PAPER SERIES VI – COMPANY VOLUNTARY ARRANGEMENTS

04/01/2021

I. Introduction

Another veritable means of corporate financing is through the internal restructuring or re-organisation of the company. Under the repealed Companies and Allied Matters Act, 1990[1]there were provisions on arrangement and compromise, arrangement on sale and these forms of corporate restructuring are retained in the new company's legislation.

Innovatively, the Companies and Allied Matters Act, 2020 ("the Act") now has provisions on Company Voluntary Arrangements, Arrangement and Compromise. This Paper Series VI deals with company voluntary arrangement which essentially is a procedure that allows a company to settle debts by paying only a proportion of the amount that it owes to creditors and to come to some other arrangement with its creditors over the payment of its debts.[2] It examines the statutory provision on proposing an arrangement, summoning of meetings, consideration, and implementation of the proposal.

II. Proposing an Arrangement and Procedure Where Nominee is not the Liquidator or Administrator.

The Act provides that a voluntary arrangement can take place when the directors of a company make a proposal under the Act to its creditors for a composition in satisfaction of its debts or scheme of arrangement of its affairs.[3]

A proposal under the Part of the Act dealing with Company Voluntary Arrangements[4] is one that provides for some person ("the nominee") to act in relation to the voluntary arrangement either as trustee or otherwise for the purpose of supervising its implementation and the nominee shall be a person who is qualified to act as an insolvency practitioner in relation to the company.[5] Such a proposal maybe made where (a) an administration order is on force in relation to the company, by the administrator; and (b) the company is being wound up, by the liquidator.

A. Procedure Where Nominee is not the Liquidator or Administrator

Section 435(1) of the Act provides that Section 435 shall apply where the nominee under section 434 is not the liquidator or administrator of the company.

The nominee shall within 28 days or such longer period as the court may allow after he is given notice of the proposal for a voluntary arrangement submit a report to the Court stating (a) whether in his opinion meetings of the company and of its creditors shall be summoned to consider the proposal; and (b) if, in his opinion, such meeting should be summoned, the date on which and time and place at which he proposes the meetings to be held.[6]

For the purposes of enabling the nominee to prepare his report, the person intending to make the proposal shall submit to the nominee - (a) a document setting out the terms of the proposed voluntary arrangement and (b) a statement of the company's affairs containing - (i) particulars of its creditors, its debts and other liabilities and of its assets as may be prescribed and (ii) other information as may be prescribed.[7] Section 435(4) of the Act specifics that the Court may on an application made by the person intending to make the proposal, in a case where the nominee failed to submit the report required by this section, direct that the nominee be replaced as such by another person qualified to act as an insolvency practitioner in relation to the company.

B. Summoning of Meetings

A proposal may also be made where the nominee is (a) not the liquidator or administrator, and it has been reported to the Court that such meetings should be summoned, the person making the report shall (unless the Court otherwise directs) summon those meetings for the time, date and place proposed in the report; and (b) the liquidator or administrator, he shall summon meetings of the company and its creditors to consider the proposal for such a time, date and place as he thinks fit.[8] Section 436(2) of the Act requires that the person to be summoned to a creditor's meeting under this section are every creditor of the company of whose claim and address the person summoning the meeting is aware.

III. Consideration and Implementation of Proposal

A. Decision of Meetings

By virtue of Section 437 of the Act, the meeting summoned shall decide whether to approve the proposed voluntary arrangement with or without modifications. The modification may include conferring the functions proposed to be conferred on the nominee on another person qualified to act as an insolvency practitioner in relation to the company but shall not include any modification by virtue of which the proposal ceases to be a proposal such as is mentioned in section 434.

A meeting so summoned shall not approve any proposal or modification which affects the right of a secured creditor of the company to enforce his security except with the concurrence of the creditor concerned.[9] A meeting so summoned shall not approve any proposal or modification under which - (a) any preferential debt of the company is to be paid otherwise than in priority to such of its debts as are not preferential debts; or (b) a preferential creditor of the company is to be paid an amount in respect of a preferential debt that bears to that debt a smaller proportion than is borne to another preferential debt by the amount that is to be paid in respect of that other debt provided that the meeting may approve such a proposal or modification with the concurrence of the preferential creditor concerned.[10]

Section 437(5) of the Act states that subject to the provisions of Section 437, each of the meetings shall be conducted in accordance with the rules. After the conclusion of either meeting in accordance with the rules, the chairman of the meeting shall report the result of the meeting to the Court, and immediately after reporting to the Court, shall give notice of the result of the meeting to such person as may be prescribed.[11]

B. Approval of Arrangement

With respect to the approval of a proposed voluntary arrangement, Section 438 of the Act applies.

The decision has effect if, in accordance with the rules (a) it has been taken by both meetings summoned under section 436; or 9b) subject to any other made under subsection (4) it has been taken by the creditors' meeting summoned under that section. If the decision taken by the creditors' meeting differs from that taken by the company meeting, a member of the company may apply to the Court.[12]

An application under Section 438(3) of the Act shall not be made after the end of 28 days beginning with (a) the day on which the decision was taken by the creditors' meeting; or (b) where the decision of the company meeting was taken on a later day, that day.

On an application under subsection (3), the Court may (a) order the decision of the company meeting to have effect instead of the decision of the creditors' meeting; or (b) make such other order as it deems fit.[13]

C. Effect of Approval

Section 439 of the Act applies where a decision approving a voluntary arrangement has effect under Section 437 of the Act. The order of the Court that the decision of the company meeting should have effect instead of the decision of the creditors' meeting (a) takes effect as if made by the company at the creditors' meeting and (b) binds every person who, in accordance with the rules - (i) was entitled to vote at that meeting (whether or not he was present or represented at it) or (ii) would have been so entitled if he had notice of it as if he were a party to the voluntary arrangement.[14]

Section 439(3) of the Act requires that where the arrangement (a) ceases to have effect, any amount payable under the arrangement to a person bound by virtue of subsection (2)(b)(ii) has not been paid and (b) did not come to an end prematurely, the company shall at that time become liable to pay to that person the amount payable under the arrangement.

Where the company is being wound up or is in administration, the court may - (a) by order stay all proceedings in the winding-up or provide for the appointment of the administrator to cease to have effect; or (b) give such direction with respect to the conduct of the winding-up or the administration as it considers appropriate for facilitating the implementation of the order of the Court that the decision of the company meeting should have effect instead of the decision of the creditors' meeting on the voluntary arrangement.[15] The Court shall not make an order under Section 439(4)(a) of the Act (a) at any time before the end of 28 days beginning with the first day on which each of the reports required by section 435(2) has been made to the Court; or (b) at any time when an application under section 435(4) or an appeal in respect of such an application is pending, or at any time in the period within which such an appeal may be brought.

D. Challenge of Decisions

Subject to section 440 of the Act, an application to the Court may be made by any of the person specified in subsection (2) on the ground that - (a) a voluntary arrangement which has effect under section 437 unfairly prejudices the interest of a creditor, member, or contributory of the company; or (b) there has been some material irregularity at or in relation to either of the meetings.[16]

Pursuant to Section 440(2) of the Act, the person who may apply under subsection (1) of Section 440 are (a) persons entitled in accordance with the rules, to vote at either of the meetings; (b) persons who would have entitled in accordance with the rules to vote at the creditors' meeting if they had notice of it; (c) the nominees or person who replaced them under section 435(4) or 437 (2) and (d) if the company is being wound up or is in administration, the liquidator or administrator. An application under this section shall not be made - (a) after the end of 28 days beginning with the first day on which each of the reports required under section 435(2) has been made to the Court, or (b) on which each of the reports required by Section 435 (2) has been made to the Court but (subject to that) an application made by a person within this subsection on the ground that the voluntary arrangement prejudices his interests may be made after the arrangement has ceased to have effect unless it came to amend prematurely.[17]

Where on such an application the Court is satisfied as to either of the grounds mentioned in subsection (1), it may - (a) revoke or suspend any decision approving the voluntary arrangement which has effect under section 437 or in a case falling within subsection (1) (b) any decision taken by the meeting in question which has effect under that section; or (b) given a direction to any person for the summoning of further meetings to consider any revised proposal, the person who made the original proposal may make or in the case falling within subsection (1)(b) a further company or creditors' meeting to reconsider the original proposal.[18] Where the Court, on an application under this section with respect to any meeting (a) given a direction under subsection (4) (b), or (b) revokes or suspends an approval under subsection (4)(a) or (5) the court may give such supplemental directions as it deems fit and in particular, direction with respect to things one under the voluntary arrangement since it took effect. Except as provided in this section, a decision take at a meeting summoned under section 436 is not invalidated by any irregularity at or in relation to the meeting.[19]

False Representation

If for the purpose of obtaining the approval of the members or creditors of a company to a proposal for a voluntary arrangement, a person who is an officer of the company- (a) makes any false representation, or (b) fraudulently does or omit to do anything he commits an offence.[20] Section 441 (2) states that a person who contravenes subsection (1) commits an offence and is liable on conviction to imprisonment for a term of one year or a fine as the Court deems fit or both.

E. Implementation of Proposal

Section 442 of the Act applies where a voluntary arrangement approved by the meetings summons under section 436 has taken effect.

The person who performs, in relation to the voluntary arrangement, the functions conferred by virtue of (a) the approval on the nominee or (b) section 435 (4) or 437 (3) on a person other than the nominee shall be known as the supervisor of the voluntary arrangement.[21] If any of the company's creditors or any other person is dissatisfied by any act, omission or decision of the supervisor, he may apply to the Court and on the application, the Court may - confirm, reverse or modify any act or decision of the supervisor; give him directions; or make such other order as it deems fit.[22] Section 442 (4) of the Act states that the supervisor may apply to the Court for directions in relation to any particular matter arising under the voluntary arrangement and is included among the persons who may apply to the Court for the winding-up of the company or for an administration order to be made in relation to it.

Section 442(5) of the Act empowers the court to whenever it is - (a) expedient to appoint a person to perform the functions of the supervisor, and (b) inexpedient, difficult, or impracticable for an appointment to be made without the assistance of the Court; make an order appointing a person who is qualified to act as an insolvency practitioner in relation to the company, either in substitution for the existing supervisor or to fill a vacancy. The power conferred by Section 442(5) is exercisable so as to increase the number of persons performing the functions of supervisor or where there is more than one person performing those functions, so as to replace one or more of those persons.[23]

IV. Conclusion

Company Voluntary Arrangement is new in Nigerian corporate practice having been statutorily introduced by the Companies and Allied Matters Act, 2020 and it is yet to be tested and its success proven in Nigeria. It is believed that Nigerian companies exploring the prospective of restructuring their debts, would now have Company Voluntary Arrangement as one of the corporate financing options to consider.

Importantly, it should be noted that Company Voluntary Arrangement is provided for in the United Kingdom Insolvency Act, 1986 and has been successfully used on a number of occasions as a debt restructuring option by several UK companies. These successes recorded by companies in England and Wales would serve as a good guide for Nigerian companies desirous of exploring the uncharted seas of Company Voluntary Arrangement in Nigeria. 

AuthorIkemefuna Stephen Nwoye, LL.B(ESUST, Ebeano City) 2010, B.L(NLS, Lagos) 2011, LL.M in International Business Regulation, Litigation and Arbitration (NYU, New York) 2014. A Barrister and Solicitor of the Supreme Court of Nigeria with expertise in the areas of banking & finance, mergers & acquisitions, international trade & law, and dispute resolution. This paper should not in anyway serve as a substitute for legal advice or opinion. The views expressed are personal to the author and do not necessarily reflect the views of any organisation or person that the author is or might have been affiliated to.

[1] See Sections 537 to 540 of the Companies and Allied Matters Act, 1990 (repealed).

[2] Company Voluntary Arrangements (CVAs): A Quick Guide by Practical Law Restructuring and Insolvency - https://uk.practicallaw.thomsonreuters.com/9-385-9881?transitionType=Default&contextData=(sc.Default)&firstPage=true accessed on 26 March 2021; Comparatively, see also Part 1 of the United Kingdom Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 amended in 2017.

[3] Section 434 of the Act.

[4] Part B: Incorporation of Companies and Incidental Matters.

[5] Section 434 (2) of the Act.

[6] Section 435 (2) of the Act.

[7] Section 435 (3) of the Act.

[8] Section 436 (1) of the Act.

[9] Section 437(3) of the Act.

[10] Section 437 (4) of the Act.

[11] Section 437(6) of the Act.

[12] Section 438 (2) and (3) of the Act.

[13] Section 438 (5) of the Act.

[14] Section 439 (2) of the Act.

[15] Section 439 (4) of the Act.

[16] Section 440 (1) of the Act.

[17] Section 440 (3) of the Act.

[18] Section 440 (4) of the Act.

[19] Section 440(7) of the Act.

[20] Section 441 (1) of the Act.

[21] Section 442 (2) of the Act.

[22] Section 442 (3) of the Act.

[23] Section442 (6) of the Act.