You are currently viewing How CAMA 2020 protects insolvent company’s assets – Punch Newspapers

How CAMA 2020 protects insolvent company’s assets – Punch Newspapers

Insolvency proceeding in Nigeria, just like in other jurisdictions, is designed to be a collective debt collection procedure. This implies that the collective interest or rights of the creditors are preferred over individual creditor’s interest. Accordingly, a single creditor can no longer, by means of execution, obtain full payment of his claim at the expense of others; neither is the insolvent firm allowed to dissipate assets or undertake actions that will prefer a particular creditor over the others.

Despite the various provisions made by the Companies and Allied Matters Act CAP C20 LFN 2014 (CAMA 2004) to prevent a company from making certain dispositions upon commencement of winding up or even prior to that, it is not uncommon to see cases of companies dissipating or deliberately disposing of assets, often to persons related to the company, at the expense of the creditors.

Once the company becomes insolvent resulting in the appointment of an Insolvency practitioner over the company (liquidator or administrator), part of what is required of the practitioner is to trace/locate assets of the company and recover same for the benefit of all the creditors. This is because in liquidation, for instance, where essentially the company’s assets are to be sold and its debts paid to the creditors according to their rank, the liquidator will ordinarily want to swell the asset pool; because the bigger the pool of assets, the chances that unsecured creditors, who are usually at the bottom in terms of ranking, will get some form of payment.

Before now, Section 495 of CAMA 2004 made scanty provision for fraudulent preference. As provided in that section, any conveyance, mortgage, delivery of goods would, if made by or against an individual, be deemed a fraudulent preference and it will be invalid.

To claw back assets under Section 494 of CAMA 2004, therefore, the liquidator will need to show that there was a disposition made within three months prior to presentation of petition for winding up and that such disposition was made to prefer one creditor over the others. In practice, Section 494 was hardly used to claw back assets. This is mainly because the “three months prior to commencement of winding up” requirement was considered too short as major assets would have been disposed of before the three months limit, coupled with the burden of proving intention to prefer a particular creditor as envisaged under Section 495.

CAMA 2020, under sections 658 and 659, made significant improvement and expanded the old Section 495. The law declares as invalid undue or unfair preference (termed “fraudulent preference”) and empowers the court to restore assets disposed of without value or undervalued transactions, subject to the conditions stated in the law. This is in addition to other provisions, including invalidating a floating charge created within three months of commencement of winding up, unless it is proved that the company, immediately after the creation of the charge, was solvent.

In terms of Section 658 of CAMA 2020, anything done or procured to be done by the company which has the effect of putting or giving company’s creditors or a surety or guarantor undue advantage is invalid. Section 658(3) of the Act also lightened the burden of proving intention to prefer by stating that so long as the party preferred is a person connected to the company, the company is presumed to have intended to prefer that person. The implication of Section 658 is that any disposition made by the company two years before insolvency to connected persons or three months before insolvency to unconnected person can be impeached by the liquidator or administrator. Connected persons exclude employees but include directors and close relatives as well as other persons connected to the company.

Section 659 of CAMA 2020 on the other hand empowers the court to reverse transactions at undervalue. Such transactions will include gift by the company made to a third party without consideration, or assets of the company sold lower than their true value or for a loss. In any of those cases, the administrator or liquidator may apply to the court to avoid such a transaction if made within two years to the onset of insolvency, once it is shown that the company was unable to pay its debts then or becomes unable to pay its debts as a result of the transaction. Further transactions at undervalue entered into by the company between (a) the time of the filing of administration application and the making of the order by the court and (b) the time of filing of notice of intention to appoint and the actual appointment may be reversed by the court.

But sections 658 and 659 of CAMA 2020 are not entirely perfect, as one expected specific and clear definition of “connected person” under those sections and even a wider approach in view of the society we live in. Secondly, Section 658(6), in defining relevant time, ought to have clearly stated “two years” ending with onset of insolvency, although this can be inferred as intended. That said, sections 658 and 659 are transplants of sections 238 and 239 of the UK Insolvency Act 1986. The UK Act, under 240 (2), however, clearly defined “relevant time” as it applies to both fraudulent preference and transactions at under value to be two years.The UK Act further defined who a connected person is to cover (a) a director or shadow director of the company, or an associate of such a director or shadow director, or (b) an associate of the company. In addition, there are indeed many judicial pronouncements on sections 238 and 239 in the UK, which can serve as persuasive authorities for Nigerian courts in interpreting and applying our current sections 658 and 659. So, presumably, these sections will yield positive results in terms of assets tracing in Nigeria.

In conclusion, the CAMA 2020 provisions on preference and transactions at undervalue will no doubt assist Insolvency practitioners in Nigeria to recover more assets, which before now would have been completely out of reach. Going forward, management who disposes and hides company’s assets on suspecting insolvency as well as companies that suddenly become very generous in granting gifts to management and their relatives must note that such dispositions may be impeached and assets recovered, where the company goes into administration or liquidation.

  • Chiwete, a legal practitioner, wrote from Lagos

 Copyright PUNCH.
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from PUNCH.

Contact: [email protected]

DOWNLOAD THE PUNCH NEWS APP NOW ON


};

(function(d, s, id){ var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) {return;} js = d.createElement(s); js.id = id; js.src = "https://connect.facebook.net/en_US/sdk.js"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk'));

Source: punchng.com