution.
Protection During Administration
A major advantage of administration is the protection it provides while the rescue process is underway. Subject to the statutory conditions, a winding-up petition presented against a company in administration may be dismissed by the court. Certain legal proceedings, execution and distress against the company are similarly restricted.
Where a company is already in receivership in circumstances contemplated by CAMA, the appointment of an administrator may also require the receiver to vacate office. Enforcement of security over the company’s property is likewise restricted, subject to the consent of the administrator or permission of the court.[8]
These provisions provide the breathing space necessary for a distressed company to reorganise its affairs, negotiate with creditors and determine the most appropriate route towards recovery.
Administration also does not completely exclude existing management. Under section 501(1),[9] officers of the company may continue to exercise management powers with the administrator’s consent. This approach combines professional insolvency oversight with the existing management’s knowledge of the business.
Importantly, the administrator must also consider whether another restructuring option could achieve the statutory objectives before proceeding with administration. Administration is therefore not intended to be an automatic response to every case of financial distress.
Administration and International Practice
The development of administration in Nigeria reflects a wider international movement towards corporate rescue. The United Kingdom (“UK”), for example, has developed an established administration regime aimed at managing corporate distress, preserving viable businesses and improving outcomes for creditors. The UK reportedly recorded a 21.8% increase in company administrations between 2018 and 2019, partly attributed to increased awareness of the procedure.
Ghana provides another useful comparison. The Corporate Insolvency and Restructuring Act, 2020 (“CIRA”) contains provisions dealing with cross-border insolvency proceedings and seeks to facilitate cooperation between Ghanaian and foreign authorities.[10] Ghana has also established an Insolvency Services Division within its Registrar of Companies.[11]
Nigeria’s framework does not yet provide an equivalent comprehensive regime for cross-border administration or a dedicated institutional structure of the same nature. The UK framework, regulated principally by the Insolvency Act 1986 and Enterprise Act 2002, also demonstrates the development of a more mature corporate rescue system, including provisions applicable to certain foreign companies and other entities.[12]
The Way Forward
Although CAMA has provided Nigeria with a statutory framework for corporate rescue, its effectiveness will depend largely on awareness, professional expertise and practical utilisation. Companies may still hesitate to enter administration because public disclosure of their status may affect the confidence of customers, investors, suppliers and other stakeholders. CAMA requires a company in administration to disclose that status on its website and business documents.
Nevertheless, financial distress should not automatically be equated with corporate failure. Early intervention may allow a company to restructure its liabilities, preserve its assets and maintain valuable commercial relationships before its position becomes irretrievable.
Directors also have an important role to play. CAMA permits the company or its directors to appoint an administrator, subject to the statutory requirements.[13]Given their knowledge of the company’s business and the circumstances responsible for its financial difficulties, early action by directors may increase the opportunity for an effective rescue.
Conclusion
The introduction of AOC under CAMA 2020 represents an important development in Nigeria’s corporate insolvency framework. It expands the available responses to financial distress beyond the traditional emphasis on receivership and winding-up and recognises that, in appropriate circumstances, saving a company may generate greater value than ending it.
Administration does not guarantee the survival of every distressed company. Its value lies in creating a structured opportunity to determine whether a viable business can be rescued, whether creditors can obtain a better outcome and whether the company’s assets can be preserved for productive use.
For Nigeria to fully realise the potential of this framework, greater awareness, specialised insolvency expertise, efficient judicial processes, stronger institutional support and mechanisms for cross-border cooperation will be necessary. Ultimately, the significance of administration lies in changing the question from whether an insolvent company must die to whether, with appropriate intervention, it can still be given a realistic opportunity to survive.
[1] Chapter 17 of CAMA.
[2] Chapter 18 of CAMA.
[3] Chapter 19 of CAMA (Receivership) and Chapter 21 of CAMA (Winding up).
[4] Nigeria Deposit Insurance Corporation, “Closed Financial Institutions” https://ndic.gov.ng/failure-resolution/closed-financial-institutions
[5] Nigeria Deposit Insurance Corporation, “Closed Financial Institutions” (NDIC, 2023) https://ndic.gov.ng/failure-resolution/closed-financial-institutions
[6] Section 408(d) of the old CAMA
[7] Section 444(1) CAMA.
[8] Section 478 of CAMA. Where there is a receiver appointed by a holder of a fixed charge in the Company, the Court shall dismiss an administration application (subject to some conditions). See section 476 of CAMA
[9] Section 501(1) CAMA.
[10] Section 150 of the Corporate Insolvency and Restructuring Act, 2020 of Ghana.
[11] Section 153 of the Corporate Insolvency and Restructuring Act, 2020 of Ghana
[12] Non-companies’ as used in the Enterprise Act include registered societies and unregistered friendly societies. See section 255 of the UK Enterprise Act, 2002.
[13] Entities with power to appoint an administrator are directors of a company; the court suo moto or upon an application submitted to the court; a company; or the holders of a floating charge in a company.
