Analysis of Insolvency-Related Revisions to BOFIA 2020 (Part 1)
The Banking and Other Financial Institutions Act, 2020 (BOFIA 2020) was assented to law on 13 November, 2020. BOFIA 2020 repealed the Banking and Other Financial Institutions Act 1991 (BOFIA 1991), which had been previously amended in 1997, 1998, 1999 and 2002. This three-part discourse examines revisions by BOFIA 2020, to Nigeria’s bank resolution and insolvency legal framework.
Restructuring, Reorganisation, Merger and Disposal of Banks
In relation to reconstruction, merger, disposal of banks and related transactions/arrangements, BOFIA 2020 has revised Section 7(1)(d) of BOFIA 1991 by adding “restructuring” and “reorganisation” to reconstruction. Given that restructuring, reorganisation and reconstruction are frequently used interchangeably in resolution/insolvency circles, the utility of this revision may not be significant. Besides, Section 7 of the repealed BOFIA 1991 was titled “restructuring, reorganisation, mergers, disposal etc. of banks”.
The following significant revisions have also been made to Section 7:
a. Section 7(2) empowers the CBN, upon an application by a bank desiring to engage in a transaction/arrangement listed in Section 7(1), to order the summoning of separate meetings of the banks. Whilst BOFIA 1991 was silent on the consequence of non-compliance with Section 7(1) & (3), BOFIA 2020 provides that contravening transactions/arrangements are void and transfers are ineffectual, “except where such transaction is subsequently ratified in writing by the CBN.” Instructively, this “ratification” of a void transaction flies in the face of the principle that where an act is void, it cannot be validated by any subsequent valid acts: Oyeneyin v Akinkugbe (2010) LPELR-2875(SC) at pg. 20D-F; Military Administrator, Benue State v Ulegede (2001) LPELR-3184(SC) at pg. 35E-G.
b. Section 7(4) provides that the CBN may only approve an arrangement/transaction under Section 7(1) if it is satisfied that (i) the arrangement/transaction is not likely to cause a restraint of competition or create a monopoly in the banking industry, (ii) significant shareholders or directors of the bank emerging from the arrangement/transaction are not those disqualified under Section 47 of BOFIA, (iii) the arrangement/transaction is consistent with public interest, and (iv) the bank emerging from the arrangement/transaction meets the prescribed capital requirements.
c. Section 7(5) provides that, where CBN grants a new banking licence to a bank which emerges from an arrangement/transaction under Section 7(1), the assets and liabilities of the banks shall be transferred to the newly licensed bank.
d. Section 7(6) provides that the provisions of BOFIA 2020 shall apply notwithstanding the provisions of the Federal Consumer and Competition Protection (FCCP) Act. This excludes restructuring, mergers and related transactions of banks and other financial institutions from the regulatory purview of the FCCP Act and Federal Competition and Consumer Protection Commission.
A contravention of Section 7(1) will attract a penalty of not less than N20,000,000, with an additional daily penalty of N500,000 for a continuing contravention: Section 7(7). Section 7(2) of BOFIA 1991 had criminalised contravention, with a fine not exceeding N1,000,000 and a daily penalty of N10,000 for continuing contravention. Revocation of Banking Licence
BOFIA 2020 has introduced additional grounds, for the revocation of a banking licence. One of the grounds is insolvency-related, namely; where in CBN’s opinion, a bank is critically undercapitalised with a capital adequacy ratio below the prudential minimum or such other ratio prescribed by the CBN: Section 12(1)(h).
A new Section 12(2), mandates the CBN Governor (subject to CBN’s board approval) to appoint the Nigerian Deposit Insurance Corporation (NDIC) as liquidator of a bank whose licence is revoked on the ground of public interest. In such instance, NDIC would be deemed to have been appointed by Court, and will have powers similar to those of a Court-appointed liquidator under the Companies and Allied Matters Act, 2020 (CAMA 2020). Once appointed, NDIC is required to promptly proceed with the liquidation and payment of assured deposit liabilities pursuant to the NDIC Act: Section 12(3). Challenge of Revocation of Licence
Section 12(4) of BOFIA 2020 vests the Federal High Court (FHC) with jurisdiction to entertain any challenge of revocation of banking licence. This is a surplusage, considering that Section 251(1)(d) of the 1999 Constitution already vests exclusive jurisdiction on the FHC. Section 12(4) also requires such actions and any consequent appeals to be determined on “an expedited and accelerated basis”. Section 12(5) limits the time within which an action challenging the revocation of banking licence may be commenced, to within thirty days from the date of revocation.
Foreclosing a Recurrence of the Restorative Order in Savannah Bank Plc v CBN?
Section 12(6) of BOFIA 2020 prohibits the making of any restorative order against the CBN/CBN Governor in an action relating to the revocation of a bank’s licence. The provision limits the remedy of any Claimant/ Applicant against the CBN/CBN Governor, to monetary compensation. Further, such monetary compensation is not to exceed the equivalent of the value of the bank’s paid-up capital at the time of the revocation of the licence. This revision appears to be aimed at foreclosing a recurrence of the restorative order in Savannah Bank Plc v CBN (2009) 6 NWLR (Pt 1137) 237. In that case, the Court of Appeal ordered the CBN to restore the banking licence of Savannah Bank Plc. Instructively, CBN had declined challenging that decision. The constitutionality of these provisions may be questioned, on the ground that they limit and/or preclude the judicial powers conferred on courts by Section 6 of the 1999 Constitution: NNPC v Fawehinmi (1998) 7 NWLR (Pt 559) 598 at 612E-F; Njikonye v MTN Nigeria Communications Ltd (2008) All FWLR (Pt 413) 1343 at 1369A-1369B.
Failing Banks and Rescue Tools
Four additional measures which the CBN Governor may adopt in dealing with failing banks, have been introduced under Section 34(2)(a)-(i). The CBN Governor may (i) suspend any payment or delivery obligations pursuant to any contract to which the bank is a party; (ii) require third party service providers to the bank to continue providing services to the bank for a specified period; (iii) transfer the bank or the whole or part of its banking business to private purchasers; and (iv) employ other intervention tools as the CBN may deem fit.
Section 34(3) of BOFIA 2020 embodies another novel rescue tool. It empowers CBN to acquire shares of a failing bank, up to a level that guarantees CBN’s control of the bank. The CBN is required to dispose of such equity investment, at the earliest suitable time.
Limiting the Role of NDIC in Bank Resolution
BOFIA 2020 has stripped the NDIC of its previous responsibilities (under BOFIA 1991) of assuming control, and managing failing banks. NDIC’s role is now limited to liquidating banks, whose licences have been revoked by CBN.
First, the second “Section 34(2)” in BOFIA 2020 (apparently a typographical error) is very similar to Section 35 of BOFIA 1991. Section 35 of BOFIA 1991 empowered CBN to turn control and management of a failing bank to NDIC (on terms and conditions stipulated by CBN), if the bank’s affairs failed to improve despite CBN’s rescue measures. In contrast, the second Section 34(2) of BOFIA 2020 empowers CBN to revoke the licence of the bank, before such bank is handed to NDIC for liquidation pursuant to Section 35.
Section 35 of BOFIA 2020 provides that where the licence of a bank has been revoked “pursuant to Section 39”, NDIC shall apply to the Federal High Court for a winding up of the bank’s affairs. This provision replicates Section 40 of BOFIA 1991. Unfortunately, Section 35 of BOFIA 2020 has wrongly referenced Section 39, which in BOFIA 2020 embodies provisions on moratorium and regulations during bail-in. Section 39 of BOFIA 1991 contained CBN’s power to revoke licences, hence, why Section 40 of BOFIA 1991 referenced it.
Second, BOFIA 2020 has omitted Section 37 of the repealed BOFIA 1991 which contained NDIC’s power over significantly undercapitalised banks. That provision stipulated that where NDIC assumed control over a significantly under-capitalised bank whose risk weighted assets ratio was below 5% but above 2%, NDIC could (i) require the bank to submit a recapitalisation plan within a stipulated period, (ii) prohibit the bank from extending further credit and incurring additional capital expenditure without NDIC’s approval, (iii) require the bank to do or not to do anything in relation to its business, directors or officers,(iv) remove (with CBN’s approval) any director, manager, officer or employee, and (v) appoint (with CBN’s approval) any person(s) as the bank’s director(s).
Third, BOFIA 2020 has omitted Section 38 of the repealed BOFIA 1991, which dealt with management of failing banks by NDIC. Section 38(1) of BOFIA 1991 mandated NDIC, upon assuming control of a failing bank, to remain in control and carry on the bank’s business in the name of the bank and on its behalf, as long as CBN considered necessary.
Fourth, Section 39 of BOFIA 1991 provided that where NDIC was unable to rehabilitate a failing bank which it had assumed control, NDIC may recommend to CBN other resolution measures, including the revocation of the bank’s licence. This has been omitted in BOFIA 2020.
Instructively, Section 37 of the NDIC Act 2006 empowers NDIC to financially assist troubled banks. Section 38(1) empowers NDIC, in consultation with CBN, to take any of the following steps in respect of failing banks: (i) take over management, (ii) direct specific managerial changes, (iii) arrange a merger with, or acquisition by, another bank, (iv) acquire, manage or dispose of assets, (v) take measures to secure and restructure. Given the revisions to BOFIA 2020, a speedy amendment of the NDIC Act is imperative to ensure an alignment of bank resolution provisions in the two laws.
“SECTION 12(6) OF BOFIA 2020 ...... LIMITS THE REMEDY OF ANY CLAIMANT/ APPLICANT AGAINST THE CBN/CBN GOVERNOR, TO MONETARY COMPENSATION. FURTHER, SUCH MONETARY COMPENSATION IS NOT TO EXCEED THE EQUIVALENT OF THE VALUE OF THE BANK’S PAIDUP CAPITAL AT THE TIME OF THE REVOCATION OF THE LICENCE”