Recession Preventive Rehabilitation and the Nigerian Draft Insolvency Bill: Lessons from the EU?

With the current economic recession with which Nigeria is faced, these are certainly not the best of times for Nigerian businesses. From the micro and small scale operators to the medium and even large corporations, no one is spared the agony of the harsh business climate. Like no other time, debtors are more likely to default on interest payment on facilities and lenders are also under pressure to cut their losses. While secured creditors are positioned to call in the securities, unsecured creditors are also exploring all means at their disposal to get debtors to pay up their debt obligations, whether by co-opting law enforcement agents or reluctantly approaching the courts to obtain money judgments. Debtors too are learning to cut their losses and without doubt, job losses are common place, with the attendant social consequences. The other day, we were greeted with the news of a businesswoman who left behind a suicide note lamenting her indebtedness. Indeed, these are trying times.

More than anything else, viable businesses now need a regime that ensures the resolution of indebtedness arising from circumstances such as those pointed out above. One lesson learnt from the 2008 global economic recession is that hard times as these present policymakers with the opportunity to rework their business insolvency legislations, to ensure the effective resolution of firm level distress. This explains the excitement which stakeholders presumably should have felt when the 8th Senate of the Federal Republic of Nigeria successfully passed what will possibly become Nigeria’s first legislation dedicated to, amongst other things, the resolution of the distress of businesses. Elementary constitutional law tells us that there is still a long way to go as the House of Representatives will need to activate the process of law making and upon completion, the Bill will still have to reach the presidency for assent.

Permit me to somewhat digress from the crux of the matter by drawing attention to two peripheral observations that should interest watchers of business insolvency reform in Nigeria. First, as at 2014, there was a Bill which was being actively pushed by the Business Rescue and Insolvency Practitioners Association of Nigeria (BRIPAN). At the INSOL International Africa Roundtable which was held in Kampala from 17-18 October, 2014, the summary submitted on reform efforts in Nigeria was that “[T]here is a draft Insolvency Bill which has been exposed to stakeholders and is now before the Federal Minister of Trade who is pursuing approval of the Federal Executive Council so it can be forwarded to the National Assembly for promulgation as a government bill. The draft Bill is basically the work of BRIPAN.” Remarkably, the present Bill passed by the Senate is different from that Bill which largely takes after the English Insolvency Act, 1986 and its provisions on business rehabilitation. One wonders what has become of the Bill and why a more recently introduced Bill has suddenly passed through the Senate with such incredible speed.

The second observation is to do with the reference to currency in the draft legislation. It is interesting that the Dollar is the currency of choice everywhere currency reference is made in the draft legislation. For instance, in the notice of intention to make a proposal to its creditors, an insolvent person (natural or legal) must state in a prescribed form, amongst other things, “the names of its creditors with claims amounting to two hundred and fifty dollars or more and the amounts of their claims as known or shown by the debtor's books” (see s. 30 of the draft legislation). Another example, s. 106 of the draft legislation provides that decisions in a meeting of creditors may be reached by resolution carried by the majority of votes. Votes are equated to “each dollar of every claim of the creditor that is not disallowed.” It is not clear whether this is an oversight on the part of the draftsman that also escaped the scrutiny of the constitutional procedure of passage in the Senate, or whether it is a deliberate preference of the Dollar over the Naira by the draftsman. The House of Representatives may have to consider this.

When businesses are unable to pay their debts, contemporary insolvency laws provide two pathways. First is the liquidation of the business and the distribution of its assets to the creditors and if possible, to the residual claimants (shareholders). Secondly, the law may facilitate the rescue of the indebted business. It does this by providing a framework within which the debtor and its creditors negotiate their debt. There is growing global preference for this latter option for viable businesses that are financially distressed. The idea essentially is that being financially distressed should not mean the end of the road for businesses. The expectation is that emerging from the process, the business is more efficient and continues to operate within the economy. The 269 sectioned draft legislation as already pointed out seeks to cater for corporate and individual insolvency. It also claims to be positioned to facilitate the rehabilitation of insolvent businesses. It is very gratifying that the Bill introduces a regime that allows the debtor to make a proposal for the restructuring of its debt. This regime should see an improvement on the floating chargee centered receivership and the hardly used arrangement and compromise provisions in CAMA which are the only extant business rehabilitation options in Nigeria.

While a cursory look at the draft legislation has so much to commend it for, one point which the House of Representatives may look out for is the provision of a prophylactic regime that facilitates restructuring for troubled businesses which although not already insolvent, are likely to become so. Providing for the restructuring of the debt of the business when it has become insolvent is just like taking a sick patient to the hospital when (s)he is already terminally ill. The chances of rehabilitation may therefore be less. In its present form, the draft legislation appears to stand at the very end of the dark tunnel, awaiting the insolvency of the debtors before its provisions may be set in motion. This may be inferred from the scope of its application (bankrupt and insolvent persons).

Nigeria may wish to learn from the response of the EU to the economic crisis of 2008. Faced with the economic and social crisis that affected people in terms of job availability and businesses survival, the EU Commission and Parliament championed a policy directed towards the modernisation of insolvency law in the EU to enable businesses weather the financial difficulties, carry out their operations within more efficient structures and when needed, provide the opportunity of a fresh start for honest entrepreneurs. The EU Recommendation on New Approaches to Business Rescue and to give Entrepreneurs a Second Chance (2014) is a manifestation of this policy thrust.

This recommendation in its essential respects requires Member States to provide for a preventive framework that enables debtors to commence restructuring of their businesses as soon as the possibilities of insolvency begins to loom. Within this framework, the debtor should be able to continue in the day to day management of its business operations. The debtor should also be able to request a temporary stay of individual creditor enforcement action while the restructuring is ongoing. As part of this prophylactic restructuring regime, the recommendation proposes a restructuring plan or proposal to be adopted by a majority of creditors prescribed by law, which upon confirmation by the court binds all creditors. Finally, because “new money” will be necessary to enable the debtor work its way out of distress, the Recommendation provides that financing for the implementation of the restructuring plan should be protected from being declared void, voidable or unenforceable in any court proceedings. Also, criminal or civil proceedings may not be instituted so far as there is no fraud involved.

There is indeed no better time to undertake the much needed reform of Nigeria’s insolvency law regime, with a special focus not only on the rescue of viable distressed businesses but through the provision of a preventive restructuring framework. Indeed, reforms of insolvency laws in many parts of the world were undertaken in critical times as these. The point has to be made here that the claim is not that a preventive business rescue framework holds all of the answers to business failures. However, it guarantees that, other things being equal, if troubled businesses are allowed access to a formal restructuring framework at the earliest possible time, it may go a long way in helping such businesses stay out of insolvency and provide enhanced value for all stakeholders in the long run.

Sanford Mba is currently a doctoral candidate in the International Business Law (IBL) program at the Central European University, Budapest, Hungary.