PAPER SERIES VII - ARRANGEMENTS AND COMPROMISE
Some important forms of corporate financing or restructuring in the new Companies and Allied Matter Act, 2020 ('the Act') are arrangement and compromise and arrangement on sale with remarkable innovative provisions on their application under the new corporate legislation. As forms of corporate financing or restructuring, these are business rescue mechanisms aimed at salvaging a company and possibly returning it to economic profitability and efficiency. It has been maintained that the terms 'compromise' and 'arrangement' are not synonymous and that an agreement that enables the majority of the creditors to accept less than is due to them may be a compromise on the part of the creditor as a whole, but where the shareholders do not give up anything, no compromise as such is involved, but only an arrangement results from a transaction.
Paper Series VII discusses Arrangement or compromise between two or more companies, the provisions applicable to schemes or contract involving the transfer of shares in a company, the provisions applicable to dissenting shareholders. Further, the Paper Series considers Arrangement on sale of company's property during members' voluntary winding-up, power to compromise with creditors and members and then the moratorium on creditors voluntary winding-up in a scheme of arrangement.
II. Forms of Arrangements
A. Arrangement or Compromise Between Two or More Companies
Where under a scheme proposed for a compromise, arrangement or reconstruction between two or more companies or the merger of any two or more companies, the whole or any part of the undertaking or the property of any company concerned in the scheme (in this section referred to as "the transfer of company") is to be transferred to another company, the Court may on the application in summary of any of the companies to be affected, order separate meetings of the companies to be summoned in such manner as the Court may direct.
If a majority representing at least three-quarter in value of the share of members being present and voting either in person or by proxy at each of the separate meetings, agree to the scheme, an application may be made to the Court by one or more of the companies and the Court shall sanction the scheme. Section 711(3) of the Act specifies that when the scheme is sanctioned by the Court, it becomes binding on the companies an the Court may, by the order sanctioning the scheme or by any subsequent order, make provision for - (a) the transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company; (b) the allotting or appropriation by the transferee company of shares, debentures, policies or other like interest in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person; (c) the continuation by or against the transferee company of legal proceedings pending by or against any transferor company; (d) the dissolution, without winding-up of any transferor company;(e) the provision to be made for any persons who in such manner as the court may direct, dissent from the compromise or arrangement; and (f) such incidental, consequential and supplemental matter as are necessary to secure that the reconstruction or merger shall be fully and effectively carried out.
Section 711(4) direct that an order under subsection (3)(d) shall not be made unless (a) the whole of the undertaking and the property, assets and liabilities of the transferor company are being transferred into the transferee company; and (b) the Court is satisfied that adequate provision by way of compensation or otherwise have been made with respect to the employee of the company to be dissolved. Where an order under Section 711 of the Act provides for the transfer of property or liabilities, that property or liabilities shall, by virtue of the order, be transferred to and become the property or liabilities of the transferee company, and in the case of any property, if the order so directs, freed from any charge which is by virtue of the compromise or arrangement to cease to have an effect.
Section 711(6) of the Act, requires that when an order is made pursuant to Section 711 of the Act, every company in relation to which the order is made shall cause an office copy of the order to be delivered to the Commission for registration within seven(7) days after the making of the order and a notice of the order shall be published in the Federal Government Gazette and in at least one national newspaper and if in default shall be liable to a fine in such amount as may be prescribed by the Commission in its regulations.
B. Provisions Applicable to Scheme or Contract Involving Transfer of Shares in a Company
A transaction that involves a scheme or contract, not being a take-over bid under the Investment and Securities Act involving the transfer of shares or any class of shares in a company to another company is subject to Section 712 of the Act, 2020. Section 712(1) of the Act states that in such a transaction, the transferee company has within four (4) months after the making of the offer on that behalf by the transferee company been approved by the holders of at least nine-tenth in value of the shares of the company (other than shares already held at the date of the offer by a nominee for the transferee company, or its subsidiary), the transferee company may at any time within two months after the expiration of the said four months give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares.
When a notice under Section 712(1) is given, the transferee company is, unless on an application made by the dissenting shareholder within one month from the date on which the notice was given and unless the Court deems fit to order otherwise entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholder are to be transferred to the transferee company.
Section 712(3) of the Act, requires that where shares in the transferor company of the said class or classes as the shares whose transfer is involved are already held as specified in subsection (1) to a value greater than one-tenth of the aggregate of their value and that of the share (other than those already held as specified in that subsection) whose transfer is involved, the provisions of this section do not apply unless - (a) the transferee company offers the same terms to all holders of the shares (other than those already held) whose transfer is involved, or where those shares include shares of different classes of each class of them; and (b) the holders who approve the scheme or contracts besides holding at least nine-tenth in value of the shares (other than those already held as aforesaid) whose transfer is involved, shall be at least three-quarters in the number of the holders of those shares.
Where a notice has been given by the transferee company under subsection (1) and the Court has not, on an application made by the dissenting shareholder, order to the contrary, the transferee company shall - (a) on the expiration of one month from the date on which the notice has been given or if an application to the Court by the dissenting shareholder is then pending after that application has been disposed of, transmit a copy of the notice to the transferor company together with an instrument of transfer executed on behalf of the shareholder by any person appointed by the transferee company and on its behalf by the transferee company; and (b) pay or transfer to the transferor company the amount or other consideration representing the price payable by the transferee company for the shares which by virtue of this section that company is entitled to acquire, and the transferor company shall thereupon register the transferee company as the holder of those shares.
Any sum received by the transferor company under this section shall be paid into a separate bank account and such sum and any other consideration so received shall be held by that company on trust for the several persons entitled to the shares in respect of which the said sum or other consideration were respectively received.
The Act provides for situations wherein pursuance of any scheme or contract, shares in a company are transferred to another company or its nominee, and those shares together with any other shares in the first-mentioned company held by, or by a nominee for the transferee company or its subsidiary at the date of the transfer comprise or include nine-tenth in value of the shares in the first-mentioned company or of a class of those shares.
Section 713(2) of the Act specifies that the transferee company shall within one month from the date of the transfer (unless on a previous transfer in pursuance of the scheme or contract it has already complied with this requirement) give notice of that fact in the prescribed manner to the holder of the remaining shares or of the remaining shares of that class, as the case may be, who have not assented to the scheme or contract. A holder may within three months from the giving of the notice to him requires the transferee company to acquire the shares in question.
If a shareholder gives notice under subsection (3) with respect to any share, the transferee company is entitled and bound to acquire those shares on the terms on which under the scheme or contract the shares of the approving shareholders were transferred to it, or on such other terms as may be agreed on as the Court hearing the application of either the transferee company or the shareholders deems fit.
C. Arrangement on Sale
For purposes of effecting any arrangement, a company may by special resolution resolve that the company be put into members' voluntary winding-up and that the liquidator is authorised to sell the whole or part of its undertaking or assets to another body corporate, whether a company within the meaning of this Act or not (in this section called "the transferee company") in consideration or part consideration of fully paid shares and to distribute the same in specie among the members of the company in accordance with their rights in the liquidation.
Any sale or distribution in pursuance of a special resolution under Section 714 of the Act, is binding on the company and all its members and each member shall be deemed to have agreed with the transferee company to accept the fully paid shares, debentures, policies, cash or other like interest to which he is entitled under such distribution: provided that if - (a) within one year from the date of the passing of any special resolution as is referred to in Section 714(1), an order is made under section 353 - 355 of the Act dealing with relief on the grounds of unfair prejudicial and oppressive conduct or for the arrangement for the sale and distribution shall not be valid unless sanctioned by the Court; or (b) any member of the company, by writing addressed to the liquidator and left at the registered office or head office of the company, within 30 days after the passing of the resolution, dissents in respect of any of the shares held by him, the liquidator shall either abstain from carrying the resolution into effect or shall purchase such shares at a price to be determined in the manner provided by subsection (4). Any member who fails to signify his dissent in accordance with Section 714 (2) is deemed to have accepted the resolution.
Section 714(4) of the Act states that if the liquidator elects to purchase the shares of any member who has expressed his dissent in accordance with subsection (2) the price payable shall be determined by agreement in the case of a private company in which aliens do not participate, and in the case of a public company or a private company in which aliens participate, by the Securities and Exchange Commission. Provided that in the case of a private company in which no alien participate - (a) such price is determined by estimating what the members concerned would have received had the whole of the undertaking of the company been sold as a going concern for cash to a willing buyer and the proceeds, less the cost of winding-up, been divided amongst the members in accordance with their rights; and (b) the purchase money is paid by the company before the company is dissolved and be raised by the liquidator or, in default of any direction in special resolution, in such manner as he may thin fit as part of the expenses of the winding-up. Nothing contained in Section 714 authorises any variation or abrogation of the rights of any creditor of the company.
Section 714 (6) of the Act, further directs that if any company, otherwise than under this section, sells or resolves to sell the whole or part of its undertaking or assets to another body corporate in consideration or part consideration of any shares, debentures, policies or other like interest in that body corporate and resolves to distribute the same in specie among members of the company (whether in liquidation or by way of dividend) any member of the company may by notice in writing address to the company and left at the registered office or head office of the company within 30 days after the passing of the resolution authorising such distribution, require the company either to abstain from carrying the resolution into effect or to purchase any of his shares at a price to be determined in the manner provided by subsection (4). Nothing contained in this subsection authorises any company to purchase its share or make any distribution to its shareholders except in accordance with the provisions of this Act.
D. Compromise with Creditors and Members
Where a compromise or arrangement is proposed between a company and its creditors or any class of them, the Court may on the application, in a summary way, of the company or any of its creditors or members or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of creditors, or of the members of the company, or class of members, as the case may be, to be summoned in such a manner as the Court directs.
Section 715(2) of the Act requires that if a majority representing at least three quarters in value of the shares of members or class of members, or of the interest of creditors or class of creditors, as the case may be, being present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement may be referred to by the Court to the Securities and Exchange Commission which shall appoint one or more inspectors to investigate the fairness of the compromise or arrangement and to make a written report on it to the court within a time specified by the Court. Subsection (3) states that if the court is satisfied as to the fairness of the compromise or arrangement, it shall sanction the same and the compromise or arrangement shall be binding on all the creditors or the class of creditors or on the members or the class of members as the case may be, and also the company or in the case of a company in the course of being wound up on the liquidator and contributories of the company.
An order made under subsection (3) shall have no effect until a certified true copy of the order has been delivered by the company to the Commission for registration and a copy of every order shall be annexed to every copy of the memorandum of the company issued after the order has been made. In the event a company defaults in complying with subsection (4), the company and each officer of the company is liable to a penalty as prescribed by the commission in the regulations.
Information as to Compromise
Section 716(1) of the requires that where a meeting of creditors or any class of creditors or of members is summoned under Section 715 of the Act, there shall - (a) with every notice summoning the meeting which is sent to a creditor or member, be sent also a statement explaining the effect of the compromise or arrangement and in particular stating any material interests of the directors of the company, whether as directors or as members or as creditors of the company or otherwise; and the effect of the compromise or arrangement in so far as it is different from the effect on the like interest of other persons; and (b) in every notice summoning the meeting which is given by advertisement, be included such a statement or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement.
Where the compromise or arrangement affects the rights of debenture holder(s) of the company, the statement shall give the like explanation as respects the trustee of any deed for securing the issue of the debenture as it is required to give as respects the company's directors. When a notice given by advertisement includes a notification that copies of a statement explaining the effects of the compromise or arrangement proposed can be obtained by creditors or members entitled to attend the meeting every such creditor or member shall on making application in the manner indicated by the notice be furnished by the company free of charge with a copy of the statement.
Where a company makes default in complying with any requirement of this section, the company and every officer of the company are liable to a penalty as prescribed by the Commission in the regulations and for the purpose of this subsection any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company. Provided that a person is not liable under this subsection if that person shows that the default was due to refusal of any other person, being a director or trustee for debenture holders, to supply the necessary particulars as to his interests.
It should be noted that a director of the company and any trustee for debenture holders of the company shall give notice to the company of such matter relating to himself as may be necessary for the purpose of this section, and any person who defaults in complying with this subsection is liable to a penalty as prescribed by the Commission in the regulation.
III. Moratorium on Creditors Voluntary Winding-up in a Scheme of Arrangement.
No winding-up petition or enforcement action by a creditor (secured or unsecured) shall be entertained against any company or its assets, when the company has commenced a process of arrangement and compromise with its creditors for six months, from the time that the company by way of affidavit provides the following documents to the Court - (a) a document setting out the terms intended to be proposed to the creditors in an arrangement or compromise; (b) a statement of the company's affairs containing the particular of the company's creditors and its debts and other liabilities and of its assets; (c) such other information as the Court may require; and (d) a statement that the company desires a protection from a winding-up process pending the completion of the arrangement or compromise.
Notwithstanding the provisions of subsection (1), a secured creditor may, by application to the Court filed within 30 days of notice of the arrangement and compromise, discharge the six months moratorium period provided in subsection (1) if - (a) the asset of the company sought to be enforced by the creditor does not form part of the company's pool of asset to be considered under the arrangement and compromise proceeding; (b) the asset sought to be enforced by the creditor is a perishable goods or commodities which may depreciate or dissipate before expiration of the six moratorium period; (c) the secured creditor enforce its security over the assets before receiving notice of the company's proposed arrangement and compromise; or (d) the company consents in writing for a secured creditor to enforce its right over the company's asset within the six months moratorium period: Provided that the Company upon the approval or consent shall file a further affidavit updating the Court of the dissipation of the said asset.
The provisions of the Companies and Allied Matters Act, 2020 on Arrangements and Compromise are unique and innovative, especially when these provisions are viewed from the perspective of having set out a well-defined procedure by which various schemes or corporate restructuring transactions can be implemented.
Significantly, a scheme of arrangement can be
implemented between two or more companies pursuant to Section 711 of the Act, 2020
and this will simply involve a process of obtaining requisite orders from the Court
approving or sanctioning the scheme and subsequent returns to the Corporate
Affairs Commission for registration of the order. There is no doubt that
private companies will find this process more costs effective and less subject to
regulatory scrutiny in comparison to the process under Section 715 of the Act,
2020 where the scheme is referred to the Securities and Exchange Commission for
purposes of determining the fairness of the scheme.
Author: Ikemefuna 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 Federal Republic of Nigeria with expertise in the areas of banking & finance, mergers & acquisitions, international law & trade policies 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.
 Anthony Ikemefuna Idigbe, SAN et al., Scheme of Arrangement as a Business Rescue Tool available at https://www.internationallawoffice.com/Newsletters/Insolvency-Restructuring/Nigeria/Punuka-Attorneys-Solicitors/Scheme-of-arrangement-as-a-business-rescue-tool.
 Hon. Dr. J Olakunle Orojo, Company Law and Practice in Nigeria, (Lexis Nexis Fifth Edition) pg.335. Statutorily, Section 710 of the Act, 2020 defines "arrangement" to mean any change in the rights or liabilities f members, debenture holders or creditors of a company or any class of them or in the regulation of a company, other than a change effected under any other provision of the Act or by the unanimous agreement of all parties affected.
 For purposes of Section 711 of the Act, Section 711(7) serves as the definition section. In the section (a) "property" includes property rights and powers of every description; (b) "liabilities" includes rights, powers and duties of every description notwithstanding that such rights, powers and duties are of a personal character which could not generally be assigned or performed vicariously; and (c) "Company" where used in this section does not include any company other than a company within the meaning of this Act.
 Section 711(1) of the Act.
 Section 711 (2) of the Act.
 Section 711(5) of the Act.
 For purposes of Section 712, subsection (6) states that "dissenting shareholder" includes a shareholder who has not assented to the scheme or contract and any shareholder who has failed or refused to transfer to the transferee company in accordance with the scheme or contract.
 Section 712 of the Act is impari materia with Section 129 of the Investments and Securities Act, 2007.
 Section 712 (2) of the Act.
 Section 712 (4) of the Act.
 Section 712 (5) of the Act.
 see also Section 130 of the Investments and Securities Act, 2007
 Section 713 of the Act.
 Section 713 (3) of the Act.
 Section 713 (4) of the Act.
 Section 714 of the Act.
 Section 714 (2) of the Act.
 Section 714 (2) (a) and (b) of the Act.
 Section 714 (3) of the Act.
 Section 714 (5) of the Act.
 Section 714 (7) of the Act.
 For purposes of Sections 715 and 716 of the Act, "Company" means any company liable to be wound up under the Act.
 Section 715 (1) of the Act.
 Section 715(4) of the Act.
 Section 716 (2) of the Act.
 Section 716 (3) of the Act
 Section 716 (4) of the Act.
 Section 716 (5) of the Act.
 Section 717 (1) of the Act.
 Section 717(2) of the Act.