THE PRACTICE OF INSOLVENCY AND BANKRUPTCY IN NIGERIA.

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THE PRACTICE OF INSOLVENCY AND BANKRUPTCY IN NIGERIA.

Bankruptcy and insolvency practice in Nigeria sterns from the provisions of the Companies and Allied Matters Act 2004 which defines an Insolvent person as follows. Any person in Nigeria who in respect of any Judgement, Decree or Court order against him, is unable to satisfy execution or other process issued there on in favour of a creditor and the execution or other process remain unsatisfied for not less than six weeks.

In this write-up, we attempt to disseminate the complex terms, around bankruptcy and insolvency procedures, define bankruptcy and insolvency, their purposes and application. Insolvency arises due to the inability of individuals, corporate bodies etc. to pay their debts (financial obligations arising from trade with third parties or secured creditors) as at when due. The words bankruptcy and insolvency can both be used interchangeably. In accounting jargon, insolvency is where the liabilities of the organisation exceeds the assets of the organisation (Balance sheet-insolvency). In Nigeria a company is deemed to be insolvent when a creditor by assignment or otherwise to whom the company is indebted in a sum exceeding #2000 then due has served on the company by leaving it at its registered office or head office, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or The Court after taking into account any contingent or prospective liability of a company is satisfied that the company is unable to pay its debt.

Professional Critics argue that the Section of the Companies and Allied Matters Act that provides a test for declaring a company insolvent in Nigeria (when compared with international provisions on situations that constitute inability to pay debt) has been said to be a vague test or examination for declaring a company insolvent. Considering the amount involved in the section, some say it is not only ridiculous but used the word laughable. In my humble view, it is the director’s responsibility to know whether or not the company is trading while insolvent, so they can be held legally responsible in any given situation. If the company is insolvent, a proposal for the winding up of a company has to be made by two or majority of the directors, depending on the numbers of directors. An insolvency practitioner will then be assigned to oversee the overall insolvency process.

WHO IS AN INSOLVENCY PRACTITIONER? An Insolvency Practitioner (IP) is someone who is authorised and licensed to act in relation to an insolvent individual, partnership or company.  An IP will also be able to help you understand your rights if someone owes you money. IPs are appointed to sort out difficult situations, their main task is to try to rescue a business. The decision to appoint an insolvency practitioner is the responsibility of the appropriate funding bodies, creditors, banks, lending institutions, the courts, the company itself, and the directors depending on the procedure.

There are various types of formal insolvency procedures, for individuals (personal insolvency) and companies (corporate insolvency) procedures ranging from Bankruptcy, Liquidation, company voluntary arrangement, administration, receiverships, and individual voluntary arrangements.

Bankruptcy: This happens when people are not able to pay their debts. It takes away most of their valuable belongings for example their houses, and the money collected from selling these is then shared among the people they owe money to (their creditors).

Liquidation: A procedure where the assets of a debtor company are collected by the IP (acting as a liquidator), sold and the money is used to pay creditors, in a specific order. This in turn means rules of priority for the purpose of redistribution of these assets to various stakeholders when the company is insolvent are crucial. Liquidation is sometimes called winding up and the courts may make an order for liquidation or the directors may decide to put the company into liquidation.

Administration: This is a rescue mission for a company, it allows an insolvency practitioner (administrator) to try to rescue an insolvent company, if this procedure is not possible, an IP is expected to sell the company’s assets to repay all the creditors as much as possible of what they are owed.

Voluntary Arrangement: Companies can also enter into voluntary arrangements. It is a procedure that allows debtors to enter into an arrangement with creditors to repay all, or a percentage of, the debts. The IP (acting as a supervisor) makes sure the agreed terms of the arrangement are met.

Receivership. A procedure to recover money lent to a business for a ‘secured creditor’ (such as a bank). The insolvency practitioner acts as an administrative receiver. The company is put in the hands of the practitioner and he helps oversee the recovery process.

Bankruptcy and insolvency practitioners are mostly accountants by training and sometimes lawyers, anyone who wants to practice as an IP must hold a licence or recognised certificate and have passed the insolvency examinations, gained experience of insolvency work; and satisfied an authorising body that they are honest and are able to carry out the role. The IP’s work involves dealing with many conflicting interests, but usually their main duty is to look after the interests of creditors. Getting advice early may help if you or your company are having problems with debts. Just because you approach an IP for advice, doesn’t mean you will end up in a formal insolvency proceeding. Many IPs will offer a free initial consultation to discuss the options available to you. Having those discussions early may help to rescue your business or sort out your personal finances. IPs must follow the law and their work is monitored by regulators in their jurisdiction to make sure that they continue to be fit to carry out insolvency work. Each country has its own law on insolvency proceedings and there are significant differences on who controls the proceedings, the flexibility of proceedings, the different classes of creditors etc.

 

More information on winding up can be obtained here.