Nigeria Airways, Nigeria Air and an Analysis of Phoenix Syndrome

The Liquidation and Rebirth of Nigeria’s National Carrier

On 18 July, 2018 the Federal Government unveiled a new national carrier, Nigeria Air, at the Farnborough International Airshow in England. Nigeria Air, was scheduled to commence operations in December 2018. It was to be largely private-driven, with Government holding just 5% equity. However, on 19 September, 2018, the Federal Government announced a suspension based on what the Government described as “strategic reasons”.

The unveiling of Nigeria Air, was done 15 years after the liquidation of the national carrier, Nigeria Airways. Established in 1958, Nigeria Airways was liquidated in 2003, after accumulating debts in excess of US$500 million. An estimated N83 billion, is being owed former workers of the defunct carrier, notwithstanding that the Federal Executive Council had reportedly, in September 2017, approved N45 billion for the settlement of the debt. The above facts, provide a backdrop for an analysis of

Phoenix Syndrome. Although the planned rebirth of Nigeria Airways as Nigeria Air smacks of phoenix syndrome, the circumstances of the rebirth, places it outside the purview of a phoenix company. Consequently, this article merely seizes this opportunity, to highlight the phoenix syndrome and English law’s legislative and judicial response to it.

Phoenix Syndrome

In a typical phoenix activity, the controllers of an insolvent company (“OldCo”) place OldCo in liquidation often with unpaid debts. The controllers then use a friendly liquidator, to sell the assets of OldCo(usually at a derisory price), to a newly incorporated company (“NewCo”) under their control, whose name is similar to or identical with OldCo’s.

Accordingly in ESS PRODUCTION LTD v SULLY [2005] BCC 435, the liquidating company was Ess Fabricating Ltd, whilst the phoenix company was Electronic Sales Services Ltd (and ESS Solutions Ltd). In ARCHER STRUCTURES LTD v GRIFFITHS [2004] BCC 156, the liquidating company was MPJ Construction Ltd, whilst the phoenix company was MPJ

Contractors Ltd. In WESTERN INTELLIGENCE LTD v KDO LABEL PRINTING MACHINES LTD [1998] BCC 472, KDO Label Printing Machines Ltd was liquidated, with assets transferred to KDO International Ltd.

Hence, like the phoenix bird of Greek myth, NewCo arises from the ashes of OldCo. With NewCo, (i) OldCo’s controllers unjustly benefit from the liquidated OldCo’s business and goodwill, (ii) OldCo’s clients may be misled to assume that NewCo is the same as OldCo, (iii) OldCo’s creditors may be unpaid, whilst assets are transferred to NewCo at an undervalue.

English Law’s Response to Phoenix Syndrome

Section 216 of the English Insolvency Act 1986 (IA), imposes a five-year prohibition on a person who was a director or shadow director of a liquidated company, within the 12 months before its liquidation, from undertaking certain roles in companies, without leave of court. These roles are: (i) being a director of a company with a name which the insolvent company was known during the 12 months before its liquidation, or a name that is so similar to the name, (ii) directly or indirectly taking part in the promotion, formation or management of such company, (iii) directly or indirectly taking part in carrying on of an unincorporated business under a name which the insolvent company was known, as to suggest an association with it.

Section 216 focuses on the use of prohibited names, and not necessarily that an insolvent company has transferred assets to a phoenix at an undervalue or that its goodwill is being exploited: THORNE v SILVERLEAF [1994] BCLC 637 at 642-643. In RICKETTS v AD VALOREM FACTORS LTD [2004] BCC 164, Air Component Ltd was incorporated in 1971 and liquidated in 1998. Ricketts, a director of Air Component, was also a director of Air Equipment Ltd which was incorporated in 1997 and liquidated in 1999, with a debt of £6,579 assigned to Ad Valorem. Ad Valorem sued Ricketts under Sections 216 and 217. The English Court of Appeal held that, Air Equipment was a prohibited name within the meaning of Section 216(2) notwithstanding that (i) no assets were transferred to Air Equipment at an undervalue and (i) the companies were not used to run-up debts which were not repaid.

In determining whether a name is prohibited, there must be a degree of similarity between the name of the insolvent and the phoenix. An applicant must show a probability that, members of the public comparing the names in the relevant context, would associate the two companies with each other: HMRC v WALSH [2006] BCC 431. Accordingly, the judicial approach, is for courts to consider the context in which the names were used, by examining the products/services offered by the companies, location of the businesses, the companies’ customers, the controllers of their operations etc: RICKETTS v AD VALOREM FACTORS LTD [supra] at 170D-E.

A person who violates Section 216, is liable to imprisonment or a fine or both: Section 216(4). Further, an offender is liable for all the debts of the phoenix company, while in violation: Sections 217(1) and (3). Where a court makes a finding that a name is prohibited, it has no discretion in relation to the personal liability of the offender.

Leave to Establish Phoenix Companies and Exemptions

A director may protect himself from civil or criminal liability, by obtaining a court’s leave to use a prohibited name. The factors which may influence the grant of leave, may be gleaned from a number of cases in this regard. In PENROSE v OFFICIAL RECEIVER [1996] 1 WLR 482 at 490, leave was granted for the controller of a liquidating company Hudsons Coffee Houses

Ltd, to act as director of Hudsons Coffee Houses (Holdings) Ltd, after the court found that there was no risk to the creditors of both companies. In Re Lightning Electrical Contractors Ltd [1996] BCC 950, leave was granted to a director of a liquidating company Lightning Electrical Contractors Ltd, to act as a director of Lightning Electrical Construction Ltd because (i) there was no phoenix syndrome or misconduct, (ii) the application was supported by the officeholders of the liquidating company who were experienced, and whom the court believed would not have given their support had creditors been at risk, and (iii) “Lightning” was the name of the director, “Electrical” was the field of the company’s business. In Re Bonus Breaks Ltd (1991) BCC 546, the court granted leave to a person who had been involved in a liquidating company called Bonus Breaks Ltd, to serve as director in Bonus Breaks Promotion Ltd because (i) the applicant was not responsible for the liquidating company’s insolvency, (ii) the application was supported by two of the liquidating company’s major creditors, and (iii) other creditors had been duly notified.

There are three exemptions, to the use of prohibited names. These are (i) where the insolvency practitioner sells the business of the insolvent company to the successor company, and notice is given to the creditors of the liquidating company: Rule 4.228 of the Insolvency Rules 1986; (ii) where the director makes an application to the court, for leave to be the director of the prohibited name company within seven days of the liquidating company entering liquidation: Rule 4.229; and (iii) where the prohibited name company had been known by the prohibited name for the whole of the 12 months, prior to the liquidation of the liquidating company: Rule 4.230. Rule 4.230 will cover cases where companies within a group share common words in their names, and one of the members of the group, enters insolvent liquidation.

The Position of the Law in Nigeria

The Companies and Allied Matters Act 1990 (CAMA), has no provisions on the phoenix syndrome. However, Section 245(1)(b), empowers a court to make restraining orders, where in the course of winding-up a company, it appears that a person is guilty of (i) fraudulent trading under Section 506 of CAMA, or (ii) while being officers of the company, of any fraud in relation to the company, or any breach of duty to the company. A court may restrain a person from being a director of, or taking part, directly or indirectly, in the management of a company for a period not exceeding 10 years. Contravention of a restraining, order constitutes an offence punishable by a fine or imprisonment or both: Section 254(6).

Section 245(1)(b), is a replication of Section 179(1)(b) of Nigeria’s Companies Act 1968, which was modelled after, and is identical with, Section 188(1)(b) of the English Companies Act 1948 (now Section 4 of the English Companies Directors Disqualification Act 1986). Although, Section 245(1)(b) may be used in tackling the phoenix syndrome, the provision is not primarily aimed at this vice. The restraint under Section 245(1)(b), may only be imposed by the court where the misconduct is discovered “in the course of winding-up a company”. Consequently, phoenix companies established after conclusion of winding-up proceedings, cannot be dealt with under Section 245(1)(b). Besides, only misconducts which are brought before a court in the course of winding-up, may result in restraining orders. In the absence of an application, a person may freely and dubiously establish a phoenix company, without any restraint.

Postscript

The Companies and Allied Matters Bill 2017, passed by the Nigerian Senate on 14 May, 2018, has no provisions regulating phoenix activities. Nigeria Air’s tagline is “Bringing Nigeria closer to the World.” Proper regulation of phoenixing, will contribute to bringing Nigeria’s corporate insolvency law regime, closer to global best practice.

“THE UNVEILING OF NIGERIA AIR, WAS DONE 15 YEARS AFTER THE LIQUIDATION OF THE NATIONAL CARRIER, NIGERIA AIRWAYS. ESTABLISHED IN 1958, NIGERIA AIRWAYS WAS LIQUIDATED IN 2003, AFTER ACCUMULATING DEBTS IN EXCESS OF US$500 MILLION. AN ESTIMATED N83 BILLION, IS BEING OWED FORMER WORKERS OF THE DEFUNCT CARRIER....”