Business Recovery and new Capital

8/7/2019 Business Recovery and new Capital

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BUSINESS RESTRUCTURING:

THE ROLE OF GOVERNMENT,NEW CAPITAL AND BUSINESSRECOVERY PRACTITIONERS:COMMENTS ON THE THEME

BUSINESS RESTRUCTURING:

THE ROLE OF GOVERNMENT,NEW CAPITAL AND BUSINESSRECOVERY PRACTITIONERS:COMMENTS ON THE THEME

BY CHIEF ANTHONY IDIGBE SAN-DISCUSSANTAT THE BRIPAN 2ND TRAININGWORKSHOP, PROTEA HOTEL, IKOYI

BY CHIEF ANTHONY IDIGBE SAN-DISCUSSANTAT THE BRIPAN 2ND TRAININGWORKSHOP, PROTEA HOTEL, IKOYI


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OUTLINEOUTLINE

OVERVIEW OF NIGERIAN INSOLVENCY

REGIME TO DETERMINE EXTENT OFBUSINESS RESCUE CULTURE

RELEVANCE OF NEW CAPITAL IN BUSINESSRESTRUCTURIN

CONCLUSIONS/SUGGESTIONS

OVERVIEW OF NIGERIAN INSOLVENCY

REGIME TO DETERMINE EXTENT OFBUSINESS RESCUE CULTURE

RELEVANCE OF NEW CAPITAL IN BUSINESSRESTRUCTURIN

CONCLUSIONS/SUGGESTIONS


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OVERVIEW OF NIGERIAN

INSOLVENCY REGIME


INSOLVENCY REGIMETYPES OF INSOLVENCY PRACTICE UNDER THE

NIGERIAN GENERAL INSOLVENCY REGIME

Receivership (S393(1) CAMA)Managership (S393(2) CAMA)

Liquidation/Winding-up (S401 et al CAMA)Mergers & Acquisition (PART XII, ISA 2007)Reorganization (PART XVI CAMA)

TYPES OF INSOLVENCY PRACTICE UNDER THENIGERIAN GENERAL INSOLVENCY REGIME

Receivership (S393(1) CAMA)Managership (S393(2) CAMA)

Liquidation/Winding-up (S401 et al CAMA)Mergers & Acquisition (PART XII, ISA 2007)Reorganization (PART XVI CAMA)


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INSOLVENCY REGIME-CONTD


INSOLVENCY REGIME-CONTDReceivership & managership: ordinarily creditordrivenM & A: a corporate reorganization/ restructuringthat does not involve a formal process of winding up. M&A procedure allows for a reversere-engineering of assets and businesses.Arrangements & compromises: a corporatereorganization that require a formal winding upprocess but does not require the fusion of two ormultiples going concerns

Receivership & managership: ordinarily creditordrivenM & A: a corporate reorganization/ restructuringthat does not involve a formal process of winding up. M&A procedure allows for a reversere-engineering of assets and businesses.Arrangements & compromises: a corporatereorganization that require a formal winding upprocess but does not require the fusion of two ormultiples going concerns


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Insolvency practice - including businessrestructuring is all about a balancing actInsolvency practice - including businessrestructuring is all about a balancing act

THE OVERRIDING PRINCIPLE OF EQUAL TREATMENT OFSTAKEHOLDERS OR THE PARI PASSU PRINCIPLE AND ITS

COROLLARY

THE OVERRIDING PRINCIPLE OF EQUAL TREATMENT OFSTAKEHOLDERS OR THE PARI PASSU PRINCIPLE AND ITS

COROLLARY


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THE PARI PASSU PRINCIPLETHE PARI PASSU PRINCIPLE

What it means-

no undue advantage to a (category of)over another.

Act in the best interest of the companyand the interests of all stakeholdersEquitable treatment means priority rules(see ranking pyramide)

What it means-

no undue advantage to a (category of)over another.

Act in the best interest of the companyand the interests of all stakeholdersEquitable treatment means priority rules(see ranking pyramide)


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The pyramidThe pyramid


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THE PARI PASSU PRINCIPLETHE PARI PASSU PRINCIPLE

What it further implies-

Exercise of management powers bydirectors of the insolvent company

Avoidance of certain transactions by the IP

Stay of all proceedings whilst a winding uppetition is pending.

What it further implies-

Exercise of management powers bydirectors of the insolvent company

Avoidance of certain transactions by the IP

Stay of all proceedings whilst a winding uppetition is pending.


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THE PARI PASSU PRINCIPLE-

contd


contdStay of disposition or transfer orattachment of any assets of the insolvent company pending the determination of thewinding up.

Settlement of list of/adjustment of rights

of contributories and application of assets

Stay of disposition or transfer orattachment of any assets of the insolvent company pending the determination of thewinding up.

Settlement of list of/adjustment of rights

of contributories and application of assets


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contd


contdTHE MAJOR CHALLENGE POSED BY THE

PRINCIPLE ON BUSINESS

RESTRUCTURING:

To balance the rights of creditors to

realize their security in the assetsagainst allowing the IP s use of tjhoseassets for purpose of restructuring

THE MAJOR CHALLENGE POSED BY THEPRINCIPLE ON BUSINESS

RESTRUCTURING:

To balance the rights of creditors to

realize their security in the assetsagainst allowing the IP s use of tjhoseassets for purpose of restructuring


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BUSINESS RESCUE CULTURE INOUR NIGERIAN FRAMEWORK

BUSINESS RESCUE CULTURE INOUR NIGERIAN FRAMEWORK

The Nigerian insolvency regime does not encouragebusiness restructuringThe statutory definition of the term insolvency inS650 CAMA is illustrative in this regard-The powers of the IPs are fraught with frailtiesrelating to certainty of his appointment and intense

litigation of directors/shareholdersThe thrust of our general substantive and adjectivallaws is on winding-up and liquidation, thus underCAMA....

The Nigerian insolvency regime does not encouragebusiness restructuringThe statutory definition of the term insolvency inS650 CAMA is illustrative in this regard-The powers of the IPs are fraught with frailtiesrelating to certainty of his appointment and intense

litigation of directors/shareholdersThe thrust of our general substantive and adjectivallaws is on winding-up and liquidation, thus underCAMA....


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the IP under CAMA is a vulture thatdevours the assetsthe IP under CAMA is a vulture thatdevours the assets


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BUSINESS RESCUE CULTURE IN OURNIGERIAN FRAMEWORK-CONTD


No Administration procedure existingunder the general law as in the UK (therefore no opportunity for grace

period/moratorium to avoid forced sale,nor voluntary arrangement plan)

No Administration procedure existingunder the general law as in the UK (therefore no opportunity for grace

period/moratorium to avoid forced sale,nor voluntary arrangement plan)


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No statutory recognition of out of court arrangements as is obtainable in other jurisdictionssuch as-

The procedure available under the Canadianbusiness rescue law (CCAA) which provides for apre-filing period within which a company canvoluntarily reach out and procure an informal

moratorium period or engage in intense out of court negotiations prior to filing of a formal Planof Arrangement and a typical and extendable 30day protection order freezing the rights of creditors to initiate insolvency proceedings

against the company

No statutory recognition of out of court arrangements as is obtainable in other jurisdictionssuch as-

The procedure available under the Canadianbusiness rescue law (CCAA) which provides for apre-filing period within which a company canvoluntarily reach out and procure an informal

moratorium period or engage in intense out of court negotiations prior to filing of a formal Planof Arrangement and a typical and extendable 30day protection order freezing the rights of creditors to initiate insolvency proceedings

against the company


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But in Nigeria, this is not what obtains. Even inthe case of a receivership and managership,the powers given to the IP are a double edgesword as business rescue has to be consideredas an option

But in Nigeria, this is not what obtains. Even inthe case of a receivership and managership,the powers given to the IP are a double edgesword as business rescue has to be consideredas an option


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BUSINESS RESCUE CULTURE IN OUR NIGERIANFRAMEWORK-CONTD

BUSINESS RESCUE CULTURE IN OUR NIGERIANFRAMEWORK-CONTD

The secured creditor may not be willing toextend credit nor want the IP to get newcapital because of the potential risk to hissecurity interests in the assets of the debtorcompanyThe issue is further exacerbated when the IP

has to deal with irate shareholders/directorsAnother challenge for business rescue cultureis the issue of crystallization of the securitywhen the debt has become due.

The secured creditor may not be willing toextend credit nor want the IP to get newcapital because of the potential risk to hissecurity interests in the assets of the debtorcompanyThe issue is further exacerbated when the IP

has to deal with irate shareholders/directorsAnother challenge for business rescue cultureis the issue of crystallization of the securitywhen the debt has become due.


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THE RELEVANCE OF NEW CAPITAL TOBUSINESS RECOVERY AND THE LEGAL

IMPEDIMENT TO GETTING NEW CAPITAL


IMPEDIMENT TO GETTING NEW CAPITALTHE CONSTRAINTS

The IP may not have access to assets he can

use as security for new capital because of crystallizationThe existing creditors may not have or offerany additional security they are over exposed

already. Worse still they may not consent toany new advance for fear of compromise of their interestsThe directors may be disputing the process

THE CONSTRAINTSThe IP may not have access to assets he can

use as security for new capital because of crystallizationThe existing creditors may not have or offerany additional security they are over exposed

already. Worse still they may not consent toany new advance for fear of compromise of their interestsThe directors may be disputing the process


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IMPEDIMENT TO GETTING NEW CAPITALTHE CONSTRAINTS-CONTD

Several restrictions on the IP s exercise of his broad powers of managership as his powers are subject

To the rights of secured creditors,

if he is a receiver/manager and the company is being woundup to the powers of a liquidator,

if he is a receiver/manager, to fiduciary obligations to thecompany and various corporate stakeholders (employees,owners of the company, creditors), and he may therefore not be able to give preferential treatment to his private appointer.

THE CONSTRAINTS-CONTDSeveral restrictions on the IP s exercise of his broad powers of

managership as his powers are subject

To the rights of secured creditors,

if he is a receiver/manager and the company is being woundup to the powers of a liquidator,

if he is a receiver/manager, to fiduciary obligations to thecompany and various corporate stakeholders (employees,owners of the company, creditors), and he may therefore not be able to give preferential treatment to his private appointer.


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IMPEDIMENT TO GETTING NEW CAPITALTHE CONSTRAINTS-CONTD

To Court s supervision or the Committee of Inspection in thecase of reorganization through arrangements and compromise

Agreement of creditors and committee of inspection

And even the Corporate Affairs Commission s supervision!

THE CONSTRAINTS-CONTD

To Court s supervision or the Committee of Inspection in thecase of reorganization through arrangements and compromise

Agreement of creditors and committee of inspection

And even the Corporate Affairs Commission s supervision!


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IMPEDIMENT TO GETTING NEW CAPITALSome of these constraints seem to have been whittled down incertain specialized statutes with special legislative interventionin the areas of

the capital market,

the banking sector,

the insurance industry, and

State owned enterprises.

Some of these constraints seem to have been whittled down incertain specialized statutes with special legislative interventionin the areas of

the capital market,

the banking sector,

the insurance industry, and

State owned enterprises.


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IMPEDIMENT TO GETTING NEW CAPITALThe provisions of Ss. 48 to 50 ISA 2007 give the regulatorpowers to intervene and manage a failing capital market operator. They however do not go as far as stating expressly that SEC may inject monies into those failing capital market corporate

entities. See however the Kinley s Securities case where SEC tookover and appointed managers and paid the investors. The sameidea applies to the insurance sector with NAICOM powers toappoint receivers (S55 of Insurance Act, Cap. 117 LFN 2004)In the recent banking crisis however, the CBN actually is said tohave injected new funds into the failing banks on claim of statutory authority (Ss.2, 29, & 30 CBN Act 2007) to do so but aswe know these acts are now being seriously challenged byshareholders and directors and are being tested by litigation (seecases such as the Akingbola action, the Afribank shareholdersaction, etc)

The provisions of Ss. 48 to 50 ISA 2007 give the regulatorpowers to intervene and manage a failing capital market operator. They however do not go as far as stating expressly that SEC may inject monies into those failing capital market corporate

entities. See however the Kinley s Securities case where SEC tookover and appointed managers and paid the investors. The sameidea applies to the insurance sector with NAICOM powers toappoint receivers (S55 of Insurance Act, Cap. 117 LFN 2004)In the recent banking crisis however, the CBN actually is said tohave injected new funds into the failing banks on claim of statutory authority (Ss.2, 29, & 30 CBN Act 2007) to do so but aswe know these acts are now being seriously challenged byshareholders and directors and are being tested by litigation (seecases such as the Akingbola action, the Afribank shareholdersaction, etc)


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IMPEDIMENT TO GETTING NEW CAPITALThe statutory intervention for state owned enterprises and

injection of new capital

The Objective

balancing various macro-economic interests.

The Procedure:

The turn-around procedure articulated under the NigerianPrivatization Policy and Law under the stewardship of the NCPand BPE for injection of new capital involved a restructuring.

The statutory intervention for state owned enterprises andinjection of new capital

The Objective

balancing various macro-economic interests.

The Procedure:

The turn-around procedure articulated under the NigerianPrivatization Policy and Law under the stewardship of the NCPand BPE for injection of new capital involved a restructuring.


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IMPEDIMENT TO GETTING NEW CAPITALSectoral reform was first carried out to create a competitiveand conducive environment. This usually involves a break up of monopolies and creation of new independent regulator.Examples are found in the telecommunications and powersectors with unbundling of a) NITEL(and creation of NCC) andb) NEPA (and creation of NERC).

Thereafter, the insolvent businesses of these state ownedenterprises are privatized either by way of a sale of thebusiness of the enterprise to private (core) investors as a goingconcern, equity participation and management rights (MBIs orBIMBOs), or liquidation.

Sectoral reform was first carried out to create a competitiveand conducive environment. This usually involves a break up of monopolies and creation of new independent regulator.Examples are found in the telecommunications and powersectors with unbundling of a) NITEL(and creation of NCC) andb) NEPA (and creation of NERC).

Thereafter, the insolvent businesses of these state ownedenterprises are privatized either by way of a sale of thebusiness of the enterprise to private (core) investors as a goingconcern, equity participation and management rights (MBIs orBIMBOs), or liquidation.


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These turn around transactions which also usuallytried to preserve employees interests were achievedthrough the inclusion of certain key clauses in ShareAsset Sale & Purchase Agreements (SSPAs) suchwarranties, condition precedents, tax incentives but

also moratorium periods, new deal with labour toattract serious and qualitative new management andinject new capital in order to cause the restructuringplan to work.

These turn around transactions which also usuallytried to preserve employees interests were achievedthrough the inclusion of certain key clauses in ShareAsset Sale & Purchase Agreements (SSPAs) suchwarranties, condition precedents, tax incentives but

also moratorium periods, new deal with labour toattract serious and qualitative new management andinject new capital in order to cause the restructuringplan to work.


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THE REALITY THE REALITY

New capital is therefore important and critical to institutional orprivate business recovery practice because it allows current trade to continue whilst reorganizations, downsizing and hivingoff occurs.This protects the business and employees and increasepotential of meeting obligations to existing creditors without forced sale of assets of the business.But doing this without legislative intervention, particularly inhostile insolvency, is extremely difficult.The hard truth is that business rescue only works where thereis a consensus or protective legal environment. In Nigeria, wedo not have such protective legal environment laws subject toour submissions for certain specialized industries.

New capital is therefore important and critical to institutional orprivate business recovery practice because it allows current trade to continue whilst reorganizations, downsizing and hivingoff occurs.This protects the business and employees and increasepotential of meeting obligations to existing creditors without forced sale of assets of the business.But doing this without legislative intervention, particularly inhostile insolvency, is extremely difficult.The hard truth is that business rescue only works where thereis a consensus or protective legal environment. In Nigeria, wedo not have such protective legal environment laws subject toour submissions for certain specialized industries.


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CONCLUSIONS/SUGGESTIONSCONCLUSIONS/SUGGESTIONS

We are facing tough times and tough decisions in the area of corporate insolvency these days but it is clear that we haveneed not only to overhaul our Nigerian insolvency regime andfill the gaping legal lacuna existing in terms of business rescueculture in order to procure a friendlier environment forprocuring new capital.

It seems that the general insolvency laws in Nigeria make nonconsensual injection of new capital in an insolvent companydifficult. There is therefore a need for legislative reform toallow non consensual creation of new security on future incomeflow of the company and suspension of the rights of existingcreditors subject to court supervision under a restructuringplan.

We are facing tough times and tough decisions in the area of corporate insolvency these days but it is clear that we haveneed not only to overhaul our Nigerian insolvency regime andfill the gaping legal lacuna existing in terms of business rescueculture in order to procure a friendlier environment forprocuring new capital.

It seems that the general insolvency laws in Nigeria make nonconsensual injection of new capital in an insolvent companydifficult. There is therefore a need for legislative reform toallow non consensual creation of new security on future incomeflow of the company and suspension of the rights of existingcreditors subject to court supervision under a restructuringplan.


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We therefore call for

Amendment of CAMA to include Administration,Amendment of CAMA to allow IP or evenmanagement to trigger Scheme of Arrangement under supervision of the court Amendment of CAMA to allow creation of newsecurity based upon future income flow and torestrain creditors based on court approvedrestructuring.

We therefore call for

Amendment of CAMA to include Administration,Amendment of CAMA to allow IP or evenmanagement to trigger Scheme of Arrangement under supervision of the court Amendment of CAMA to allow creation of newsecurity based upon future income flow and torestrain creditors based on court approvedrestructuring.


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Amendment of CAMA with respect to receivershipand managership provisions to achieve better controlof the insolvency process and professionalimplementation of the insolvency options openwithout undue interference fromdirectors/shareholders or court system. This impliesa greater professionalization of the profession itself and creation of a regulator for purpose of propersupervision and control of abuse of powers androgue IPs,

Amendment of CAMA with respect to receivershipand managership provisions to achieve better controlof the insolvency process and professionalimplementation of the insolvency options openwithout undue interference fromdirectors/shareholders or court system. This impliesa greater professionalization of the profession itself and creation of a regulator for purpose of propersupervision and control of abuse of powers androgue IPs,


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Such a legal environment wouldencourage financial engineering that

would drive business recovery inNigeria.

Such a legal environment wouldencourage financial engineering that

would drive business recovery inNigeria.


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THANK YOU FOR LISTENINGTHANK YOU FOR LISTENING

Chief Anthony Idigbe SANPUNUKA Attorneys & Solicitors

International Law CentreNo. 45 Adjarho Street,

Off Admiralty Way (Opposite White Dove)

Lekki, LagosTEL: 2704789, 2704791FAX: 234 (0) 1 2704790

WEBSITE :www.punuka.com

Chief Anthony Idigbe SANPUNUKA Attorneys & Solicitors

International Law CentreNo. 45 Adjarho Street,

Off Admiralty Way (Opposite White Dove)

Lekki, LagosTEL: 2704789, 2704791FAX: 234 (0) 1 2704790

WEBSITE :www.punuka.com

Documents

Business Recovery and new Capital