Business rescue mechanisms under CAMA 2020 and BOFIA 2020: a business case for distressed M&A

May 2023 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING

financierworldwide.com

The recent failures of Silicon Valley Bank and Signature Bank in the US have focused attention on insolvency regimes and business recovery mechanisms across jurisdictions. In Nigeria, the insolvency regime for companies is primarily regulated by the provisions of the Companies and Allied Matters Act 2020 (CAMA 2020).

Prior to CAMA 2020, Nigeria’s insolvency regime was liquidation oriented and only provided limited business rescue options for distressed entities, such as arrangements and compromise. However, CAMA 2020 introduced salient business rescue options including company voluntary arrangement (CVA) and administration.

Under chapter 17 of CAMA 2020, a company may make a proposal through its director, liquidator or administrator, as the case may be, and enter into a binding arrangement with all its unsecured creditors in respect of the restructuring and payment of outstanding debt in a bid to forestall liquidation. This arrangement, popularly referred to as a CVA, helps a distressed entity manage its cash flow insolvency and does not require prolonged court or regulatory engagement as it is supervised by an insolvency practitioner, save where there are judicial challenges to the CVA proposal.

Where the proposal is approved at both the court-ordered creditors’ meeting and members’ general meeting, the proposal becomes effective and binding on all unsecured creditors. However, a CVA cannot compromise the rights of a secured creditor without his express consent and is limited with respect to the treatment of preferential debt and creditors. Therefore, secured and preferential creditors can defeat the object of the arrangement by immediately proceeding with enforcing their rights. Another drawback of this business rescue mechanism is that it does not provide any automatic statutory moratorium which wards-off immediate enforcement by the creditors pending the effective date of the arrangement.

Another business rescue innovation introduced by CAMA 2020 is administration. Here, an insolvency practitioner is appointed to act as administrator of a distressed company in order to manage the company’s business, affairs and assets with the primary aim of rescuing all or part of its undertaking as a going concern. However, if rescue is not practicable, the administrator is responsible for achieving a better result for the company’s creditors and selling assets to make distributions to secured and preferential creditors.

Administration affords a company some protection from its creditors enforcing their debts against it and it makes for a good business rescue mechanism because once the appointment of an administrator is in effect, no steps may be taken to enforce any security over the company’s property nor can any legal action be instituted or continued against the company or its property, except with the permission of the court or the consent of the administrator (section 480 of CAMA 2020). As such, the administrator is able to implement business rescue efforts without being sidetracked by the looming insolvency claims of various creditors.

Notwithstanding the benefits of an administration, certain companies cannot take advantage of the mechanism by virtue of sections 447(4) and (5) of CAMA 2020. These include commercial banks, insurance companies (without the approval of the National Insurance Commission), and non-authorised deposit takers within the meaning of banking laws and regulations.

It is important to state, however, that Nigeria has a modified insolvency regime as the insolvency provisions under CAMA are subject to the insolvency provisions of other specialised legislation, where expressly provided. For example, the Banks and Other Financial Institutions Act (BOFIA) 2020, which primarily governs the establishment of banks, banking operations and ancillary activities in Nigeria, empowers the Central Bank of Nigeria (CBN) to supervise and regulate the management, restructuring and insolvency of banks and other financial institutions. BOFIA further provides under section 53 that where there is a conflict between its provisions and that of CAMA 2020, the provisions of BOFIA shall prevail.

Under BOFIA, additional business rescue mechanisms were introduced, such as the asset separation tool under section 41, which isolates the ‘bad’ assets of the bank into an asset management vehicle for an orderly wind down if immediate liquidation is not justified in current market conditions. BOFIA also introduced the sale of business tool under section 42 which empowers the CBN to sell all or part of the securities or other assets of a failing bank to a third party without the consent of the failing bank’s shareholders.

As a case in point, in 2018 the CBN revoked the banking licence of Skye Bank Plc due to its inability to recapitalise despite receiving a capital injection. Consequently, in accordance with section 39 of the Nigerian Deposit Insurance Corporation Act, 2006, Polaris Bank was created as a bridge bank, for the purpose of assuming certain assets and liabilities of the failed Skye Bank and continuing its business operations pending acquisition by a strategic and financial investor.

The bridge bank rescue mechanism was first utilised by the CBN during the 2009-10 banking crisis which led to the creation of three bridge banks, Keystone Bank, Mainstreet Bank and Enterprise Bank, to assume certain assets and liabilities of Bank PHB Plc, AfriBank Plc and Spring Bank Plc, respectively, which were subsequently sold. In 2022, the CBN, further to an auction process, announced the sale of Polaris Bank to Strategic Capital Investment Limited (SCIL) for a total sum of NGN50bn and an undertaking by SCIL to repay the consideration bonds injected by the CBN.

Aside from the business rescue options introduced under CAMA and BOFIA, distressed companies can explore viable commercial arrangements in the form of corporate restructuring, when the company is on the cusp of insolvency. One such option is distressed M&A.

Distressed M&A is a subset of traditional M&A which essentially aims to save or pull a distressed entity out of insolvency through various forms of business combination or transfer, and provides the dual utility of serving as a business rescue mechanism and an attractive business opportunity for financial and strategic investors. The process for a distressed M&A depends on a number of factors ranging from the parties involved, how close the company is to insolvency, the existence of an insolvency proceeding, the optimal deal structure to tax considerations.

A distressed M&A transaction could be structured as an asset deal where the distressed company sells off its non-core assets, or the strategic or financial investor cherry-picks assets not encumbered with legacy debt. It could also be structured as a share deal where the strategic or financial investor acquires the distressed company below the market value in view of its liabilities, or acquires it for peppercorn, with no capital gain tax obligation and assumes responsibility over existing liabilities.

A distressed transaction could also entail a merger with a strategic investor with the necessary dry powder, or an arrangement where the liabilities owed by the distressed company to its creditors are reclassified and converted to shares in the distressed company, thereby reducing the company’s balance sheet liability.

Where the company is not involved in any formal insolvency process and is approaching but not faced with the immediate threat of insolvency, it will have some breathing space to negotiate restructuring options with standard provisions typical in a traditional M&A deal. At this stage, the company can negotiate a flipping protection anti-embarrassment provision in the transaction document, which will entitle it to receive an additional payment from the purchaser, where the purchaser sells off the assets or business to another third party at a significantly higher price within an agreed period from the date of the transaction. However, parties must ensure that the distressed M&A arrangement effected at this stage does not amount to fraudulent preference or fraudulent trading under sections 658 and 672 of CAMA 2020 respectively.

Where the company is faced with an immediate threat of insolvency or is involved in a formal insolvency process, a distressed M&A process can still be pursued albeit under the stter of an insolvency practitioner, relevant regulatory authorities or supervision of the court. It might entail the execution of a standstill agreement with creditors, and a composite process of negotiation and documentation in order to adequately balance the interests of creditors, shareholders and other stakeholders, and might involve the participation of regulators, the court and creditors.

Innovations under CAMA 2020 and the BOFIA have provided the Nigerian business ecosystem with adequate business rescue tools and mechanisms to preserve and rejuvenate the corporate existence and operations of businesses as going concerns while safeguarding the interests of creditors and other relevant stakeholders.

Parties may also adopt creative and pragmatic commercial solutions as they approach insolvency, such as distressed M&A, thereby securing their interests and rescuing their business from the jaws of imminent liquidation.

Anu Balogun is a partner and Akinwunmi Ajiboye and Nsikan Efo are associates at Olaniwun Ajayi LP. Ms Balogun can be contacted on +234 1 270 2551 or by email: abalogun@olaniwunajayi.net. Mr Ajiboye can be contacted on +234 1 270 2551 or by email: aajiboye@olaniwunajayi.net. Ms Efo can be contacted on +234 1 270 2551 or by email: nefo@olaniwunajayi.net.

Anu Balogun, Akinwunmi Ajiboye and Nsikan Efo

Olaniwun Ajayi LP