The Potential Impact of Administration on Secured Creditors under CAMA 2020

March 9, 2021

Introduction

Compulsory liquidation has always been the centrepiece of formal insolvency law and practice in Nigeria. This may change with the introduction of administration and company voluntary arrangements (CVA) by the Companies and Allied Matters Act 2020 (CAMA 2020). These formal business rescue and restructuring procedures, will provide failing (but viable) businesses with means of being restored to profitability.

There is a perception that administration and CVA may tilt Nigeria’s hitherto creditor-friendly insolvency regime to either a more balanced regime, or a debtor-friendly regime. Whilst this may be music to the ears of some, it is understandably a cause of concern to creditors, lenders and financial institutions.

CVA proposals are precluded from interfering with the rights of secured creditors without the concurrence of the secured creditors: Section 437(3). This is in contrast with administration, where secured creditors do not appear to be completely immune. This discourse examines the potential impact of administration on secured creditors in CAMA 2020.

The Moratorium

The moratorium is arguably the most significant feature of administration. In compulsory winding-up, a stay is actuated when the procedure commences: Sectionsq 580, 666(1) CAMA. The stay does not affect secured creditors and persons with proprietary rights, but halts actions by unsecured creditors and other third parties against the company. In contrast, the moratorium is more pervasive and affects both secured and unsecured creditors. For unsecured creditors, the moratorium will suspend their rights to: repossess goods in the company’s possession under hire-purchase, exercise a right of forfeiture by peaceable re-entry, present winding-up petitions, and commence or continue legal processes/proceedings.

For secured creditors the moratorium suspends taking steps to enforce security over the company’s assets: Section 480(2)(a) CAMA 2020. What may constitute taking steps to enforce a security interest will depend on the type of security and the terms of the security instrument. Holders of possessory security interests such as liens and pledges may find themselves in a dicey situation. On one hand, such secured creditors must retain possession of the collateral to maintain their secured status. On the other hand, wilful retention of the collateral after the moratorium becomes operative may amount to enforcing, or taking steps to enforce, the security. Under English law, a lienor or pledgee who retains possession of the asset(s) whilst investigating the administrator’s claim may not be viewed as taking steps to enforce, or enforcing, security. Further, retaining possession of asset(s) whilst seeking an administrator’s consent or applying for leave of court for exemption from the moratorium, may not amount to a violation of the moratorium.

The apprehension of secured creditors towards the moratorium should be assuaged by the fact that it does not extinguish substantive rights: Barclays Mercantile Business Finance v SIBEC [1992] 1 WLR 1253. It merely suspends enforcement actions during administration. This gives the company a breathing space and the administrator an opportunity to perform his responsibilities unhindered. Besides, a creditor may seek for an administrator’s consent or apply to court for permission to enforce his security notwithstanding the moratorium.

In Re Atlantic Computer Systems Plc [1992] Ch 505 at 542-544, an English Court of Appeal laid down guidelines for administrators or courts to consider in determining whether or not to grant consent or leave to enforce a right despite a moratorium. The applicant/creditor has the duty of making out a case for consent/leave. Consent/leave would be granted if the applicant/creditor shows that the purpose of the administration would not be impeded. In appropriate cases, the court may undertake a balancing exercise of the legitimate interests of the applicant/creditor (on one hand) and the general body of creditors (on the other): Re Meesan Investments Ltd [1988] BCC 788. In undertaking this exercise, leave would be granted where significant and greater loss would be caused to the secured creditor. Great weight is required to be given to proprietary interests: Bristol Airport Plc v Powdrill [1990] Ch 744 at 767D-E. The conduct of the applicant/secured creditor may also be a material consideration in determining whether consent/leave should be granted: Bristol Airport Plc v Powdrill [supra].

Administrator’s Proposal

Administrators have the responsibility of preparing proposals which set out the objective which the administration will aim to achieve: Section 486(1). CAMA precludes administrators from including in statements of proposals any actions which affect the right of a secured creditor to enforce his security: Section 510(1)(a). A secured creditor may waive this protection.

Where an administrator desires to pursue the objective of rescuing a company as a going concern, this may be done via a CVA. A CVA is a distinct procedure but lacks the advantage of a moratorium. Hence, even where the aim is to restructure via a CVA, the company may be placed in administration to enable it benefit from the moratorium. A CVA is an arrangement between a company and its unsecured creditors regarding the restructuring of its debts. Whether carried out in or outside administration, CAMA precludes CVAs from interfering with rights of secured creditors without their concurrence: Section 437(3).

Disposal of Assets Subject to Floating Charge

The administrator’s power to dispose of assets which are subject to security arguably constitutes the most serious threat to secured creditors in administration. This power is useful where an administrator wishes to sell a company as a going concern in line with Section 444(1)(b) of CAMA. An Administrator is empowered to dispose of a company’s assets which are subject to a floating charge as if they were not subject to the charge. The administrator’s power is however subject to a condition aimed at protecting the floating charge-holder. In this regard, the floating charge-holder must be given the same priority he had in relation to the disposed assets, over the proceeds realised from the disposal of the assets: Section 507 CAMA.

Disposal of Assets Subject to Fixed Charge

Administrators may also sell assets which are subject to fixed charges. This power is subject to more stringent conditions aimed at protecting fixed charge-holders. Firstly, an administrator wishing to exercise this power must apply for and obtain a court order to this effect. Secondly, in granting the order, the court is required to consider whether the asset disposal would likely promote the purpose of the administration. Thirdly, the court order must direct that the net proceeds of the asset disposal and any additional money should be applied to discharge the debt that was subject to the fixed charge: Section 508 CAMA; Re ARV Aviation (1988) 4 BCC 708.

Adjustment of Antecedent Transactions

Certain transactions which the company engaged in before administration commenced, may be adjusted or reversed at the administrator’s instance. Transactions which have the effect of either making a previously unsecured creditor to become secured, or an under-secured creditor to become fully secured, may be reversed at the administrator’s instance. Such transactions may be reversed on the ground that they constitute transactions at an undervalue: Section 659. They may also be revered for constituting fraudulent preferences: Section 658. Furthermore, unregistered charges over the assets of the company may be void against an administrator: Section 222(1) and (2)(d).

Appointment of Administrators and Receiverships

An administrator may be appointed out of court by a floating charge-holder, a company or its directors: Section 443(1). An administrator may also be appointed by Court upon application by either the company, its directors or one or more creditors: Section 450(1). There appears to be a deliberate effort to protect secured creditors in all modes of appointment of administrators.

An out-of-court appointment of an administrator by a floating charge-holder is impermissible where there is a prior floating charge-holder. Such appointment may only be made where the prior floating charge-holder has been given two days’ prior notice or the prior floating charge-holder consents in writing: Section 453(1). Furthermore, a floating charge-holder is not permitted to appoint an administrator where a receiver or manager had been appointed prior to the enactment of CAMA 2020: Section 454(c).

An out-of-court appointment of an administrator by a company or its directors is impermissible where a receiver is in office: Section 462(c). Furthermore, a company or its directors desiring to appoint an administrator must give a floating charge-holder at least three working days’ written notice: Section 463(1)(a).

As regards court-appointed administrators, a floating charge holder may “hijack” a court application by the company, its directors or creditors: Section 473(1)(b). Where such an application has been made to court, a floating charge-holder may apply to the court that his nominee should be appointed as the administrator instead of the nominee of the applicant(s). The Court is mandated to grant such application unless there are good reasons for a refusal: Section 473(2).

Where there is a receiver in office, an application to court for the appointment of an administrator will be dismissed. However, the floating charge-holder who appointed the receiver may consent to the application. Also, a court may not dismiss the application if the court considers that the security by which the receiver was appointed is liable to be discharged or released by the administration order as fraudulent preferences or transactions at an undervalue: Section 476(1).

Subject to the above, once an administration order is effective, a receiver of the company appointed by a floating charge-holder or by court must vacate office: Section 478(1). Also, a receiver of part of the company’s property appointed by a secured creditor must vacate office if required to do so by the administrator: Section 478(2).

Postscript

Administration in CAMA 2020, is primarily aimed at salvaging failing businesses. There is however, an underlying policy that it should not be done at the expense of secured creditors or persons with proprietary rights.

 

Insolvency Discourse by Kubi Udofia